Manufacturing production and new orders continued to expand in November, according to the latest Purchasing Managers Index, signs that the recovery is underway. But not every distributor has been able to take advantage of increased demand, says Erik Gershwind, COO of industrial distributor MSC Industrial Direct, Melville, NY. Gershwind recently presented at the Robert W. Baird Industrial Conference.
The cuts many “mom-and-pop” local and regional distributors have had to make put them in a precarious situation now that demand in increasing, Gershwind says. “They face severe pressure on working capital in the form of inventory and receivables,” he says. “So many of these businesses can’t afford to put the cash back into their businesses.”
And that has given MSC opportunity to grab market share, according to Gershwind. He says that MSC was able to maintain and grow its sales staff to focus on the opportunities even during the downturn. As of Aug. 28, 2010 the end of the company’s fiscal year, MSC employed 973 direct sales representatives, a 3.6 percent increase over the prior year.
And the company is expanding its geographic presence particularly in the western U.S. “Our market share in the state of Connecticut is 3 percent, which is a tiny number but it’s still a growing number,” Gershwind says. “But if you take our Connecticut market share and extend it across the rest of the country, you have a business doing in excess of $4 billion in revenues (each year). Without doing anything much different than what we’re already doing today, we have a huge growth opportunity in this company.”
MSC’s growth strategy also includes building upon its position in metalworking, looking at new customer segments, making “selected acquisitions” such as the recently announced acquisition of Rutland Tool & Supply Co., and expanding product offerings. (MSC currently has more than 600,000 SKUs on its website.)
The investments seem to be paying off for the distributor. Fiscal 2010 sales were up 13.4 percent over 2009, and even up 2.4 percent when compared to fiscal year 2007 before the recession formally began.
Beating the Industry
At 46 percent, MSC’s gross profit margin is double the company’s estimate of an industry average of 23 percent. A higher-than-average gross profit margin is a result of three key strategies, according to CEO David Sandler, also speaking at the Baird Industrial Conference.
The first reason is the type of demand MSC targets: unplanned and semi-planned demand. “The semi-planned demand is the stuff that fills the storeroom,” Gershwind explains. “They know they’re going to need it, but they don’t know when and they don’t know how much.”
MSC offers options for its customers to manage the unknown, through automated replenishment systems and vendor- or customer-managed inventory. It also works to reduce the cost of orders that are often low-dollar.
The size of MSC the distributor reported sales of $1.69 billion for fiscal year 2010 also provides an advantage for maintaining a high profit margin. “While we’re not a huge company, we are quite large in our space,” Sandler says. “Which means we enjoy a lot of leverage with our suppliers, and we use that leverage to command better pricing.”
The third reason identified by Sandler for MSC’s success in maintaining higher gross margins is its focus on branding and private label. While the company does not publicly disclose what percentage of its revenues are from private label, he said it is “significant.” “It’s really impossible for a small distributor to be able to import directly, and that gives us an enormous advantage on the gross-margin line,” he says.
Of the 43,000 new SKUs added to the 2011 catalog distributed in September 2010, about 30 percent of them were MSC proprietary brands, according to MSC’s 10-K SEC filing for fiscal 2010. But focusing on a private label can create its own challenges in dealing with other suppliers. “It’s definitely about creating a balance,” Gershwind says. MSC has to make sure that other suppliers do not feel that the company is trying to compete with them. For MSC, that meant positioning its private label offerings on a different value proposition and not just on the lower price.
“We’re in the early innings of a really powerful growth story, a story that we continue to invest heavily in,” Gershwind says. “The way we’re going to grow going forward is very much the way we’ve grown for the past 15 years.”