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GWW -- Grainger


lincolnc
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Anyone ever look at this wholesale distributor?  Amazing track record of growth for a relatively boring business.  Not sure how deep/wide economic moat is.  Not that I know Buffett, but I can imagine this is as good or better than some of businesses in his current stable.

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Something of interest: http://gannonandhoangoninvesting.com/blog/2016/4/27/distributors-like-grainger-gww-can-benefit-from-their-biggest-corporate-customers-wanting-to-consolidate-suppliers-for-decades-to-come

 

Almost all of the company’s profit comes from the U.S. So, when you think about what Grainger does – think unplanned purchases by big U.S. businesses.

 

vs FAST:

 

Things like light bulbs, safety gloves, and fasteners – a key part of Fastenal’s business – are bought more frequently in greater quantities as part of planned orders. Grainger sells to both large customers and small customers. And customer orders are sometimes planned and more frequent, sometimes unplanned and less frequent. But, the biggest part of Grainger’s business is unplanned purchases made by large business customers who have a contract with the company. Almost all of the company’s profit comes from the U.S. So, when you think about what Grainger does – think unplanned purchases by big U.S. businesses.

 

Online became a huge part of Grainger’s business. Today, Grainger is the 13th biggest online retailer in the U.S. It is one of UPS’s top 10 customers. And it gets 40% of all U.S. revenue through the internet.

 

or now, we’ll just let you know that Grainger is the majority (53%) owner of a publicly traded Japanese company called MonotaRO. The stock – which is a wildly expensive, Japanese growth stock – has a market cap of $2.4 billion (that’s U.S. dollars). That gives Grainger’s stake a $1.3 billion value at market. I’m not sure that’s the correct value. The P/E on the stock is astronomical. But, so is the growth rate.

 

The reason for Grainger’s success in the U.S. is supplier consolidation.

 

he average order size is small. However, it needs to be filled fairly rapidly. Customers are often satisfied with next day shipping on most items. They’re unlikely to be satisfied with next week shipping. This means Grainger has to keep a lot of inventory on hand. They also have to offer credit terms to customers. Business customers are used to buying on credit. They don’t want to have to pay their bills any faster than 30 days. So, Grainger has a lot of inventory and a lot of receivables. It has low turns. But, it has high margins. This surprises some people. Investors and analysts see 40% gross margins and wonder how that can be.

 

Grainger has 1.4 million stock keeping units. About 500,000 SKUs are kept in inventory. Most orders ship same-day or next day. Grainger keeps products in inventory at 19 distribution centers and 350 branches across the country. Branches average 22,000 square feet.

 

As we said, Grainger actually grew 10% a year since going public 40 years ago. And, it has grown sales to large businesses by more than 8% a year since the financial crisis. Earnings grow even faster than sales. So, Grainger is definitely a growth stock. In fact, it’s a growth at a reasonable price stock. As I write this, Grainger stock sells for about 10 times EBIT. That’s a great price for a growth stock.

 

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doesn't this sound a lot like something that could easily be dominated by Amazon if they decided to enter the space?

 

Emphasis added. The interesting thing is that Amazon tried once and failed. Their second attempt looks better. Specifically, they are creating a platform for smaller distributors to compete more effectively against Grainger, MSC, and Fastenal. This could potentially slow or even reverse the market share gains that the bigger distributors are gaining at the expense of the local and regional players.

 

BUT, you have to remember that even Grainger has a tiny share of the market. It is possible for Amazon to build a very big business and for Grainger to do fine.

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doesn't this sound a lot like something that could easily be dominated by Amazon if they decided to enter the space?

 

Emphasis added. The interesting thing is that Amazon tried once and failed. Their second attempt looks better. Specifically, they are creating a platform for smaller distributors to compete more effectively against Grainger, MSC, and Fastenal. This could potentially slow or even reverse the market share gains that the bigger distributors are gaining at the expense of the local and regional players.

 

BUT, you have to remember that even Grainger has a tiny share of the market. It is possible for Amazon to build a very big business and for Grainger to do fine.

 

I would also add that Grainger has had a good amount of success in e-commerce, enough certainly to give them a fighting chance against AMZN.  Aggregating the traffic on their websites would, if I remember correctly, make them a top 10 e-retailer in NA.  They also have done an amazing job with MonotaRO in Japan, which is now a +90% online business.

 

Generally speaking, the MRO parts distribution business is a very good business.  And the moat appears to be quite wide.  Google entered the space a few years back and, from what I understand, has retreated quite a bit. 

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