Grainger invests in technology
Slew of e-commerce deals vaults Grainger into the online community
By John R Johnson -- Industrial Distribution, 6/1/1999
CHICAGO--Internet fever is gripping distribution. That's certainly the case with W.W. Grainger, the $4.3 billion MRO giant that is investing heavily in Internet-related technology. All indications are that those investments are starting to pay off quite nicely.After months of debate as to just how much business Grainger is conducting over the Internet, the firm revealed last month that its online revenue run rate will be $70 million in 1999. That means Grainger's online revenue is already larger than many mid-sized distributors. If you take Grainger's online sales only, for example, and include them as a separate entity in Industrial Distribution's Top 100 (see page 73), Grainger online would come in at No. 73.
However, Grainger isn't about to rest on its laurels, as recent announcements indicate. Last fall, for example, Grainger invested in a small technology company called Requisite Technology. Although terms of the deal weren't released, Grainger has revealed it was the major investor in the firm's $7 million venture capital financing.
That was just the start for Grainger, which last month announced an alliance with Bedford, Mass.-based PSDI, a provider of enterprise asset maintenance systems. As part of the alliance, Grainger took a minority ownership position in the firm, acquiring 500,00 PSDI shares, worth $14.5 million, equal to a four percent stake in the company. Grainger also purchased an option to acquire five percent of MRO.com, PSDI's new Internet commerce subsidiary.
PDSI plans to use the funds to "accelerate MRO.com's development of Internet-based maintenance, repair and operating commerce products."
That announcement was followed by another partnership with Commerce One, which Grainger also invested in during its round of private funding. The two firms announced they will align forces to provide customers with access to Grainger's industry-leading catalog of MRO supplies.
"It does make sense where appropriate to take an equity stake in order to cement the relationship, and also to capture some of the value and the upside that we are creating together," says Daniel Hamburger, president of Internet commerce for Grainger. "It's decided on a case by case basis. Grainger has a tremendous financial strength with its cash flow. In case you haven't noticed, Grainger is serious about the Internet."
Indeed, the firm launched OrderZone.com, a Web site partnership with six other companies, on May 15. The site is seen as a place where buyers can procure much more than MRO supplies, and is part of Grainger's effort to provide e-commerce solutions to all of its customers.
"Our Internet strategy is to make sure that Grainger is on every desk top," says Hamburger, referring to the "old" Grainger concept of having its red catalog on the desk of all buyers. Grainger has tried to provide alternatives for the MRO buyer, the buyer with broader procurement needs, and for large customers requiring a full technology package.
"For the pure focused MRO buyer, Grainger.com is the perfect solution," says Hamburger. "For the buyer who has MRO needs but also needs other products like office supplies and uniforms, Orderzone is a great solution. And for larger customers who have very complex procurement processes, they'll need [advanced] technology and it's our strategy to partner with those companies. So that's why you see us partnering with the enterprise software players like SAP, the procurement software people like Ariba and Commerce One, the asset management people like PSDI, and the other e-commerce enabling technology companies such as Requisite. It's a segmented approach to make sure we have a solution for every customer."
Overall, the industry seems to be responding well to Grainger's Internet initiatives. As for its online sales, Hamburger says the growth has been due to new customers signing on, as well as traditional customers. And, those customers are buying more than ever, he says.
"We are finding that most of it is new business," he says. "We are signing up brand new customers, and we are increasing overall business with [current customers] by a very wide margin. The online customers are growing at a rate which is about five times as fast as the customers who haven't gone online yet."
While customers seem to like ordering online, the investment community, which in many cases is the gauge for whether a company strategy is working or not, seems to be embracing Grainger's efforts. In the few days following its announcement about online sales, Grainger's stock was up as much as $5 a share. Grainger is also one of the only distribution stocks trading near its 52-week high.
"We're mostly focused on the reaction of our customers, and that continues to be strong," says Hamburger. "It does appear that the more we show the investment community our plans ... every time we reveal more information, it's been very positively received. I think the market has been speaking that it clearly makes sense for us to be making these investments and strategies."
Indeed, one industry analyst commends Grainger for its efforts, but wonders if the advantage of being the first online player is sustainable. After all, 10 years ago, the Grainger catalog was the only one on many buyers' desks. Today, purchasers are flooded with catalogs.
"I absolutely commend that they are shedding this stodgy image and developing a stronghold [on the Internet]," said the analyst, who follows Grainger and other distributors. "They are only picking the cream of the crop to partner with, but I also think that investing a lot of money early on because you think the first-mover advantage is sustainable probably isn't the wisest decision. Even if you are a first-mover and develop brand image ... they already have a brand image. They are the behemoth and everyone is frightened of them and they have successfully carried that image over to the Internet.
"Ten years ago the big red book may have been the only book on the shelf, but now MSC, JLK and McMaster Carr books are all there, and that's indicative enough to say that first-mover advantage isn't sustainable on the Internet."
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