On March 13 at Grainger Show in Orlando, a group of other trade publication editors and I took part in a roundtable discussion with Grainger CEO D.G. Macpherson, who essentially provided the state of the company, and fielded our questions regarding factors impacting Grainger and industrial manufacturing as a whole.
Macpherson — Grainger's CEO since Oct. 1, 2016 — answered our questions candidly. The discussion covered topics ranging from e-commerce operations to the Internet of Things. Here's what he had to say regarding the U.S. industrial economy, Grainger's 2016 downsizing and how the company views Amazon.
For the full year 2016, Grainger's sales of $10.14 billion increased 1.7 percent over 2015, although U.S. sales declined 1.1 percent and Canada fell 17.6 percent. Like for many industrial distributors and suppliers across the market, these 2016 declines can be largely attributed to an industrial recession that is still impacting the industrial economy, though has shown many signs of improvement over the past six months.
"We’ve had some pretty significant challenges in our space over the last two years," Macpherson told editors at Grainger Show. "This is the first time in decades that we’ve had two years in a row where the markets have been down. Almost all of that has been industrial economy with oil price deflation, and lack of economic growth has been a big driver of that. We continue to gain share, but it’s certainly been more challenging than it was coming off the last downturn in 2010. We long for the days when the market is raging."
Macpherson said oil had a bigger impact on the industrial economy that anybody realized, with arguably the biggest impact happening in heavy machinery
"I think it will be better this year. I think we’ll start to see modest growth," Macpherson said about the industrial economy. "With the administration change people are excited about what might happen. There could be good things or bad things that could happen."
Industrial distributors and manufacturers certainly have good reason to be optimistic. The Manufacturing PMI — widely considered a good barometer of the overall manufacturing economy — has improved for six straight months, and it's March reading of 57.
That’s the highest PMI mark since October 2014. The Industrial Supply Association’s February Distributor and Manufacturing Indexes — though a little lower than January’s — both showed continued solid expansion.
I, myself, have heard several small and mid-sized distributors say they’ve seen customers start making a return to capital spending after being largely dormant over the past two years. For Grainger, at the far end of the spectrum, Macpherson expects moderate improvement throughout 2017.
“I’d say we’re in the early days of recovery with some things turning on,” he said. “The oil rig counts are back up in the U.S. In Texas we’re seeing more activity than we’ve seen in years. The big heavy machinery companies haven’t fully switched on yet. I think we’re going to be in a growth mode, but it’s going to be more moderate than we saw in the late 2000s.”
In Grainger’s 2015 fourth quarter earnings report, the company announced it would close 55 U.S. branches in 2016 as part of an overall plan to readjust its branch network. At Grainger Show, Macpherson said the company has gone from 420 U.S. branches to a current total of 250.
“If you go back to the conversation of how much e-commerce plays a role today, we’ve had to rationalize our branch footprint,” he said. “The 250 branches we have now are performing well. We really like the footprint we have.”
E-commerce now comprised more than 60 percent of Grainger’s total sales, and Macpherson said he’d be surprised if that figure isn’t at 80 percent within five years. He said the company continues to invest heavily in all phases of e-commerce and that the company is doing the same things to gain market share in the current market as it would if the market was booming: investing in having a great customer experience, acquiring customers and cost-effectively serving customers well.
“I think that will position us well when this (market) does turn,” Macpherson said. “In some areas we’ve narrowed our supply base, and some areas we’ve added.”
The impact of Amazon Business on the industrial supply market has been a hot topic among our Industrial Distribution audience since before Amazon re-branded its B2B platform in April 2015.
Last September, reports surfaced that Amazon Business chief officer Prentis Wilson identified Grainger and Staples as his division’s rivals and that he designated the B2B supply market as a “must-win”. Those reports also said Amazon believes its window to take advantage of growth in the B2B supply market could close by 2018 and that it hoped to hire new employees and take advantage of features like custom pricing to take on Grainger.
So, on the flipside, what is Grainger’s take on Amazon? I asked Macpherson at Grainger Show.
“We view them as a competitor and a customer, frankly, so it’s an interesting relationship,” Macpherson responded, then recapping Amazon Business’ 20-year history in the B2B market. “We feel like they’re going to be a competitor. We feel like their distribution is set up differently than ours. They can’t really provide completion delivery to customers next-day with ease. We feel like we have some advantages in our business and customers tell us that.
“We view them as a competitor that we’re watching closely. We don’t know where it’s going to evolve, but we feel like if we step on the advantages we have around technical products or our sales and service model, our fulfillment, we’re going to be in good shape.”