Recommended Reading: The Downside of Grainger’s Pricing Initiative

Optimal pricing should offer short- and long-term positives. Why are Grainger's margins down?
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When Grainger publicly announced its web pricing initiative earlier this year, the goal was to improve penetration and acquisition of midsized customers. But that goal came with a caveat: The company would report declining margins through 2018, which, according to Lee Nyari in Grainger’s Pricing Initiative, pt 1: A ‘Suboptimal’ Solution?, is a sign that the solution may be flawed.

"In many ways, Grainger is doing the right thing," Nyari says. "However, the particular solution Grainger chose to deal with its pricing challenges may be suboptimal. It has been destructive to short-term performance (measured in absolute margin dollars), and it may cause the distributor to miss out on significant long-term opportunities that could make a material difference in its performance."

If the pricing initiative was optimal, Grainger would be seeing positive short-term results, Nyari says. But the distributor reported profit down 43.6 percent for the second quarter.

Some positive indicators have emerged, as well, with Grainger reporting increased sales to the targeted segment (midsize, uncontracted customers). But the question remains: Will that volume be enough to offset the margin losses?

It's a question MDM Publisher Tom Gale posed back in April, in the early days of the initiative. While the "race to the bottom" on price that was feared from this latest move by Grainger has yet to materialize (and Nyari points out that Grainger is taking steps to ensure that it doesn't, starting with not trying to be the low-price source), pricing pressures may still increase for some. Which, in turn, means that those distributors will need to focus on other ways to compete.

"This latest move validates a strategy of strengthening the core differentiation of localized and specialized talent, service and knowledge with digital tools to drive deeper engagement and customer value," Gale writes in Commentary: Can Grainger Make it up on Volume?

Nyari's article – part 1 in a two-part series – used publicly available information, including SEC filings and public pronouncements by the management team, to analyze the impact of the initiative. Read more in Grainger’s Pricing Initiative, pt 1: A ‘Suboptimal’ Solution?

Part 2, Grainger’s Pricing Initiative, pt 2: The Quest for Optimization, available Sept. 10, will provide a more in-depth examination of the challenges Grainger faces with its current initiative – and how they may be overcome.

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