W.W. Grainger Inc. (NYSE: GWW) is a distributor of industrial supplies serving the maintenance, repair, and operational (MRO) needs of businesses across North America through catalog sales and approximately 600 storefront locations. Grainger sells parts in most common industrial product categories—from hydraulic pumps to drill bits. The MRO market is highly fragmented, and Grainger, with 4% market share, is by far the largest player.
Grainger aims to increase sales by reaching new customers and encouraging customers to treat Grainger as a one-stop shop for hardware purchases, including purchases they might otherwise make from a more specialized distributor. Toward those ends, Grainger is increasing store coverage in U.S. cities, recently opened a distribution center in Shanghai, and is expanding catalog offerings dramatically. Furthermore, during 2009 Grainger acquired two businesses in the U.S., one in Canada, one in India, and a majority share of a business in Japan.
Grainger’s earnings in the coming years will depend on largely the health of the MRO market in the United States. Revenues may also grow relative to GDP if Grainger succeeds in increasing its customer base and sales per customer.
W. W. Grainger Inc. was founded in 1927 as a wholesale distributor of electric motors. By 1936, Grainger had 15 branches across the United States. By the late 1930s, Grainger had begun to move beyond motors and launched Dayton, a private label brand that Grainger still sells today. The company went public in 1967.
During 2009, Grainger was able to post a net income of $431 million from total revenues of $6.2 billion. Revenues declined by 9.2% when compared to its 2008 revenues of $6.9 billion. This decline was largely due to lower demand for products, as sales volume declined 14% in 2009 due to the tough economic conditions. In particular, the heavy manufacturing customer sector hurt Grainger's sales the most, as their sales declined by 20% for those customers.
Grainger breaks its business into three reportable segments: i) United States, ii) Canada, and iii) Other Businesses.
For the year ended December 31, 2009 Granger's United States segment earned a total of $5.4 billion in revenues, a decrease from its 2008 total revenues of $612 million. As a result, the segment's operating income declined from $840 million in 2008 to $736 million in 2009. The company attributed this decline in large part to the tough economic conditions in 2009. Heavy manufacturing customers were hit particularly hard, as net sales to these customers declined by 20%.
During 2009, Grainger's Canada segment had total revenues of $651 million, a decline of $77 million from its 2008 revenue. As a result of these declining revenues, the Canada segment had its operating earnings decline by $10.5 million in 2009 to $43.7 million. Like the United States segment, these declines were largely driven by heavy manufacturing customers purchasing significantly less.
Grainger's Other Businesses segment includes its operations in Mexico, Panama, Japan, Puerto Rico, and China. Net sales for other businesses increased 47.7% for 2009. The increase in net sales was due mostly to the acquisitions they made in 2009 of companies in India and Japan. Despite the increase in net sales, this segment had an operating loss of $11.6 million in 2009, which was a 1.6% improvement from its 2008 operating loss.
Because Grainger derives the great majority of its revenues from U.S. sales, it is vulnerable to downturns in the U.S. economy. This is particularly noteworthy because most of Grainger’s customers are themselves vulnerable to economic cycles. As a result, downturns in the U.S. economy hurt Grainger through lower sales, but even more so because their customers themselves are facing difficulty as well.
However, during 2009 Grainger acquired two foreign businesses, one in India and another in Japan. By expanding overseas, Grainger reduces its dependence on U.S. sales. Whether Grainger continues this trend of international expansion in the future remains to be seen.
Keeping Grainger's stores and distribution centers stocked is a significant logistical task. Fuel costs contribute significantly to the costs of stocking material and shipping to customers. As a result, rising fuel prices may force Grainger to pass on these extra costs to customers, something they may or may not be able to accomplish.
Most of Grainger’s competitors are nothing like Grainger. In the highly fragmented MRO market, Grainger’s 4% market share is larger than any other distributor’s. While Grainger originally dealt only motors and electronics, it now covers almost every industrial product category and derives no more than 15% of revenue from any single one. Most of Grainger’s competitors are small, often family-owned, local distributors that specialize in a single area. Even national distributors usually focus more on a single product category.