In the second quarter this year, W.W. Grainger (NYSE: GWW) tried an interesting marketing test – offer free freight to customers in an effort to boost sales and gain market share in a cut-throat competitive year. Brent Rakers, analyst with Morgan Keegan, mentioned this in his latest research note. (Send an email to brent.rakers @ morgankeegan.com to get on the report list of the distribution companies they cover).

 

It did not work. Rakers estimated the impact was negative about half a percent on the company’s second quarter gross margins of 40.76%. So it turns out customers are not as price sensitive – even in the trough of this downturn – as Grainger expected. I found this interesting from a few angles.

First, it supports the position that their customers value them as the convenience store, not as the direct competitor to their local specialized distributor, where they are comparing every pricing component to make their decision. I think the same applies to their catalog competitors like McMaster Carr or MSC Industrial Supply. Every company thinks they have this huge overlap with primary competitors when often the market is either much more fragmented or polarized than the perceived competitive landscape. Or if there is a true dogfight for market share, it’s often difficult to get past the emotional investment management often holds to find the real reasons for customer alignments.

 

I have to believe that after this experiment there was at least one meeting in which someone asked a few questions, such as:

Of course, one could argue that customers were not buying enough in the second quarter to go shop it. They were only buying need-to-have replacements in minimum quantities, so they stuck with who they were used to rather than search for new suppliers for off-contract or one-off purchases.

 

Second, the fact that Grainger is even testing marketing initiatives like this marks a dramatic shift from the company culture in the 1990s. CEO Jim Ryan has transformed a company known in the industry more for its risk aversion and protecting the family franchise to a more innovative online and global company. At the same time, remember that it was Grainger that first sunk millions of dollars in the mid-1990s transforming a print catalog model to digital efforts, including portals, CD-ROM and eventually the Web.

 

Today there is a more diverse group of younger talent driving company programs. When the test didn’t work, they killed it quickly and moved on. It is all relative, especially when you are talking about multi-billion-dollar public companies, but this is definitely a more nimble and open-minded company than 10 years ago.

This same Morgan Keegan report is bullish on industrial distribution MRO sales in 2010 due to a positive impact MRO destocking in 2009 versus OEM materials (final goods production). They see Grainger sales growth of 14.5% ($877 million) in 2010, driven in seven major areas they detail as follows in their report:

 

 

Morgan Keegan & Co. does have a relationship with W.W. Grainger, as outlined in their required disclosures.