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Big strategies for big distributors

If you don't know where you're going, any path will take you there

by Brent Grover

Do your employees, suppliers, customers and competitors know what your strategy is? Does one of the following three choices capture your company’s thinking about strategy?

1) What we do – and don’t do – is crystal-clear to those who know our company.
2) Our strategy is a closely guarded secret. No one
outside of our inner circle knows.
3) We don’t really have a strategy. We’re just trying to grow and make money.

My friend Jonathan Byrnes of MIT says that a company’s strategy is defined “as much by what it doesn’t do as by what it does.” I would add that many distributors are notorious for lack of focus. Evergreen Consulting’s experience facilitating strategic plans for distributors shows that management is highly reactive to what customers ask for. The distributor responds to whatever business “comes over the transom.” There isn’t much discipline about which customer segments, products and services, and geographic markets the business will invest in, those it will harvest and others it will ignore.

Publicly held wholesale distribution companies provide a window into the inner workings of distributor strategy in several trade lines; Wesco in electrical, MSC in industrial products, and Applied Industrial Technologies in bearings and power transmission, for example. As the largest distributors continue to expand into new lines, their product focus has blurred. Grainger (once a specialist in electric motors) and Fastenal (originally fasteners) started out with narrower lines but have blossomed into many other products and services. Others have become more of a processor than a distributor (Olympic Steel) or are also in non-distribution businesses (Genuine Parts owns Motion Industries; Kaman and Barnes Group own distributors and other businesses).

This article is about distributor strategy, so I am going to concentrate on two public companies that are “pure” distributors and one diversified company that is making a strong move into distribution with a clear strategy.

I. Fastenal
Fastenal is a hard-charger in wholesale distribution that has exploded out of its niche to become a major player:

• Fastenal operates more than 2,650 stores (wholesale + retail = “wholetail”?). The company opened 73 new stores in the first nine months of 2012.
• Under its “FAST Solutions” banner, Fastenal has placed more than 20,000 industrial vending machines in customer locations. The firm installed 10,000 machines in 2012 and announced plans to install 2,500 per month in 2013.
• The machines dispense products such as cutting tools, fasteners and safety supplies.
• Coin-operated vending machines were used to sell chewing gum as far back as the 1880s, and were introduced in distribution in the early ’90s.
• Technology that enables machines to signal the distributor for replenishment has finally made the machines economically feasible.
• Over 20% of Fastenal’s total sales in the most recent quarter were through vending machines. Competitors no longer refer to industrial vending machines pejoratively as “candy machines.”

Fastenal is executing these distinct strategies simultaneously. One is building out its enormous network of “whole-tail” stores. The other is installing thousands of sophisticated vending machines at customer locations.

II. Grainger
W.W. Grainger is an old-timer in the distribution business but the company certainly doesn’t show any signs of its age:

• Well over 25% of Grainger’s sales are coming in through the Internet. The company predicts that total will soon exceed 50%.
• The company recently introduced a mobile app to provide full access to the Grainger website from customers’ smart phones and other devices. The capabilities include a voice search function and an integrated workflow system.
• Grainger’s private label brands, including Tough Guy, Westward and Dayton, comprise 20% of the company’s sales.
• The company’s famous catalog has grown in recent years to offer more than 500,000 products. The catalog included only about 80,000 products as recently as 2005.

Grainger is also executing multiple strategies. One is leveraging its extraordinary logistics capabilities with tens of thousands of new products including private label brands. A second is innovative electronic commerce. Another is rapid overseas expansion with acquisitions in Europe, Asia and Latin America.

III. AmazonSupply
For distributors, AmazonSupply (amazonsupply.com) is the new kid on the block:

• Amazon launched its entry in April 2012 in 14 major product categories with 500,000 stock items, including many top brands in the various industries. The service offering is backed by two-day delivery, free freight on orders over $50 and a 365-day return privilege. Corporate charge accounts and phone support are available.
• AmazonSupply brings Amazon’s patented “One-Click Ordering” and the incredibly successful “Amazon Prime” customer loyalty program to wholesale distribution electronic commerce.
• Which competitors is AmazonSupply targeting? The benefits for unplanned purchases of MRO items are apparent. The threat to sellers of supplies to contractors is less obvious. The threat may be greatest to Grainger, which does much business with small customers and handles small orders for all kinds of customers. The big box retailers such as Lowe’s and The Home Depot may also be affected. In any event, AmazonSupply’s flexible strategy is ready to meet the unpredictable needs of new types of customers in the future.
• Amazon is well known for its ability to test, perfect and implement breakthrough strategies. It is experimenting with same-day delivery in some large metro areas.

AmazonSupply is bringing its extraordinary “B2C” electronic commerce capabilities into the wholesale distribution channel. The powerful attack is being waged on multiple fronts with a barrage of offerings.

These three large companies are in different stages of development in their presence in the wholesale distribution channel. While there are many things going on beneath the surface, note that even these leviathans are concentrating their efforts on a fairly small number of strategic initiatives. They are executing relentlessly.

Brent R. Grover is a nationally recognized distribution industry consultant, speaker and writer. Brent is a NAW Institute Fellow and the author of six NAW books, including Strategic Pricing for Distributors. He founded Evergreen Consulting, LLC in 2001 to exclusively advise companies in the distribution channel. Brent is the editor of Advanced Distribution Today, a daily news blog and weekly newsletter. Subscribe for this service at www.advanceddistributionsoftware.com.

This article originally appeared in the March/April 2013 issue of Industrial Supply magazine. Copyright 2013, Direct Business Media.

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