Two Distributors. Different Models. Rexel and Grainger.

It’s 2020 Q2 earnings season and recent reports from Rexel and Grainger provide an opportunity to consider two drastically different models.

Rexel is a traditional electrical distributor challenged with a consistent business model and painstakingly slowly trying to evolve to a digital operational and Commerce-enabled model. COVID’s impact on construction markets, in the Pacific Northwest and the decline of activity in the oil / gas markets impacted Q2

Grainger, on the other hand, is a diversified MRO distributor typically serving “Fortune 500” and the institutional environment via an omni-channel strategy driven be electronic means. While industrial businesses and educational facilities were impacted by COVID, its sourcing capabilities, PPE offering and government and healthcare contracts have buoyed business.

A tale of two companies. Perhaps intentional. Perhaps coincidence. But potential lessons of diversification or products, customers and means to service customers?

Let’s look at Q2

Rexel

In reviewing Rexel’s quarterly call (and presentation) with a focus on North America (and the quarter ended prior Rexel’s divestiture of two locations to Schaedler YESCO) …

• Overall, for the first half of the year, worldwide digital sales represented 21% of sales lead by 31% in Europe (US has a ways to go not only due to serving primarily a contractor-oriented customer base but because, nationally, the company serves mostly small to mid-sized contractors who are less prone to having robust digital capabilities and are less likely to use eCommerce.)
• Overall, in the first half, globally, company sales is down 10.6%.
• Reduced salary and benefits by 19.7% in Q2 and sales, globally, were down 17.7% (obviously layoffs and furloughs)
  • Hasn’t closed branches (at least yet) as it didn’t “want to jeopardize” the rebuild it is attempting in the US.
• North America was singled out as “lagging” with Q2 being down 23% overall improving to -20.5% in June and -13% the first two weeks in July. (so, they were down much more in April and May, slow recovery in June. Should be compared to our last COVID survey.)
  • The US was down 14.8% for the half, 22.8% for Q2.  Canada was down 11.8% in the half, down 23.6% in the quarter.
  • By Region in the US for Q2
    • Northwest down 10%, represents 28% of business
    • California down 10.2%, represents 11% of business
    • Midwest down 24.2%, represents 9% of business
    • Mountain Plans down 17.3%, represents 8% of business
    • Florida down 7.3%, represents 12% of business
    • Gulf Central down 41.1%, represents 11% of business
    • Southeast down 23.1%, represents 16% of business
    • Northeast down 33.2%, represents 5% of business
• Recovery being driven by the residential market (which is the smallest portion of the electrical industry and typically has the lowest gross margins.)
• Industry (industrial) is down with hard hit segments being automotive, aerospace and oil / gas.
• EBITA was down only 73 basis points to 3.2% as “OpEx, salary and benefits dropped more than sales” … (so, lots of personnel change … 4000 worldwide, 16%), although they say in US it is “temporary” and mainly for logistics and transportation staff. Had 10-20% salary reductions for management.
• Tout their data analytics capabilities as a tool for communicating with suppliers and that they are the “eyes and ears of our suppliers in our markets.” (Presumably this is rest of world given that they have nominal share in most geographic markets, hence marketplace insights would be nominal. However, the capability is potentially noteworthy for others to consider.)
• Seeking acquisitions in the US with priority in digital space to speed up development (should be interesting to see what they pursue that will support current model or if it will drive diversification.)
• Company plans to continue to focus on digital transformation. Also expects that, globally, there will be a “green” recovery with a focus on green energy generation and electric vehicles. Also focusing on intelligent building solutions. (platforms that others could consider, especially “intelligent building solutions” as the terminology could cover an array of products / solutions.)
• Looking forward
  • Expect customers to want multi-channel, hence accelerating digital.
  • Focus on price management
  • Manage based upon KPIs rather than to sales budgets given the unpredictability of a COVID-induced economy.
• Input from analyst questions:
  • Increased productivity measurements so can delay restaffing levels, as appropriate.
  • Admitted that some on furlough “will never come back”. Re-evaluating every week. Expect, globally $30M euro in restructuring charges in second half.
  • US business mix has become more project-oriented which has impacted their gross margins. (The question then becomes “where did the counter business go?” If small contractors, may have gone to big box. We’ve also heard that independents have been more flexible in serving customers during the pandemic and hence are picking up share.)
  • Rexel expects to negotiate reduced goals with suppliers to retain a portion of expected rebate income (interesting how everyone thinks manufacturers can always “give” … just threaten them with a loss of business and expect that they will cave … at least to some degree!)
  • Feel that they are overstocked and will work down until sales normalize.
  • Have continued to stress test the business to determine additional employment reductions that could be needed.
  • Many projects in Las Vegas reportedly stopped / canceled.
  • Feel gained share in Florida. Northeast “stopped losing share”. Gained share in Denver, Northwest, California, Phoenix and Albuquerque … most, if not all, due to branch openings. (In looking at prior reports, this is questionable since the growth from new openings was nominal.)
  • Second half project outlook is “soft”.
  • Backlog in US down 8%.
  • Feels that future loyalty will be to efficiency, not to a salesperson and hence Rexel things digital solutions will enable it to retain market share. Also feel that digital is cost-prohibitive for smaller distributors (which is incorrect as there are a few affordable solutions now in the marketplace.)
  • Rexel’s US digital team is about 50 people based in Portland.
  • Waffled on the question of Rockwell APR disposals saying, “may buy, may sell”.

Lot’s of Rexel specific insight. 39% of its business is west of the Rockies. Lots of performance variability in the business. Heavily contractor-oriented Many challenges. Trying to go digital (with more success in Europe). Trying to paint a good picture, but … challenged.

Grainger, on the other hand, is growing but is a different model.  Click here to read about Grainger’s Q2.