Richard L. Keyser, 57, has one foot in the Old Economy and one in the New. He heads W.W. Grainger Inc. in Lake Forest, Ill., the nation's main vendor of factory-floor parts and supplies. Founded in 1928, Grainger peddles 220,000 no-frills products ranging from eyebolts and fan belts to keyboards and kneepads. You can find them listed spec-by-detailed-spec in a catalog as thick and red as one of the bricks in its many brick-and-mortar branches--or you can pop in a CD-ROM or surf one of its five Web sites.
Last year, Grainger's 16,700 employees posted $4.5 billion in sales. The lion's share was generated the old-fashioned way. But the company has also been a pioneer in online business-to-business transactions. Its first Web site appeared back in 1996--an electronic catalog with more than twice as many listings as its ink-on-paper version. In March, Grainger launched its fifth site for buyers and sellers of maintenance, repair, and operating supplies. And on June 12, Grainger branched out further, merging its OrderZone.com unit, aimed at small and mid-size business customers, with a rival called Works.com. Grainger's sites logged $102 million in sales in 1999, up from $13.5 million in '98, and they are headed toward $250 million this year.
But at what cost? The company spent $20.6 million to promote its sites last year, and more in the first quarter of this year. All told, the cost of Internet sales dragged down profits by 27% in the first quarter, to $41.2 million. Investors have expressed concern: Grainger's stock has slumped more than 25% over the past two years, recently sliding down to the mid-30s.
Keyser is staking his position as chairman and CEO on producing Web payoffs. He figures Grainger has some key advantages. For one, it has a long-established distribution system serving all 50 states, so delivering goods to customers is no problem--something many newcomers can't promise. Also, while customers might be able to cut costs by buying big volumes of basic components through their own electronic marketplaces, it's a different story if they need a few items from many different sources and can't afford delays. In that case, it is still easier and cheaper to fill a shopping cart on a single site like Grainger's. Keyser spoke recently with Business Week Chicago correspondent Michael Arndt. Here are some excerpts from their conversation:
Q: How is the Net transforming the company?
A: It has the potential to be the company. Our core business is tied pretty much to the ups and downs of the economy. We don't create a lot of primary demand for maintenance supplies unless we go out and throw sand in people's gears. In fact, it's a shrinking market as the economy shifts away from the old manufacturing base toward services and information. The only way we can really grow is to take market share, and we think a great way for us to increase share in the future is to be present in all these online platforms. There is a tremendous amount of savings available. For a lot of companies, a percent on the bottom line is a big deal. And they're wasting a lot of money in the process of buying things. The Internet has the capability of creating a lot of efficiencies there. That's what we do; that has been our sales pitch for a long time. The Internet kind of supercharges it.
Q: A lot of procurement sites are popping up, often involving your customers. Why wouldn't they deal directly with vendors and cut out you, the middleman?
A: Let's consider the marketplace we live in. This is a very messy, complex, arcane--some people would say boring--area. I have rarely, if ever, found a CEO who can tell me in any level of detail how his company buys its maintenance supplies. Typically, they are consumed one at a time, and even in the best companies, the needs are unplanned about 40% to 50% of the time. Also, the needs are quite often immediate. A given manufacturing company might buy thousands of different products that ultimately come from thousands of different manufacturers.
Q: So what will you bring to the party?
A: If you're going to attempt to buy your maintenance products over the Internet, you have three alternatives. One is to establish a catalog of the products you buy inside your own own database. You therefore would have to create a catalog across all of these suppliers of all of these products. You'd also have to maintain that catalog because it would be out of date immediately with regard to price or changes in product specifications. That is an onerous task. The second way is to put in an enterprise software solution, such as an Ariba system, to manage your purchasing. But you still have to be able to connect to a large number of suppliers in order to transact business. That is not an insignificant task, to create all that connectivity. A third and better way to do that is along the lines of our newest offering, TotalMRO.com. In that, we are establishing a network catalog in which we will maintain a catalog for a large number of suppliers--not just Grainger, but even including our competitors. The whole marketplace would be maintained once, for everybody, by us. We're now in a race with the rest of the world to create this catalog.
Q: How much advantage do you think there is to being the first mover?
A: First mover is important. But first to scale is more important: getting people in the habit of coming to your site. Obviously, nobody wants to bid on an online auction if there's nothing there to buy. And nobody wants to put anything up for auction if there's no one there to buy it. There's a reinforcing loop here. If you're satisfied, you'll go back. And if you have a bad experience a couple of times, you won't go back. A year or two lead in this space is enormous, both from the experience and the learning you can get.
Q: Is anything startlingly different from what you envisioned?
A: I don't know if they were startling. But our average order size is about double what it is in our traditional business, and a disproportionate amount of our business comes in after hours. In effect, you are formulating strategy, implementing it, and learning simultaneously. We did a couple of things right, some of it by luck. Very early on, we set up a separate unit to do this and put it in a separate location. It developed its own culture and was able to act a lot like a dot-com. I don't know if we were brilliant or lucky.
Q: How do you plan in such a fast-growth climate?
A: We found that the annual budgets don't work real well when you're growing at 500% or 700% a year. Early on, we set up a process whereby we made resource decisions on a quarterly basis. That is part of getting people attuned to Internet speed.
Q: Is it your thinking that five or 10 years out, virtually every one of your customers is going to be ordering from Grainger through the Internet?
A: I don't know when. I think it's a little different in the business-to-business space than it is in the business-to-consumer space. Business-to-consumer, everybody will be on the computer when the next generation takes over the world. When your kids and my kids, our grandchildren, are running the world, everything, I'm sure, will be digital. In the business-to-business space, it's likely to happen much faster because of the economic pressure. If there is, indeed, value to using the Internet, one competitor can't allow another to gain that advantage. They'll be forced to use it, too. Technically, what's being done isn't that hard. In fact, it's easier than the old system. What I think a lot of companies have been afraid of is cannibalizing their own business--but if it's going to happen, you better do it to yourself.