Distributors Take Note
No distributor would deny that Grainger is a titan in the wholesale distribution world. But does Grainger’s pricing struggle mean that this Chicago-based behemoth is losing its magic touch?
All eyes were on Grainger in April when the iconic company’s leaders held their analyst conference call about first quarter results: sales, margins, and profits were disappointing. The defensive tone of the quarterly call was out of character for the proud company. Grainger quarterly numbers were weaker than the results posted by estimable competitors such as Fastenal. Most of clients, firms much smaller that the publicly-owned giants, report that they are mostly ahead of their expectations so far this year.
So why is Grainger struggling, closing branches, and laying off staff? The company with the big red catalog always has been an innovator and early adopter especially in electronic commerce. Wouldn’t a mighty enterprise such as Grainger be a fortress against sniping from new online competitors?
Pricing is a major culprit. Grainger has a dilemma. Management presented a slide show during the call detailing how pricing has been slashed in several ways. List prices were lowered in January. Prices were cut for Internet customers. Contract pricing was unilaterally reduced even for some large customers. Overall, prices were reduced for many product lines for small, medium, and even large accounts. Management is determined to continue the price reduction process for the rest of the year. They contend that the price reductions curtailed the recent drop-off in sales. But, as a result of the price cuts, margins and profits went down sharply. These major moves follow Grainger’s establishment in recent years of a sister company, Zoro Tool, which offers lower online prices for many of the same items available through Grainger.
Investors have long admired Grainger’s dividends, hefty gross margins, awe-inspiring return on sales, and return on investment. But, as evidenced by sales results, apparently customers noticed those high prices. Competitors noticed too. Grainger is a juicy target for pesky online sellers. Amazon Business clearly has the leviathan in its sights. Perhaps the days of “skimming the cream off the top” of the market and mouth-watering markups on freight charges are over. The old value proposition of snagging orders for unplanned purchases of supplies items at high prices in exchange for convenience and reduced procurement costs seems to have changed. Management has now determined that Grainger prices need not be the lowest but they must be “in the ballpark.”
How do Grainger’s struggles with pricing affect your business? You must sit up and take notice if a gigantic and innovative distributor with vast resources, including world-class consultants and hundreds of e-commerce specialists, isn’t able to cope. Is your value proposition compelling to your customers? Is your pricing in tune with your cost structure? Do you need inflated margins to cover bloated costs? Are you vulnerable to Internet sellers whose pricing tempts your best customers? Look at what happened to Grainger when they got “caught speeding” and presented an opportunity to competitors.
We advocate consistent, optimized pricing that is market driven. We advise you to analyze your pricing, fix below-market pricing outliers, and develop market driven pricing matrices to make sure your sales team has realistic pricing guardrails. Analyze the profitability of your customers and work on your cost to serve to control the costs of your services. Increase your people productivity to reduce your operating costs and maintain high service levels. Rethink your strategy to focus resources on the customer segments, products and services, and geographic markets that make the most sense for your company.