I was employed by Grainger for over twelve years, including three and a half years as a Director of Corporate Sales. As such, I was interested to read the two-part blog series on Grainger’s future, which was written by MDM President Ian Heller and published last week on the MDM website. While I thought the series had some very valid points, my own thinking varies to some degree.
I believe there are two reasons that Grainger will be challenged going forward:
The first is the changing of the buyer. There has been a dramatic shift towards the millennial buyer in recent years. In 2014, millennials were involved in the purchasing process at a rate of just below 50 percent; today, that rate is above 80 percent, and the millennial buyer today has the sole decision-making power in almost 50 percent of purchases.
Why is the millennial buyer having an increasing impact on a legacy company like Grainger? The company has put more focus into their e-commerce model, what they call single channel. This model has been growing at double digits for a number of years, but the shift rate is still too slow given the high operating cost of the business and they have experienced significant channel conflict with Zoro Tools and Gamut as they have attempted to transition to this new marketplace model. Millennial buyers are typically 60% through the buying cycle before engaging any sales resources from a supplier. This does two things that work against Grainger: one, it turns a higher proportion of purchases into online transactions where relationships are less important with regard to tail-spend; two, it makes the tail-spend purchase more price sensitive, which significantly works against Grainger as a premium supplier in this marketplace.
Grainger’s second challenge is the way the digitization of procurement has led to more price transparency. Grainger, like most distributors, broadly negotiates price with customers in two buckets: first, by negotiating part-specific pricing on price-sensitive items; and second, on broad discounts against a category. The pricing in these two categories is competitive and allows corporate buyers to show savings against their historical baseline or list price. Grainger has excelled in earning above-market margins on customers’ unplanned MRO buys; this unplanned category can erode all the savings the customer negotiated. This was the primary reason Grainger launched the web pricing initiative in the summer of 2017 but, while they have started to see higher volumes to offset the lower margins, the operating earnings have steadily declined since 2014. In addition, SG&A expenses have essentially remained flat despite numerous efforts to get these costs under control.
I believe Grainger still has a window of competitiveness with Amazon Business, although it is closing. What happens in this window will definitely define the future of Grainger and whether they will be able to compete or face the fate of Sears and Kmart, as outlined in Ian’s blog series. I see a couple of things that can help them win in this window.
First, Grainger for now has an advantage over Amazon in the B2B market and that has to do with how its products are delivered. Grainger is able to ship orders in a consolidated manner versus the Amazon marketplace model, where shipments arrive piecemeal. B2B customers want consolidated shipments because it provides efficiency in the receiving department. However, this advantage is not going to last long. As Amazon gathers purchasing data it will be able to consolidate shipments in its distribution centers and put itself on a level playing field with Grainger. This is also the reason that Grainger doesn't want to sell on the Amazon marketplace because it will essentially be giving its purchasing data to Amazon.
Second, Grainger needs to focus on how the millennial buyer purchases. One thing I’ve learned with millennial buyers is to never leave them a voicemail. They prefer to communicate through an electronic channel, so text, don’t call. The company has done some things to respond to the dramatic shift to the millennial buyer, such as launching an online university to help engage these buyers earlier in the buying cycle, but the shift isn’t accelerating fast enough. Grainger needs to capture these buyers by attracting them through social media versus the legacy model of prospecting.
This is a new environment for Grainger and the first step for the company is recognizing the current playing field. The winner in the industrial supply marketplace will need to have the talent to win the specialized core business and a strategy to win market share with tail spend. I look forward to watching this battle unfold in the next few years.
Keith Reinhard is a former Director of Corporate Sales for Grainger and is currently the COO of Axial Global Solutions and a Senior Advisor for Fleet Core Inc. You can learn more at www.axialgs.com and www.myfleetcore.com.