Grainger opens branch in China and makes progress on expansion
By Susan Avery -- Purchasing, 11/2/2006 2:00:00 AM
Finding, buying and managing maintenance products is a worldwide problem, says James T. Ryan, president of Grainger. “Our long-term intent is to find ways to solve this problem in different geographies around the world.”
Now the distributor of maintenance, repair and operations (MRO) products is concentrating its efforts on North America and China. Ryan met recently with Purchasing to discuss Grainger’s strategy.
The company opened its first facility in China in September. This master branch, which measures 125,000 sq. ft., is located in the Shanghai suburb of Minhang, and initially stocks 20,000 products in such categories as electrical, lighting, tools, test and instruments, pneumatics, plumbing, material handling, safety, security, metalworking and HVAC (heating, ventilation, air conditioning). Grainger also published a Chinese language catalog that features all the products carried in the master branch, and launched a website at www.grainger.com.cn for customers in China. It also has a customer service center located in central Shanghai that offers sales consultation.
“Shanghai is an amazing place,” says Ryan. “To get maintenance products, companies must go downtown to Beijing Road, where there are little hardware stores or kiosks. If it’s difficult to get maintenance products in North America, it’s nearly impossible in China, because you have to walk, bicycle or drive a car to Beijing Road and negotiate or barter with a lot of very small specialists.”
Ryan says that Grainger is bringing simplicity to this process. “We have a kiosk on Beijing Road which is essentially a customer service center. But what we’re doing is unique. There isn’t anyone bringing a very broad product offering to bear with same-day or next-day local delivery. We are very excited about our potential in China.”
Still, the market is different from the U.S. Ryan says that while Grainger is very attractive to large multinational companies for purchasing MRO products—and the company expects to do well with them—they represent a very small percentage of the global market. “We think the key to success is understanding the local companies and growing with them over the long term.” So, the distributor is talking to its customers through its sales force and on Beijing Road to learn more about how, when and where they buy maintenance products.
Not unlike what they do in North America. And Grainger understands the market here very well.
“We think the strategy for this industry is simple and straightforward in concept, but very difficult to execute,” says Ryan.
The distribution industry is very fragmented competitively and is consolidating at a much faster rate than ever before. “As it consolidates, we believe that there are going to be a small number of very large-scale players and a very large number of specialists,” he says. “For those that are in between, life is going to be difficult over the next decade.”
There is a very clear trend in this industry that companies are waking up to and it’s how costly and how much time it takes to find and buy and manage MRO products, Ryan says. It’s the case with large companies and is moving downstream to smaller companies as well. They are looking at this as a new opportunity for savings. Having done a lot of work over the past couple of decades driving out costs in the purchase of raw material and production consumables, they are finding that there’s great opportunity to improve efficiencies in this area of their business as well. Consolidating the supply base, standardizing on products used, streamlining processes—these activities continue.
“So, if you are going to be a large player as customers consolidate their supplier base, you have to have a very broad product offering and we are seeing that in this industry,” he says. Companies that were historically specialists are broadening their product lines. Companies not in the industry before have come in and are broadening their lines through acquisition. Regional competitors are coming together to be national competitors.
“Anyone who has an appetite to be a market share leader through this consolidation knows you have to have a broad product offering,” says Ryan. “Grainger’s heritage is as a generalist. We already have a broad product offering and have kicked off a very aggressive product line expansion program earlier this year, adding more products to our catalog than we ever have in our history, and we are going to continue to do that over the next several years as well.”
In March, Grainger announced in Purchasing the biggest product line expansion in its history: It added more than 30,000 fastener SKUs (stock keeping units) to its catalog. Since then, the distributor has added products in other categories such as HVAC as well.
But it takes more than products to be a player in the industrial distribution industry. Ryan says that “if you want to be a big MRO supplier, you have to have lots of customers. That’s one of the great challenges: Finding, attracting, growing and retaining millions of customers. Because you have to have millions of customers if you are going to be a double-digit market share kind of company.” To that end, Grainger has been aggressively expanding its sales force, essentially doubling its size, and has reduced the number of accounts its sellers are responsible for so they spend more time with fewer customers. The company also created an inside sales organization that by year end will employ 500 people. It’s also been aggressively distributing its catalog as well.
Still, there’s more. “In order to be profitable in this business, you have to be able to have economies of scale,” Ryan says. “Having a lot of customers and a lot of revenue alone is not enough. In order to make money with small transactions, you have to have an integrated supply chain and IT infrastructure. We are now essentially running an end-to-end ERP system (SAP), and we have a very tightly integrated supply chain.” That means that Grainger fulfills all of its business in the U.S. through the same supply chain regardless of where the order comes from geographically—over the phone or via Internet.
On Grainger’s market expansion program which it kicked off in 2005, Ryan says that the company is more than halfway through the top 25 metropolitan markets, which represent about 50% of the $100 billion maintenance supply industry.
“We twice accelerated the program and twice increased our expectations and we are very excited about how it’s going,” he says. For the program, Grainger is looking at the location and size of its branches, the deployment of inventory, merchandising and sales coverage. In other words, it’s added branches, moved others to locations more accessible to customers and expanded still others in such metro areas as southern California, Houston, St. Louis and Tampa. For more on the market expansion program, please see Purchasing’s July 14, 2005, issue.
Lake Forest, Ill., based-Grainger had sales of $5.5 billion in 2005, placing the company at number three on Industrial Distribution magazine’s Big 50 for 2006.
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