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Is Grainger the Sears or the Target of Distribution? Pt. 2

Is Grainger the Sears or the Target of Distribution? Pt. 2

October 19, 2018

Yesterday, MDM President Ian Heller covered the history of disruption in retail, describing how Walmart’s explosive growth resulted in different reactions from Kmart, Sears and Target. Heller suggested that Grainger and other traditional distributors can learn important lessons from what happened in retail as they make strategic decisions about their own futures.

Grainger’s Four Strategic Alternatives

Today, Grainger must solve a problem similar to the challenges major retailers faced as Walmart began to dominate its rivals 15–20 years ago. The disruptor in distribution is, of course, Amazon Business, which has a clear value proposition: the widest assortment of products, very rapidly available, at good prices. Other disruptors could emerge, of course, including Walmart; we are hearing rumors that the company is developing an interest in B2B. 

I wrote that Grainger has four fundamental strategic alternatives:

  1. Ignore the problem presented by Amazon Business and other disruptors (the Sears approach).
  2. Attempt to go head-to-head with Amazon Business (the Kmart approach).
  3. Reposition its value proposition to be clearly differentiated from Amazon Business (the Target approach).
  4. Collaborate with Amazon Business – including selling on the company’s marketplace.

In July 2016, Grainger’s now-retired Chairman and CEO, Jim Ryan, told Crain’s Chicago Business, “What I don't worry about is our market, both in the U.S. and worldwide. There's still share to be gained.” That article included conflicting opinions from various analysts about the threat Amazon Business posed to traditional distributors.

While it’s necessary for company leaders to express confidence publicly, my guess is that Grainger’s senior executives are worried indeed – and they should be. If they’re not, then they’re taking the Sears approach, and we know how that story ends. 

Grainger could also choose the Kmart strategy and choose to go head-to-head with Amazon Business. Frankly, I think this will be hard for Grainger to resist. Just like Kmart in retail, Grainger was the original leader in its niche; in the latter’s case, by providing an enormous assortment of SKUs and making them quickly available. The problem is that Amazon Business, thanks to its marketplace model, has an insurmountable advantage in its ability to quickly deliver the widest assortment of products.

Grainger has given some signs that it may follow this strategy. The company has eliminated headcount, closed a lot of locations and recently cut prices – this is all very Kmart/Sears-like. In addition, like many distributors, Grainger has developed an obsession for bragging about the percentage of its revenues that come through its online channel. This mystifies me, as it’s a very double-edged metric. On one hand, it shows your ability to satisfy online shoppers, which is good; on the other, it’s a measure of your vulnerability to Amazon Business, which is really, really bad.

It’s tough for me to see a Grainger/Amazon Business collaboration outside of an acquisition. Amazon Business doesn’t need product assortment or market coverage, although Grainger’s expert sales force would be an advantage. Grainger, on the other hand, has a strong brand and enormous institutional knowledge it can rely on to develop a truly differentiated value proposition if it chooses to do.

That’s the Target approach: accept that you have a new competitor of unprecedented size and scale. You can’t confront it head on and you can’t ignore it, but you can be nimble and get out of the way.

Grainger as the Target Corporation of Distribution

Like Target, Grainger has a great brand. For a distribution company, it has spent a lot of money on advertising in recent years. But the challenge it faces today is not an awareness or branding problem and it won’t be solved with advertising. 

Brands have strength when they’re built on truly differentiated value propositions that customers understand and like. Grainger needs to get out of the way of Amazon Business and build a new identity – a new value proposition – and that means building out “moats,” many made of services, while maintaining but no longer trying to differentiate primarily on a wide assortment or robust online capabilities. Amazon Business now owns that position and, like Walmart with its low-price strategy, has built strengths no competitor can match.

Grainger has made quite a bit of progress in building moats. The value-added services it offers customers have become an increasingly important part of its business. However, I believe it needs to go farther, move faster and stop caring about what percentage of its business transacts online. Yes, that capability is very important. But it’s a highly flawed metric that can lead to bad strategic decisions.

Target found a unique niche in discount retail and I believe Grainger can find an effective position in distribution. There are a handful of large, publicly held distributors with reasonably differentiated value propositions from Amazon Business, including Fastenal and HD Supply. Plus, there are many smaller distributors that offer a number of hard-to-digitize services ranging from to kitting to rentals to light assembly to high levels of technical expertise and differentiated merchandise assortments. The examples are there for Grainger to follow. 

In 2012, retail consultant Sid Doolittle told Ad Age that Kmart was "A slow-motion train wreck. Long term, retailers have to have a reason for existence that customers love.” 

“What do you love about Kmart?" he asked. "There's nothing really." 

Does Grainger offer enough to ensure its customers will continue to love it in the future? That’s not clear to me. But it’s not too late. Grainger is still financially sound and CEO D.G. Macpherson demonstrated real courage when he cut prices soon into his tenure, which I believe was necessary in order for the company to become more competitive no matter what strategy it follows in the future.

If Mr. Macpherson can demonstrate similar courage in leading the company towards a new strategy, the company can continue to grow and thrive. In other words, he can make Grainger’s story more like Target’s than Sears’ or Kmart’s. He can’t beat Amazon Business at its game, even though that company does what Grainger used to dominate. But he can change the game and avoid the juggernaut.

What About You?

This is not just a story about Grainger. Most distributors will face similarly tough choices and need to figure out what to do as disruption rolls through the distribution industry. 

As a starting point, you need a detailed understanding of the Amazon Business value proposition, how it’s differentiated and how it’s likely to adapt and change over time. You need to decide how you will compete in the future: by building moats, selling on the Amazon Business Marketplace, or some hybrid. In addition, you need a network of senior executives who are wrestling with similar choices so you can benefit from their insights and share yours. 

I suggest you attend MDM’s upcoming event, “How Distributors Should Respond to Amazon Business.” This forum, coming up on Dec. 4-6 in Denver, will include leading thinkers on Amazon Business and an array of senior executives you can talk to during our facilitated breakout sessions. 

Ten years ago, it was hard to imagine an outside player entering distribution and making companies like Grainger look potentially vulnerable. But things change and the sooner you understand and react to the new competitive environment, the better your chances of thriving through the coming chaos. I hope you will join us in Denver to get started.

Register or leave a comment below and please feel free to send me an email at ian@mdm.com

https://www.mdm-forum.com

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