As many readers know, we have been fans of W. W. Grainger for decades. Full disclosure: Rich is a part owner (a small number of shares) because he wanted to own a really great supply house. Since he didn’t inherit one and didn’t have the money to start one from scratch, he settled for a small position in a large, well-run, growing distributor. (He likes to claim part-ownership just as many vendors claim a contribution to their e-commerce success. They are probably equally significant from Grainger’s perspective.) While most wholesalers in our industry don’t think they compete with Grainger, we respectfully disagree. 

Grainger has quietly helped themselves to business from customers who probably would have gone to traditional plumbing, HVAC, electrical, fastener, industrial and MRO wholesalers if Grainger hadn’t made it so darn easy for the customer. Some wholesalers say they aren’t interested in the occasional high-margin business from the customers who Grainger sells to. For some that is an explicit business decision. For others, it may be sour grapes. We know a traditional wholesaler who went after the plumbing part of a Grainger customer whom they had ceded to Grainger by neglect. They have been happy with the results. Grainger started with a catalog so their customer and prospective customers could easily look up their needed products from the proverbial “crap-ton” of products that Grainger stocked. Grainger built a brick and mortar store in almost every reasonably sized trading area. They became experts at logistics supporting their branches with distribution centers and direct-to-customer shipping. 

They pioneered online buying to provide easy access to their products. AND (big AND) they did it while making very good gross margins AND turning their inventories…for many years.  In 2015, they had higher raw dollar profits than Amazon on less than one tenth of the top line sales.  In 2015, they conducted 25 percent of their business on the internet. In 2016, 60 percent of their business was online. They are thinking 80 percent by 2022. In 2016, Amazon finally surpassed Grainger’s raw dollar profits but they had to sell more than 13 times as much on the top line to do it. Where Grainger once was able to quietly operate below the radar making tons of money, they are now the target of Amazon and other large nationals. Their focus on e-commerce also puts their high-margin pricing in a spotlight.  This has forced them to adjust pricing (our guess is down) in order to be perceived as competitive. They are closing some of their Canada locations and shopping some of their non-key businesses. 

The churning of their business model has caused their stock price to suffer as investors worry about the increased competition and the impact on the company’s profitability. We have loved their strategy and their execution for years but currently they are scrambling to implement strategy 2.0 or 3.0 or whatever number it is. It is not the smooth sailing and steady growth they have enjoyed for the last decade.

The point is: We have always used Grainger as a leading indicator of the forces that traditional wholesalers will face. Frankly, we have never been able to get the time differential right (in terms of how many years they are ahead of our industry in experiencing the same effects) but a lot of the forces seem the same. 

Change is coming.

So here are our takeaways:

Online business will continue to grow faster than you may expect - Duh? Everyone is telling you this. Grainger’s ratio has increased faster than we expected (and we think they expected). We think that many of Grainger’s target customers are possibly more tech savvy than the average contractor; but that is changing fast as contractors are forced toward technology in order to compete. We hear stories of contractors operating their businesses mostly from their phones and think this will be the future for most contractors.

Getting the product to the customer is becoming more important than having a store – Even Rich isn’t old enough to remember how we got to the “city counter” and delivery model that many wholesalers use; but some markets have transitioned to a “mostly delivery” model as contractors see little value in making a trip to a wholesaler’s store. Many of the current generation and most of the next generation of contractors will have more than a small expectation that the product will be delivered or shipped to them. Wholesalers must have a clear and accurate understanding of the costs of each delivery option and deploy those options efficiently to get the product to the customer as promised at the lowest cost. The days of running a big truck out to deliver a half inch elbow are gone or at least the wholesalers who do it regularly will be gone. It will be critical to integrate shipping company APIs into their operation. These APIs allow wholesalers to create the correct delivery paperwork and to schedule pickups/deliveries, ideally, through their ERP system or, less ideally, via a standalone application. 

Webstores require an investment – Building a reasonable webstore requires time and effort. Grainger has invested a ton in their webstore. For traditional wholesalers, the challenge will be to offer a reasonable webstore. While we have a bias, we think the sweet spot for many wholesalers will be above the standard cookie-cutter, same-as-everyone-else store attached to your ERP but far below the $200,000 plus investment that we hear self-anointed “e-commerce experts” are espousing. We have wondered if they espouse $200,000 plus stores because they have undisclosed relationships with companies selling $200,000 plus stores.

Pricing will be much more public – Hopefully not as public as grocery store prices but pricing will be easily accessed on a wholesaler’s online store which invites comparisons and shopping. As regular readers know, we are proponents of high resolution price management. (As a reminder, we think every company with greater than $20 million in sales should have a dedicated price manager assigned to fine tune pricing for the optimal competitiveness and maximization of profits.)  We see the role becoming even more critical because pricing will be changing by the minute as online companies vary their pricing using some software-based algorithms. Your online pricing will be compared to other online prices so it better be market-based and current to the minute. Are you using this source of pricing information now? Check with your lawyer to determine if you can access publicly available websites to evaluate the pricing in your market. It is our understanding that the big guys have electronic “shoppers” that gather and leverage this information (maybe your information).

Procurement software will assist buyers in rationalizing their many options - Big companies are already using these systems and require that their suppliers participate. We expect this trend to move downward into smaller buyers over time. Make sure you are positioned to play (or punch-out to their software) if and when you get invited to the game. Email us at jen@go-spi.com for more information.

Margins will be compressed – High margins mask a lot of operational sloppiness. As margins are compressed, sloppy operations will not be profitable. Making the best use of your ERP to create operational efficiencies will be required. We have referenced this joke before but it still applies. Two guys are walking in the woods and happen upon a bear. One starts to retie his shoes. The other says, “That’s silly, you can’t outrun a bear.” The first says, “I know, I just need to outrun you.” Many wholesalers take comfort in the fact that they can outrun the lazy wholesalers down the road. Amazon and the large nationals are working to build operational efficiencies that will allow them to outrun that lazy guy AND you.

Talent will be scarce – We should say, GOOD talent will be scarce and probably more expensive. Your challenge will be to create a process that reliably identifies the talent you need at market prices. While some in our industry seek to operate like McDonalds where the order entry terminal has little pictures of the products, we have seen no success in dumbing it down to that level. We think the mantra will be hire the best and brightest, pay to market and set the bar high.

Multi-lingual support will open up access to more installers – In many areas, the openings for installers are being filled by English-is-a-second-language folks. Making it easy for them to use your website and counters will help you to sell more stuff.

Some ideas - We cannot guess what is right for your company but sitting in the middle of the street hoping not to get run over is probably not your best option.

1. Plan to grow – We have always felt that this is the most fun option for the owners and the team.  It is not for the faint of heart. It almost always involves a significant investment of money and energy.
2. Sell – If you’ve lost the fire or are just too small to remain an independent; selling may be a good option and some wholesalers are in a buying mood. 
3. Harvest – Maybe you configure your business to throw off the most cash and see how long you can last. Not very inventive but better than option four in many cases.
4. Do nothing – Always an option for you. Doing nothing in the face of rapid change may result in “impact with the terrain, followed by combustion” as they say in aviation accidents.

Do something - We want to remind you of a quotation from last month’s interview with Epicor’s Himanshu Palsule. “If you don’t like change, you are really going to dislike irrelevance.”