While often considered a leader in the distribution e-commerce space, Chicago, IL-based Grainger now finds itself playing catch-up online. New customers have been turned off by the company's higher-than-market list prices, and existing large customers have cited those same prices as a reason for not consolidating more purchases with Grainger.
"With large customers, pricing has been a barrier to capturing all of the volume with customers," President and CEO DG Macpherson said in an investor call this week. As a result of the response, the company is accelerating its pricing initiative plans for completion in the third quarter of this year rather than the first quarter of 2018. In addition, it plans to remove the opt-in requirement it currently has for placing online orders.
The MRO distributor identified this issue during the fourth quarter of 2016 and launched a strategic pricing initiative in January to get prices into the same ballpark as its competitors. But the response to what was supposed to be a yearlong effort caught executives off guard. "We've seen the strongest volume growth in two years for this quarter," Macpherson said. "And we expect to see volume grow in the U.S. about 6 percent for the year." At the same time, the distributor has taken – and expects to continue to take – a hit to its profit margin.
Grainger's sales volume in the U.S. climbed 4 percent during the first quarter, but because of the strategic pricing project, that increase in volume translated into a revenue decline of 1 percent. Gross margin is expected to be down 210 basis points for 2017, with a "bottoming out" not coming until 2018; previously, the company had forecast gross margin to be down 40 to 70 basis points for 2017.
"This is a huge change for Grainger," Macpherson said. "It's not an easy one to execute, but this is absolutely the right thing to do."
The ability to shift course and accelerate the initiative is a testament to Grainger's willingness to invest in adaptation, but is the move too little too late? Review by Nicholas Johnson, co-author of Modern Monopolies, suggests that the move might at least be a bit short-sighted.
"Grainger predicts its volume growth will come from a relatively even mix of increased spot buy business from existing large customers as well as new e-commerce business from small and mid-sized customers," Johnson writes in an Applico blog. "While we view the former growth as likely in the short term, the latter assumption from Grainger’s leadership is much harder to swallow."
Underlying Johnson's analysis is the lack of digital marketing undertaken by Grainger to this point – a deficiency acknowledged by Macpherson in the investor call. But, Johnson notes, Amazon Business already has a significant leg up in this space and will likely increase the price pressure on Grainger even as it tries to adjust to the online market.
Grainger hasn't entirely struggled in the online space, particularly with small customers. However, those customers aren't shopping with the Grainger brand, instead participating through its online platforms Zoro and MonotaRO. Those platforms experienced sales growth of 23 percent during the first quarter and saw operating margins expand by 100 basis points.
The question is whether Grainger will be able to translate that success to the Grainger.com brand without engaging in a race to the pricing bottom.
Read more about Grainger’s plan to realign its prices in Grainger’s Pricing Solution.
