Grainger Chugs Along in Q3

Grainger’s Q3 2019 report affirmed a slowdown in the US industrial / institutional MRO market, which Grainger outperformed.  The performance was driven through sales deployment, an increase in product assortment which generates increased sales of wallet and effective marketing.  In other words, they used a good offensive plan in a market that is becoming stagnant.

From the Grainger Q3 analyst call

• Grainger has two models, their “US” model which is their grainger.com and branch network offering (think of it as their “full-service” model) and their MS assortment (i.e. Zoro, MonotaRO) which is an online only, almost marketplace approach that, for Zoro, will approach 13 million SKUs (currently has 3.1 million) – added 350,000 SKUs in Q3 and 800,000 SKUs YTD … which helps drive incremental revenue.
• “soften global demand”.  “US market has slowed but not falling off the cliff”.  Believe that the US market was flat (0%) in Q3.
• Grainger US performance
  • Large business grew 2%
  • Mid-size customers grew 5%
  • US GP is 38% on $2.277 billion during the quarter
  • SG&A is 23%
  • Operating profit is 15.1%
• Feel have accelerated share gain in the US by 250 basis points (2.5 points) , given the softening market
• Total company performance, including Canada and international, was 2.5%
  • Overall GP is 37.3%
• Market segment performance
  • Softness in heavy manufacturing, natural resources, contractors, pockets of manufacturing
  • Healthcare remains strong
  • Government and retail are flat to modest.
• US initiatives
  • Improve quality of customer and product data, embed their storeroom management service (focus on customer, improve “stickiness”, enhance customer experience
  • Focus on long term goals through incremental investments (some of which is product content development for Zoro as well as their new CDC in Louisville)
• Merchandising efforts generated incremental revenue … comprehensive category review process (something that distributors rarely do … review what stock / not stock, expand product assortment to capture share of wallet, evaluate competitive suppliers, proactively manage pricing, etc)
• Reenergized their corporate account work (perhaps a sales effort / resources?)
• Regarding their assortment model, Zoro and MonotaRO (Japan), Grainger mentioned “freight headwinds” impacting gross margin. (which is interesting to note, and be aware of, as a major consideration for a web-driven strategy.  How you negotiate freight and charge / not charge for freight will have a direct impact on the bottom line for this business.  For those manufacturers who have low pre-paid freight policies, this issue also applies.)

Insights from Analyst Questions

• Grainger has a long-term goal of growing SG&A at 50% of sales growth (perhaps a good metric for distributors to consider … and they track annual operational cost savings through process improvement)
• Grainger expects to continue to grow / gain share in the midsize customer market.  Merchandising (product assortment / breadth of offering) and marketing is having a major impact in driving this.
• 2020 … Grainger’s current outlook is that the MRO market will be flat, which affirms analyst reference from other large industrial distributors.  Grainger is “planning for a wide range of potential market growth outcomes for next year.”
• Tariffs … Grainger commented that “stated (tariffs) and what we’re actually able to negotiate in terms of realized tariff”.  Grainger incurred some level of tariffs on its own brands and products it imports from China and then the ones for national brands from suppliers. (the comment implies that the 10% / 25% tariffs are “negotiated / subsidized” either by their suppliers in China or not fully passed on by their national branded suppliers … who may have negotiated with their suppliers … or Grainger may have negotiated with their supplier. Perhaps a case of superior negotiation skills coupled with “size has its privileges?)
• Midsize customers are starting to purchase more frequently, hence a more solid sales base and accelerating sales to this audience (reinforces the need to remarket to customers as well as focus on order frequency, recency and product breadth.)
• Entering new verticals to expand customer coverage.
• The Zoro offering will include “third part” product which is picked and shipped in a different color box to facility processing.
  • This concept could be, theoretically, replicated by like-minded distributors and perhaps optimized in local areas (for independent distributors from many industries) and then us a locally-oriented url to support SEO. Consider something like ChicagoMRO.com … local serving local.  It’s marketplace software with orders parsed to local distributors who can deliver same day / next day.

Additional from Grainger Q3 Earning Slides

• Sales results by end-market
  • Retail                               up high-single digits
  • Commercial                     up mid-single digits
  • Government                    up low-single digits
  • Light Manufacturing       up low single digits
  • Contractor                       up low-single digits
  • Heavy Manufacturing     down low-single digits
  • Natural Resources           down mid-single digits
• Monthly performance … July 2%, August 3.5%, September 1.5% … flat to “choppy”

Tidbits from Grainger Q3 8-K and 10-Q Filings

• Overall, sales for the quarter were $2.9 billion, up 4%
• US segment and endless assortment grew 4.5%
• Foreign exchange / currency had no impact on results
• Overall GP% was 37.3%, down from 38.1% last year
• Reiterated company guidance of 2-5% for the year.
• Service revenue is only about 1% of sales (interesting given “industry’s” always talking about the need to charge for services to compete versus Amazon Business … and there was no comment by Grainger, or questions by analysts, regarding Amazon Business or online.)
• The company sells products from approximately 5000 suppliers and 1.7 million products are stocked at distribution centers / branches worldwide.
• % of sales by customer segment in US
  • Government – 20%
  • Heavy Manufacturing – 18%
  • Commercial – 17%
  • Light Manufacturing – 12%
  • Retail / Wholesale – 9%
  • Contractors – 9%
  • Transportation – 6%
  • “Other” – 6%
  • Natural Resources – 3%
  • The percent of sales is interesting as the common perception is that Grainger is “industrial MRO” but, when looking at the percentages, only 33-35% (including some of “other” are manufacturing / natural resources). If Transportation is added the rate is about 40%. 26% is “commercial MRO” and 20% is government. So, pretty balanced from a customer segment viewpoint.
• Grainger’s US sales “tend to positively correlate with Business investment, business inventory, exports, industrial production and GDP. (If you’re business follows the above customer mix, these become key metrics to guide your planning. If you are are more construction, then different metrics may apply.)
• The forecast for these metrics, according to Global Insight is:
  • Business investment – 1.6%
  • Business inventory – 2.8%
  • Exports – minus 0.2%
  • Industrial production – 0.9%
  • GDP – 2.3%

While the overall market continues to slow, as does Grainger, they still outperform the market in serving the MRO segment (and yes, other distributors may perform better in their geography, but Grainger gives a sense of the national market.)

A couple of takeaways from the Grainger Q3 Earnings:

• Customer segment diversification is good.
• Marketing can drive performance at the mid-sized customer level, and should be tasked with that objective
• Focusing on share of wallet is a key to growth
• Investing for innovative concepts to find “green fields” (i.e. Zoro) is needed to drive future growth (and sometimes “smaller” companies, with less resources, should consider collaborative approaches)