As a distribution industry consultant who spent many years with Grainger (NYSE: GWW), I often get questions about the company from other distributors. Usually the questions are something like this:
“How does Grainger do it? They’re the biggest distributor out there, they have more customers and more products and higher margins than anyone else, and they show no signs of slowing down. How can I be more like them?”
Sometimes executives will give me specific examples. An electrical dealer recently told me, “One of my customers just bought 10 30-amp circuit breakers from Grainger at 35 percent gross margin. If he had called me, I would have sold them at 17 percent markup. Why does that happen?
Adding to the general confusion about Grainger: a high-priced approach is supposed to be a niche strategy. But Grainger is arguably the largest distributor of its kind, selling to almost all kinds of businesses and offering around 1 million products. In other words, Grainger appears to be meeting the very difficult challenge of being the leader in distribution margins and market share.
So how do they do it? It’s really quite simple. Almost all dealers target one of these types of segments:
- HAS product category (for example, power transmission, fasteners, tools, HVAC products, PVF, building materials, office supplies, etc.)
- HAS customer industry (eg, hotels and motels, restaurant equipment, mining, health care, cleaning, utilities)
- Prayed some combination of the two (eg, selling construction materials to home builders)
Grainger’s segmentation is different. In fact, the company sells just about every kind of product to just about every kind of customer. But Grainger defines its target segment by a specific situation: when customers need products quickly and without hassle. Informally referred to as “speed and convenience,” this target segment allows Grainger to operate differently from other dealers and deliver superior results.
So, while most distributors try to make a lot of revenue from a small number of customers, Grainger wants to make a small profit from each customer.
When companies or individuals need products quickly, they think of suppliers differently. On the one hand, they accept that they will pay a higher price for access to products that they can obtain immediately, a concept that academics call “place utility.” A former president of Grainger for whom I worked used the example of a vending machine in a hotel. You know $2 is a steep price for a can of soda, but it’s worth it because it’s quick and easy to get your Diet Coke there instead of buying it. leave the hotel to find a very cheap source, like Costco. The Costco store may not be open, and even if it is, you’ll have to buy an entire case of hot soda in exchange for saving 90%. That’s a big markup change, but the “speed and convenience” of the hotel’s vending machine, coupled with product cooling, which is a “value-added service,” makes it worth it.
Think of the times you stop at a 7-Eleven. There are no offers in the store, but you know and accept this before entering. So if you end up paying 30 percent more for milk, you’ll probably feel like the “speed and convenience” benefits were worth it compared to driving to a grocery store.
Businesses work the same way. Purchasing agents, maintenance staff, warehouse managers, etc. often need something quickly and conveniently. In those situations, they go to the supplier that is most likely to have all the items they need (called “stocking convenience”), has the easiest ordering system, and can deliver products the fastest. In these situations, clients are not very price sensitive, even if they are very tough buyers when negotiating traditional contracts. Therefore, Grainger is often the best real or perceived choice for the customer.
This applies to all types of product, including “commodities”. The more urgently a customer needs a product, the less commodified that product becomes. For example, very few HVAC contractors trust Grainger as their primary source of refrigerant. It’s a commodity most of the time, and HVAC dealers sell it at very low margins to try and win other business. However, if you’re an HVAC contractor with a customer whose cooling isn’t working on a 100-degree day and you need refrigerant, you’ll likely point your truck right into the Grainger parking lot. You will have a high degree of confidence that the product will be in stock and will be in and out of the branch quickly. In this situation, price doesn’t matter, even for a commodity. It’s about speed and comfort.
Well, we’ve defined Grainger’s target segment and discussed the nature of the products that are urgently needed. Here are some of the ways Grainger delivers value for “speed and convenience” customers:
Most locations. Grainger has more than 600 warehouse locations in North America. Sometimes customers need things extremely fast, even the same day, and Grainger is the closest and fastest alternative more often than other distributors. Plus, through its huge distribution network, Grainger can probably deliver a wider variety of products overnight than any other supplier.
The largest inventory. Grainger has huge stocks of inventory. In his “2009 Fact Book,” he claims to have over a billion dollars on hand. Of course, this was offset by a relatively high gross margin of 41 percent. Like all distributors, Grainger has to choose between service levels and inventory turns, and in the business of speed and convenience, you choose service levels.
The best catalog. In some types of distribution, paper catalogs remain essential because they are the fastest and easiest way to search for many types of products. Grainger’s catalog is particularly quick to use, adding to the tendency for customers to choose it over competing books. Grainger’s catalog enhances the company’s ability to handle “speed and convenience” transactions faster than competitors.
The easiest website to use. Sometimes the quickest and most convenient way to buy something is by using the keyboard right in front of you. If you’re a business buyer, you already know that Grainger is more likely to have what you need quickly than to have what you need. other dealers. You also know that Grainger.com is a particularly well-designed and easy-to-use website. Grainger has always been a pioneer of electronic commerce; The truth is that they are still in the lead.
Let’s end by going back to the question of how Grainger can be one of the largest distributors while executing what appears to be a niche strategy. Actually, it’s really a niche strategy, but the niche is huge in the extremely fragmented industry that makes up MRO. All businesses need products quickly and conveniently, and therefore become a relevant target for Grainger’s value proposition. In an industry the size of MRO, which Grainger estimates to be $125 billion in its 2009 Fact Book, they have less than 6 percent market share. So even in this “niche”, there is plenty of room to grow.
Remember that “convenience” is also part of the equation. Sometimes, even when customers aren’t in a hurry, it’s more convenient to shop at Grainger. The company is more likely to have the product on hand, it is clearly listed in their catalog or website, and they provide very friendly and competent service. All of these considerations make customers care less about price and more willing to buy from Grainger.
So there’s really nothing mysterious about what Grainger has done. The company has been successful in serving “speed and comfort” needs for decades. What has changed in recent years is the company’s willingness to focus on what it does best and move out of areas that don’t take advantage of its core competencies. This is the result of very high-quality leadership that is likely to find new ways to improve its capabilities. That means Grainger will likely become even stronger in the future and gradually but steadily expand its market share.