Distributors Like Grainger (GWW) Can Benefit From Their Biggest Corporate Customers Wanting to Consolidate Suppliers for Decades to Come
(This post is a reprint of one of the nine sections that make up the Singular Diligence issue on Grainger.)
Grainger distributes the products needed to keep a large business running smoothly. It sells light bulbs, motors, gloves, screwdrivers, mops, buckets, brooms, and literally thousands of other products. About 70% of the orders customers place with Grainger are unplanned purchases. By unplanned we mean things like the filter in an air condition system, the up / down button on an elevator’s control panel, the motor for a restaurant kitchen’s exhaust fan. The customer knows these things break eventually. But, they don’t know when they will break. These aren’t cap-ex purchases made when the place first opens. And they aren’t frequent, predictable purchases. Things like light bulbs, safety gloves, and fasteners – a key part of Fastenal’s business – are bought more frequently in greater quantities as part of planned orders. Grainger sells to both large customers and small customers. And customer orders are sometimes planned and more frequent, sometimes unplanned and less frequent. But, the biggest part of Grainger’s business is unplanned purchases made by large business customers who have a contract with the company. Almost all of the company’s profit comes from the U.S. So, when you think about what Grainger does – think unplanned purchases by big U.S. businesses.
Grainger was founded by William W. Grainger (hence the W.W. in the company’s name) in 1927 in Chicago. The company is still headquartered in Illinois. It started as a wholesale electric motor distributor. At the time, manufacturers were switching their assembly lines from a central DC driven line to separate work stations each with their own AC motor. Grainger focused its business on customers with high volume electric motor needs. It was a catalog retailer. The original “Motorbook” catalog was just 8 pages. Today, Grainger’s “Red Book” catalog is over 4,000 pages. It features more than 1.4 million stock keeping units. Grainger started opening branches in the 1930s. From Chicago, it expanded into Philadelphia, Atlanta, Dallas, and San Francisco. By 1937, it had 16 branches. In 1953, Grainger started a regional warehousing system. The company added distribution centers to both replenish stock at the branch level and to fill very large customer orders. The company eventually added distribution centers in Atlanta, Oakland, Fort Worth, Memphis, and New Jersey. As alternating current became standard throughout the U.S., Grainger focused on doing more than just selling motors to American manufacturers. It sought out smaller scale manufacturing customers, service businesses, and other parts of the economy. Today, Grainger’s customer list is very diversified. It is much less dependent on the manufacturing sector than publicly traded peers like MSC Industrial and Fastenal. Grainger basically sells to any U.S. business customer who makes a lot of small orders. So, high frequency combined with low volume per order. Grainger is best at dealing with big customers. The company’s competitive position is strongest where the customer has a contract with Grainger and is served by a …Read more