The secret to being a Grainger
As a long-time distribution industry consultant with Grainger (NYSE: GWW), I often get questions about the company from other distributors. Typically the questions are something like this:
“How does Grainger do it? They are the biggest distributor, 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. A power distributor recently told me, “One of my customers just bought 10 30-amp circuit breakers from Grainger at a 35 percent gross margin. If he had called me, I would have sold them at a 17 percent margin. Why what happens that? “
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 types of companies and offering about 1 million products. In other words, Grainger appears to be meeting the very difficult challenge of being a distribution leader in both margin and market share.
So how do they do it? It really is quite simple. Almost all distributors target one of these types of segments:
- FOR product category (for example, power transmission, fasteners, tools, HVAC products, PVF, building materials, office supplies, etc.)
- FOR customer industry (for example, hotels and motels, restaurant equipment, mining, healthcare, cleaning, utilities)
- Gold some combination of the two (for example, selling building materials to home builders)
Grainger segmentation is different. The company, in fact, sells almost all types of products to almost all types of customers. But Grainger defines its target segment by a specific situation: when customers need products quickly and without problems. This target segment, informally referred to by Grainger as “speed and convenience,” allows you to operate differently from other dealers and achieve superior results.
So while most distributors try to get a lot of revenue from a small number of customers, Grainger wants to get a little bit of revenue from each customer.
When companies or people need products quickly, they think of suppliers differently. On the one hand, they accept that they will pay a higher price to have access to products that they can obtain immediately, a concept that academics call “utility of place.” A former Grainger president whom I worked for used the example of a vending machine in a hotel. You know $ 2 is a very high price for a can of soda, but it’s worth it because it’s quick and easy to get your Diet Coke there vs. leaving the hotel to find a very inexpensive source, like Costco. The Costco store may not be open, and even if it is, you’ll have to buy a full case of hot soda in exchange for saving 90%. That’s a big margin change, but the “speed and convenience” of the hotel’s vending machine, coupled with the cooling of the product, which is a “value-added service,” makes it worth it.
Think of the times you stop at a 7-Eleven. There are no bargains in the store, but you know and agree to this before entering. So if you end up paying 30 percent more for milk, you’ll probably feel the “speed and convenience” benefits are worth it compared to driving to a grocery store.
Businesses work the same way. On a regular basis, purchasing agents, maintenance personnel, warehouse managers, etc., need something quickly and comfortably. In those situations, they go to the supplier who is most likely to have all the necessary items (called “stocking convenience”), has the simplest ordering system, and can deliver the 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 customer’s actual or perceived best option.
This applies to all types of product, even “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 is a commodity most of the time and HVAC dealers sell it at very low margins to try and win other business. However, if you are an HVAC contractor with a customer whose cooling shuts off on a 100 degree day and is in need of coolant, you will likely be pointing your truck directly into the Grainger parking lot. You will have a high degree of confidence that the product will be in stock, and you will be in and out of the branch quickly. In this situation, the price does not matter, not even for a basic product. It’s all about speed and convenience.
Well, we have defined Grainger’s target segment and discussed the nature of urgently needed products. Here are some of the ways Grainger offers value to “speed and convenience” shoppers:
Most locations. Grainger has more than 600 warehousing branches in North America. Sometimes customers need things extremely quickly, even on the same day, and Grainger is the closest and fastest alternative more often than other distributors. In addition, 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 inventory stocks. In his “2009 Factbook,” he claims to have more than $ 1 billion on hand. Of course, this was offset by a relatively high gross margin of 41 percent. Like every dealer, Grainger has to choose between service levels and inventory turnover, and in the business of speed and convenience, you choose the service levels.
The best catalog. For some types of distribution, paper catalogs are still essential because they are the fastest and easiest way to search for many types of products. The Grainger catalog is particularly quick to use, adding to the tendency for customers to choose it over competing books. The Grainger catalog enhances the company’s ability to handle “speed and convenience” transactions faster than the competition.
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 are a business buyer, you already know that Grainger is more likely to have what you need fast vs. other distributors. You also know that Grainger.com is a particularly well-designed and user-friendly website. Grainger has always been a pioneer of e-commerce; the truth is that they are still in the lead.
Let’s conclude by returning to the question of how Grainger can be one of the largest distributors while executing what appears to be a niche strategy. It’s actually a niche strategy, but the niche is huge in the extremely fragmented industry that constitutes MRO. Every business needs products quickly and conveniently and thus becomes a relevant target for Grainger’s value proposition. In an industry the size of MRO, which Grainger estimates at $ 125 billion in its 2009 Fact Book, they have a market share of less than 6 percent. So even in this “niche”, there is a lot of room to grow.
Remember that “convenience” is also part of the equation. Sometimes, even when customers aren’t in a rush, 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 a very friendly and competent service. All of these considerations make customers less price sensitive and more willing to buy from Grainger.
So there really is nothing mysterious about what Grainger has done. The company has been successful in meeting the needs for “speed and convenience” for decades. What has changed in recent years is the company’s willingness to focus on what it does best and to move out of areas that are not leveraging its core competencies. This is the result of very high-quality leadership that is likely to find new ways to enhance its capabilities. That means Grainger will likely tighten up even more in the future and expand its market share gradually but steadily.