Grainger Earnings: Demand Continues to Moderate, but Industrial Production Remains Resilient

W.W. Grainger GWW operates in the highly fragmented maintenance, repair, and operating product distribution market, where its over $15 billion of sales represents only 6% global market share (the company has 7% share in the United States and 4% in Canada). The growing prevalence of e-commerce has intensified the competitive environment because of more price transparency and increased access to a wider array of vendors, including Amazon Business, which has entered the mix. As consumer preference began to shift to online and electronic purchasing platforms, Grainger invested heavily in improving its e-commerce capabilities and restructuring its distribution network. It is the now the 11th-largest e-retailer in North America; it shrank its U.S. branch network from 423 in 2010 to 246 in 2021 and added distribution centers in the U.S. to support the growing amount of direct-to-customer shipments. Still, the company had work to do on its pricing. Grainger historically relied on a pricing model that applied contractual discounts to high list prices. Leading up to 2017, though, this model made it difficult to win new business. To address this problem, Grainger rolled out a more competitive pricing model. Lower prices hurt gross profit margins, but volume gains, especially among higher-margin spot buys and midsize accounts, have offset price reductions and helped the company meet its 12%-13% operating margin goal by 2019 (12.1% adjusted operating margin in 2019).

Grainger continues to expand its endless assortment strategy, but we’re skeptical of the margin expansion opportunity for this business, given strong competition in the space from the likes of Amazon Business and others. Still, we believe Grainger has distinct competitive advantages in its traditional business, such as its long-standing relationships with large customers and its inventory management solutions, which should help it earn excess returns over the next 10 years.