Slow Growth in Industrial MRO … Grainger Reports

The industrial MRO market appears to have slowed its rate of growth as evidenced by Grainger’s 2019 first quarter report. While Grainger is much more than electrical products, products commonly associated with the electrical industry (electrical, lighting, motors) represent 9% of sales with power and hand tools representing another 10% according to Grainger’s 2019 Fact Sheet, hence Grainger represents $1-2 billion in electrical material sales.

Grainger reported “profitable growth” for Q1 on top of their strong 2018 Q4 growth.  Perhaps it is somewhat tied to weather (many companies in the Upper Midwest “lost” work days due to the bitter cold) or perhaps it is historically seasonal (Q1 being slower) but we are also hearing some tepid marketplace performance from industrially-oriented manufacturers.

From the Grainger call:

• Interesting story to start the call that is emblematic of a sales process. Talked about a customer visit built around relationship and services Grainger offers (and for a good overview, check out the Grainger 2019 Fact Book). A key element is the roles of the people mention … safety manager, operations manager, plant controller (among others).  The question becomes, how many people within each end-user account do you know / does your company have contact information on and know? Do you have valued services (information) to provide to them that add value, and help build, your relationship with the account? Do you market products … and more … to these customer types?
• Grainger is open about offering different models (full-service and endless assortment) to accelerate revenue. They don’t worry about cannibalizing the business as they recognize different customers need different services at different times. Perhaps there is a lesson here for distributors? Perhaps seek to “attack” yourself and develop an alternative model to pursue a different customer base (and different could be the same type of customer but with a different buying persona). The key is identifying how you can have multiple revenue streams leveraging common infrastructure (and with eCommerce, this is now easier to conceive and execute on than ever before.)
• Performance
  • Total company sales up 3%
  • US
    • US market was “choppy” due to tariffs, government shut down (overall, government is 14% of sales) and weather.
    • Estimate US market grow at 2-2.5% of which 1 point is price
    • Daily sales up 3.5%.
    • US large customers grew at 5% (slower than Q4, but still good
    • US mid-size customers grew 9% (up 14% last quarter)
      • Driven by marketing and some market-based pricing adjustments (hence a price sensitive market for a less full-service relationship sales approach.)
    • Q1 US sales performance included 1.5 points in price increases (somewhat consistent with what we’ve heard from manufacturers … back to “standard” price increases.
    • Company still believes it will accelerate its growth rate this year and will take incremental share … at large customers and continue to capture, and penetrate, mid-sized customers.
  • Canada
    • In a word, challenged, as they “continue to stem volume losses and drive towards sustainable profitable growth.” Business was down 24% (with currency also playing a role.)
    • Improving website functionality and assortment.
  • Zoro
    • US focused
    • Continue to see double digit growths.
    • MonotaRO (Japan) and Zoro had a combined 22% growth!
• New initiatives
  • Value Documentation Tool – helps salesforce demonstrate value Grainger brings to its customers through inventory management, energy management and safety solutions.
  • Rep Pass program for mid-sized customers which offers free freight.  These customers are served by inside sales teams.
  • Adding SKUs to better serve mid-sized customers as customer profile and hence needs is slightly different.  Also increasing support for marketing efforts.

From analyst questions:

• Grainger admits to “still learning” on mid-size customers on how best to capture and service. Feels its share in this segment is only 2%.
• Zoro added 200,000 SKUs in Q1 with another 800,000 to be added through 2019.  A significant incremental cost due to the cost of creating data.
• Interesting how analysts expect gross margin to continue to grow and are concerned when it is “flattish”, however, for independent distributors this is always a challenging area unless it grows through purchasing / supplier relation initiatives.
• Grainger commented about “uncertainty around the market.” If the market is strong, it feels it can take share and grow at a faster rate than the market. If the market is slow, it may take some share. The key takeaway … concern for the market … can’t read the “tea leaves.”
• Seeing some slight weakness in government spending as well as light manufacturing.
• Had favorable economics in overall freight costs due to less usage of spot market. Using more / full truck loads.
• Goal is to grow SG&A at 50% of sales growth rate (perhaps a metric for other distributors to consider to improve profitability.)
• A little “de-stocking” in Q1 … better managing inventory from pull-forward Q4 inventory buying. (We’ve also heard some manufacturers mention that they are seeing a little more of this. Could be seasonal? Could be a reflection of concern in the marketplace outlook.)
• Expect Q2 market growth to be between 1-4%.
• In 2018, advertising was up 30%, driven by investments in digital marketing
  • Advertising consists of catalog, mass media and digital
  • Radio is providing a strong ROI

Some takeaways:

• Slowing growth? Slowing industrial market?
• Time to focus on improving inventory management?
• Grainger continues to invest in marketing to acquire customers and take share. Something to be replicated?
• Focus on multiple contacts with targeted services to each to strengthen relationships and broaden breadth of products that can be acquired?
• Concept of multiple businesses under one roof leveraging infrastructure / investments?
• If you are in the industrial space, how was your MRO business in Q1? Takeaways from Grainger’s Q1?