Grainger’s Q1 2016 Highlights Industrial Challenges

Grainger released its Q1 results today. Historically they represent a proxy for the industrial and industrial MRO market so we decided to review for insights…(italics are commentary).  The bottom line is that business is essentially flat in the US with challenges in the industrial / natural resources segments AND the company is experiencing pricing pressures, which industrially-oriented electrical distributors can sympathize with. The company exceeded earnings projections through cost savings and buybacks.

Overall

• Sales increased, overall, 3%.  Organic company sales, however, declined 2% (acquisitions always distort performance as does some foreign currency influence).
• Overall, gross margins decreased 3%, down to 38.8% from 41.8%.
• Operating expenses declined 4% driven by restructuring benefits and timing of planned spending!
• “Experiencing economic headwinds” (so, industrial market is still hurting)
• KeepStock is their version of storeroom management and was mentioned in the quarterly report as a highlight.  (a number of distributors offer storeroom management, albeit not as broad as Grainger. We typically see distributors offer this on a targeted basis rather than market the benefits to their customer base. Grainger’s advantage, other than breadth of stock and their procurement technology, is that they typically call on higher level management to obtain “the order”.  The question for distributors becomes, “how do you gain attention as a product specialist?”  For manufacturers, “how do you get to be preferred in the account and can Grainger prioritize you in their online system if the end-customer desires?”)
• Carryover sales from December helped Q1 results (so Q1 would have been worse)
• Expense management and delaying expenses helped gross margin (closures? layoffs? spending freezes?)
• Expects increased gross margin pressure for remainder of year (“deflationary pressure”) (for distributors this also means increased attention to price optimization strategies and targeting niches for growth.)
• Typicado an annual price increase (perhaps something electrical distributors should consider?) but this year doing “selective group of items as the year progresses” (less visible to the customer … more targeted … price optimization … less sensitive items?)

U.S. Market

• US accounts for 75% of company sales
• Sales down 2%
  • 3% point decline based upon price (this could be from pricing pressures due to marketplace and/or customer driven negotiations)
  • 1% volume growth
  • -1% seasonal products
• Government up mid single digits
• Light manufacturing & retail up low single digits
• Commercial down low single digits (perhaps lost some business or generating lighting growth in units but decline in dollars due to decreasing unit costs or perhaps not playing much in the lighting retrofit market or could have nothing to do with electrical and be all about mix?)
• Contractor / Heavy manufacturing down mid single digits – (not a surprise for those involved with industrial contractors. Distributors working with construction contractors in certain geographic areas are outperforming this but typically don’t compete against Grainger.)
• Natural resources down mid-teens (no surprise given the oil / gas market and some aspects of coal. This is a longer-term issue for many and an indication of the decline in MRO to this market and is probably responsible for a significant percentage of the margin pressure.)
• March sales down 5% (an accelerated rate of decline!) with 3% coming from price.  (The margin pressure we’re seeing here from Grainger we’ve heard from industrially-oriented electrical distributors as well as re-negotiations on contracts / blankets. Companies that have cut their capex are now seeking savings from opex budgets.)
• Closed 5 branches and will close about 50 more this year! (opportunity for hiring some experienced end-user focused / distribution-experienced staff?)

And, if you’re wondering if Grainger can be a proxy for the electrical industry, consider this from their 2015 Factbook (2014 US sales):

• 7% electrical
• 7% hand tools (some electrical)
• 6% lighting
• 3% power tools (some electrical)
• 2% motors (some electrical, some power transmission)
• and 17% is safety / security which some electrical distributors nominally play in.

So, it could be 15-20% of an industrially-oriented electrical distributor’s product offering

Canada

• 7% of company sales (so US and Canada is 82% of Grainger sales)
• Sales down 25% (14% from lower sales, 6% due to SAP implementation (no, SAP does not reimburse them nor is their SAP interruption insurance!) and a +3% due to pricing). Difference is currency issues.
• Challenging economy due to oil / gas
• Installed SAP and CRM but SAP implementation affected February and March sales
• All end-user markets are down

So, some Grainger inspired thoughts:

• Grainger’s results affirm what we’re seeing with industrially-oriented distributors … tough sales environment and declining margins
• Grainger, and other distributors, are focusing on price optimization. We’ve become aware of some price optimization tools that are relatively new to the industry that are more robust than historical third party systems that can support distributors of all sizes. Pricing strategies will become more of a mix of art and science for the distributor of the future rather than the province of the sales organization. This will also require distributor salespeople to more effectively communicate and sell their value (and for sales management to coach as well as require accountability).
• While SPAs have strengths and challenges (especially from a process management viewpoint), they 1) are not going to go away and 2) we’re hearing of increased usage. Perhaps a part of a targeted account development, market share focused and profit improvement strategy?
• We’re aware of Grainger as well as some other national electrical chains considering line reviews. Category management thought processes will evolve purchasing as well as price negotiation based upon utilization of analytics. We’re not advocating reducing to one supplier in a product category, but every distributor has some categories that could have some “rationalization.”

What are you seeing from Grainger in your market? What are your “takeaways”?