W.W. Grainger Inc. Chief Executive Officer Jim Ryan said the largest U.S. industrial supplies distributor is increasing Internet sales, helping boost profit margins while fending off competitors including Amazon.com Inc.
Grainger, based in Lake Forest, Illinois, is expanding U.S. sales 1.5 times faster than the industrial supplier market, maintaining its long time pace of share gain even after Amazon created a unit in April 2012 that competes directly with Grainger, Ryan said.
“Our U.S. business continues to be very healthy,” Ryan said in a telephone interview. “We’re growing at a multiple of the industry. It’s not at all unusual for different types of competitors to come into this industry.”
The company’s shares slumped 12 percent in the two months after the AmazonSupply website began operations amid concern that the Web retailer would lure Grainger’s industrial customers with goods such as drill bits and pumps. Grainger’s shares have advanced 54 percent since June 14, 2012.
Grainger gets 95 percent of its U.S. sales from medium and large businesses, which rely on Grainger’s salespeople and branch stores to complement their online purchases, Ryan said. Businesses depend on Grainger’s “multichannel” service to help manage their supplies and reduce inventory, which is factored into the final cost of products, Ryan said.
“There are a number of large companies in this industry that have a catalog shipped directly to customers out of regional distribution centers -- with no sales force, no branches. That’s very similar to Amazon and the many other Internet-based business models,” he said. “We’ve been competing with that model for years.”
Grainger shares have risen 34 percent this year, outpacing a 24 percent gain for the Standard & Poor’s 500 Index. The stock climbed 0.7 percent to $271.88 at the close in New York.
Sales through the Internet are now a third of Grainger’s total, up from 25 percent in 2010, said Ryan, whose company has been selling over the Web since 1996. The operating margins on those sales are as much 400 basis points higher than non-Internet sales.
Larger companies shopping for supplies or spare parts are more concerned with availability of products and technical assistance than price, said John Baliotti, an analyst with Janney Montgomery Scott LLC in New York, who has a buy rating on the stock. Grainger’s spending to build distribution centers, add salespeople and improve its Internet system is helping the company take market share, he said.
$118 Billion Market
“Grainger is so far ahead of the competition and they just keep accelerating,” Baliotti said in an interview. “They’re not looking back and waiting for the competitors to catch up.”
In one example, the company introduced an Internet service in October that lets customers send a photograph of a part they need through a live chat to a sales representative, who can look up the item, Baliotti said.
There’s room for competitors, Ryan said. The $118 billion market for supplies for U.S. businesses is one of the few industries in the nation left that’s still divided among hundreds of small distributors, providing opportunities for larger ones to grow faster, Ryan said. Grainger, the biggest, has only 6 percent of the market, up from 4.6 percent in 2008.
“It’s highly fragmented and possible to grow for many years as the industry consolidates,” he said. “We’re still very much on the front end of the consolidation.”
Grainger’s shares are commanding a premium from investors because sales are growing faster than the market, said Brandon Geisler, a fund manager with Marsico Capital Management LLC in Denver, who owns the stock. The company has proved it can retain larger customers with services and compete for smaller ones on price with private-label goods, said Geisler, whose firm manages about $17 billion.
Grainger trades at a price-to-earnings ratio of 24 times compared with 17 for S&P 500 Index companies.
“We’re in a low-growth environment, so people are paying up for franchises where there’s relatively consistent growth,” Geisler said in a telephone interview. “Grainger is viewed as one of the better growth franchises.”
The company has opportunity to grow overseas, where markets for industry supplies are even more fragmented than the U.S., Ryan said.
Grainger gets about 25 percent of its sales outside of the U.S., with most of that in Canada. The company lowered the top end of its annual earnings per share forecast in October to $11.65 from $12 after third-quarter sales shrank in Canada and the stronger yen cut into its Japanese profits, Ryan said. The company also has operations in Europe and Latin America.
Grainger eventually aims to expand in China and India, where the $94 billion industrial supplies market is the second-largest behind the U.S. The company has had small operations in China since 2006 and in India for two years to study the market, he said.
“Once we figure out how to grow in China, we’ll get much more aggressive about investing,” Ryan said. “It won’t take us another five years. We’ll figure it out before then.”