FAST tracks

Fastenal has mastered the art of executing detailed plans in order to reach its vision of fiscal growth and market expansion

By -- Industrial Distribution, 6/1/2000

You can gather great insights into the Fastenal Co. just by standing outside its headquarters in Winona, Minn. The building is vast, yet unassuming. Visitor parking spots are right up front, but there are no V.I.P. spots. Employees' cars stretch into the distance. An American flag decorates the walkway, with an inscribed marker, noting that Fastenal employees donated the pole. The lobby is simple, functional-as is the rest of the headquarters complex.

The absence of grandeur, of privilege, hints at some of the company's chief characteristics. This is a firm that believes in putting its customers' needs first, that promotes equity within its ranks, and believes in re-investing its profits by making expenditures where they count-on things that will make a difference to the customer. It's a company where employees are encouraged to make their mark.

Fastenal's decentralized structure, its commitment to empowering employees, and its unique growth strategy have all contributed to a winning track record. Because of two decades of over 30 percent growth, Fastenal has enjoyed a traditionally healthy relationship with Wall Street since going public in August 1987.

Fastenal's continual quest for 25 to 30 percent growth rates has manifested itself most recently in efforts to diversify its product line and to incorporate electronic commerce initiatives into its growth strategy. With $609 million in sales, the company jumped three spots to number 15 on this year's Top 100 list.

Minnesota beginnings

Like the mighty Mississippi River, Fastenal's humble start began in Minnesota, but its reach has spread throughout the United States and into Canada and Puerto Rico.

Fastenal was founded in 1967 in Winona, Minn., the hometown of founder and company president, Bob Kierlin. The company has since expanded to become one of the fastest growing full-line distributors in the country with 809 locations at the end of 1999 and plans to add 100 more stores this year.

In keeping with its dedication to providing opportunities for growth to employees, Fastenal has developed nearly every member of its leadership team from within. Each of them has a story they love to tell that is intertwined with the growth of the company.

For example, marketing manager Bob Strauss and national sales manager Nick Lundquist have been with the company for 23 years and 20 years, respectively.

"I came in as a branch manager in 1977, just as anyone else would. We had four stores then and I would never have expected to stay here as long as I have," Strauss says. "For the first 10 years I worked here, we were privately held and it didn't seem like work. We just went and sold product. We had no name, but we got people to believe in us and we just built the company. In 1987, we were only at $20 million when we went public."

Vice president and COO Will Oberton began working at Fastenal in 1980.

"I was hired and started in the warehouse training to become an assistant manager. At that time we had $2 million in sales and 35 employees," Oberton says.

Oberton's career path led him from being an assistant branch manager to branch manager, then to district sales manager. In 1986, he became general operations manager and spent 11 years working on setting up the systems and logistics behind the company's unique distribution network. He was named head of sales and operations in 1997.

Culture of opportunity

The stories of the rise of Fastenal's leadership through the ranks are important because they exemplify one of the principles of this company: that given the opportunity, most people will outperform your expectations.

"Our people policies, our decentralized structure, show that we believe that all people will rise to a higher level if you allow them. If you truly believe that, you get more out of people and that's what it's all about," says Oberton.

Typically, Fastenal hires trainees right out of college or technical school to work as assistant managers in a branch or to work in a distribution center. The company trains them and teaches them the business, and then promotes them from within.

"Because of the fact that we're growing, everyone understands that if you grow, you add more people. And if you add more people, then you change and diversify and that provides opportunity," Lundquist says. "We provide an environment that is honest, ethical, hardworking and entrepreneurial, and most people will magnate toward that environment."

The success of Fastenal's formula for growing its leadership from within is not lost on suppliers like Infasco, a distributor-oriented manufacturer of standard and specialty fasteners headquartered in Marieville, Quebec, Canada.

"I think the success of Fastenal is predicated on their taking a very different attitude to the marketplace," says Infasco's Robert Ivanier, distribution manager. "They hire young people, give them a lot of independence, make them work for a living. It's similar to a franchise. They take a store, teach them about the product and the industry, and tell them to go out and hustle business. They're aggressive."

To add to the opportunities available to Fastenal employees and to get the stock ownership broader and deeper into the company, Fastenal announced last November the creation of an employee stock option plan. What's unusual about this plan is that it consists of options granted directly from the company's founder, Bob Kierlin. No new shares have been issued to fulfill the option needs, so there has been no dilution of the stock.

Kierlin says that while he believes that employee stock options motivate people to work harder, he also believes that shareholders should not see their stock watered down via stock options.

FAST tracks

Suppliers like Infasco, which has done business with Fastenal for close to 20 years, are attracted to Fastenal's remarkable growth record.

"[Fastenal's] growth pattern over the last 15 years is quite out of the ordinary and having them as a customer for us represents someone whose growth does not necessarily mimic the market, which is fairly mature," Ivanier says.

"They represent a unique thing in our business: a distributor growing at percentages that were previously unheard of," Ivanier says. "They're growing at [more than] 20 percent per year without acquiring other companies. We believe that they will continue to grow at that rate. They're also a company that has a tremendous amount of integrity."

Fastenal enjoyed a steady climb in stock prices from its initial offering in August 1987 through the third quarter of 1995.

"When we hit the ground we were really hot: we were stock of the year on the NASDAQ in 1987," says Steve Slaggie, Fastenal's secretary.

Since then, the stock has been subject to the ups and downs of the market, although it has consistently outperformed many comparable distribution stocks. In 1998 for example, Fastenal was one of only four distribution stocks monitored by R.W. Baird & Co. that posted positive returns. In that same year, stock prices for the remaining distribution stocks fell an average of 21.1 percent.

"Fastenal is a high performer, having produced an unequalled track record, with a 27.4 percent return on equity and 10-year CAGR in earnings per share of 33.1 percent," Jeff Germonotta, Baird's senior vice president of equity research, wrote in the June 1999 issue of ID. "More impressive is the fact that all growth is organic and funded with internally generated cash flow."

One of the big advantages of going public is the access to capital that the process provides, but Fastenal has steered clear of borrowing capital.

"We've paid for everything out of our positive cash flow for 30 years," says Oberton.

Fastenal shareholders owe much of their earnings to the penny-wise philosophy that fact represents.

"We're very frugal. We understand what's important to spend money on. We don't have huge offices and we don't fly corporate jets. We don't even fly first class. We're very aware of where we need to save money so that we can provide a higher level of service," Oberton says. "If you provide high service, you can make money."

The potential for employee ownership and recognition in the marketplace are the key advantages Fastenal sees in its status as a public company.

"With our record being as good as it is, being public has really been a plus," Slaggie says. "We've got that good record because we're good at what we do. It's been a great story."

Growth strategy

Fastenal's unique growth strategy has, with the exception of the last few years, resulted in an annual compounded growth rate of nearly 30 percent over the past 20 years. Even this year-a slow year from the perspective of Fastenal's leaders-the company grew sales by 21.1 percent.

"Our market strategy has always been to get as close to our customers or potential customers as possible," Lundquist says. "That's why we continue to open branches. We pride ourselves on the service, the one-to-one contact and the customer relations. If you have too many customers [served by any one branch], it takes away from that."

In order to make that strategy work, Fastenal continually adds new stores, the placement of which is determined largely by the distribution managers working in the field. In 1999, the company opened 43 new sites, ending the year with 750 traditional Fastenal stores and 59 satellite stores. Its goal is to open another 100 stores in 2000 and add about 900 employees.

The shear number of Fastenal locations is important to customers like Fisher Valves International, a division of Fisher Controls International, Inc., which manufactures control valves, regulators and instrumentation products.

"It's important to us that they have excellent coverage in the U.S. and that they're willing to go into other areas of the world for us. We need delivery at each of our manufacturing sites. So what we're able to do with an organization with such an extreme number of branches is that I can achieve worldwide leverage of volume with local distribution," says Bill Clemens, CPM, manager of administrations procurement worldwide for Fisher Valves.

In order to make this intricate network of facilities work, Fastenal owns and operates a fleet of approximately 100 semi-trucks and trailers and 2,200 branch vehicles. The semis regularly replenish branch inventory from strategically located hubs.

The company-owned trucking system, Oberton says, improves the speed and dependability of delivery to its branches.

"By speeding up that service, it allows us to have smaller branches with less inventory, but still provide the service, which creates higher performance," Oberton says. "Our goal is to be closer to the customer and ultimately to have a higher market penetration. So if you have the resolve and you're willing to stay in the business, eventually being closer to your customers will get you more business."

The other side of Fastenal's decentralized philosophy is that the company empowers branch managers to make decisions and function much like entrepreneurial owners.

"We like to empower people, particularly the people who have direct contact with the customers, to make quick decisions," Lundquist says. "So our branches are allowed to purchase product on their own, dictate their own time, and make decisions based upon the particular needs of their marketplace."

Future ambitions

Fastenal has several initiatives that will shape its future: further diversification of its product line, e-commerce, and its continuing goal of growing at rates of 25 to 30 percent.

Today, approximately 65 percent of Fastenal's sales are fasteners, and the other 35 percent come from product categories like power and cutting tools, hydraulics and pneumatics, material handling products, janitorial, electrical, safety and welding supplies. In the next few years, Strauss says, the company would like to develop four to five more product lines.

Simonds Industries, a cutting tool manufacturer headquartered in Fitchburg, Mass., believes in Fastenal's ability to tackle new product lines with the same level of service and technical expertise they provide to fastener consumers.

Raymond Martino, Simonds' president and CEO, calls its recent product expansion program with Fastenal a "great success story." Through the test program, which began in earnest in 1999, Fastenal began selling metal band saw blades.

"The program has been enormously successful, it's growing like mad," Martino says. "They're not afraid to try new things. Fastenal is rapidly on its way to becoming one of our largest customers because of its growth rate and the products we're adding to the line."

Electronic commerce is quickly forcing its way into the strategic plans of nearly every distributor, and Fastenal is working hard to stay one step ahead of the game.

Fastenal offers online shopping on its own Web site, www.fastenal.com, and recently announced e-commerce alliances with Datastream Systems, Inc., and EqualFooting.com. Oberton says the company's goal is to have five percent of its customer base buying electronically by the end of this year. Fastenal sees creating alliances with independent e-commerce providers as just one more way of going to market.

"We really look at it as simply an opportunity to get our name in front of more and more customers. There's a lot more customers out there than we have, and if a customer would like to buy [through an e-commerce portal], that's fine with us," Lundquist says. "Ultimately, we want them to buy product from us and how they choose to buy it is really up to the customer."

If Fastenal makes good on these ambitious goals, this spirited company could move into the billion-dollar range in just a few short years.

COMPANY SNAPSHOT

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