Grainger CEO outlines market strategy

Editor's note: The following excerpted remarks by Richard L. Keyser, chairman and CEO of W.W. Grainger, were to a meeting of the Electrical Products Group of New York on May 8. Click on "Complete Document" at the end of this article to view his complete remarks.

For 2002 and beyond we're concentrating on driving sales growth and continued margin expansion. This is what I hope you'll remember about Grainger after I'm finished. Let me start with our growth opportunities.

Simply put, there is no one in our industry better positioned than Grainger to grab market share in the $100 billion facilities maintenance market.

In the past, we've talked about the larger, $400 billion maintenance, repair, and operating supply market. Our sweet spot is a subset of that market. We know that 20ﾠpercent of our customers make up about 80ﾠpercent of our U.S. sales. So in the short run, by concentrating our efforts on satisfying our best customers, we have a much greater opportunity to gain share and grow profitable sales.

If you talk to our customers, you find that our real competitors are the 150,000 local suppliers who represent almost 90 percent of the market. These competitors have a good understanding of their local customer base, but they don't have Grainger's scale as a national supplier. They offer a relatively narrow product line, modest physical presence, and nowhere near the e-procurement choices that customers want.

By contrast, Grainger's multiple channels and national footprint enable customers to find and get the supplies they need faster, saving them time. And we know that for them, time is money.

You've probably heard us talk about time and cost savings before. Ask any of the companies presenting at this conference, and they will tell you that buying indirect materials is expensive. That's because, on average, only 60ﾠpercent of a customer's total cost goes toward the product itself. The other 40ﾠpercent goes toward what we call process costs. Costs associated with identifying the right product, finding suppliers who have the product in stock, searching for the best deal, generating a requisition, approving the order, receiving the product, and paying the invoice. Contrast that to buying direct materials, where the product represents more than 90 percent of the cost.

If that sounds abstract, here's a point that may hit a little closer to home. The companies presenting at this conference bought $60 million worth of product from Grainger last year. We thank each of them for their business. Assuming that we have about 5 percent of the market, that means that these companies spend more than $1ﾠbillion on facilities maintenance products overall. And on top of that, they incurred some $700ﾠmillion in process costs. You'll never see that money explicitly itemized on their financial statements. More importantly, that $700 million represents a real opportunity for them to realize significant cost savings and for Grainger to grow market share. Cost savings is a major initiative for all of our customers.

Trends in distribution study

Last year, Texas A&M University conducted a study of trends in distribution. They found that the key issue among customers was documented cost savings. In fact, the study reported that 50 percent of end users plan to ask suppliers for documentation in the upcoming two years. Even more importantly, 79 percent say they think that if a supplier could produce documented cost savings, they would expand their business relationship with that company.

This confirms our belief that one of our biggest opportunities in this market is our ability to identify and document ways for customers to reduce the time and costs involved in finding and acquiring maintenance supplies. We do that by analyzing their buying practices and providing reports on their costs in four key areas: product, acquisition, possession and usage.

By taking a closer

look at a customer's purchases and determining which products they use most often, we can help them standardize. Doing so aggregates their spend, leverages our scale, and lowers the customer's costs.

To cost effectively find and purchase the right product, we recommend our customers use our electronic channels. I'll talk more about the results we're seeing from this channel a little later.

We also help customers shift their buying practices from 'just in case' to 'just in time.' If the customer maintains stockpiles of inventory, products could become lost, damaged, or obsolete before they're used. Grainger's same day shipping capabilities and local availability mean that customers can reduce the amount of inventory they keep on hand, reducing possession costs.

Finally, we analyze whether customers are using the most effective products for the job. For example, we can suggest energy efficient substitutes that could help customers reduce their costs over time.
We expect that by providing tangible means for customers to save time and money as they're procuring facilities maintenance supplies, we will gain share. And picking up market share is the way we expect to grow.