Grainger’s Disappointing Q2 Highlights the Ever-Growing Amazon Threat

By Jonathan Goodwin

This week, the leading MRO distributor Grainger (GWW) delivered its second quarterly earnings report of 2017 and the underwhelming results validate our predictions made in our webinar in March on the company’s decline.

Even though Grainger leadership won’t admit to the $490 billion elephant in the room, Amazon is the key cause of the ailing distributor’s woes. Amazon Business, the e-commerce platform’s B2B marketplace, is on the rise and aggressively expanding into new verticals, which highlights the unit’s success in its current ones, chief among them being MROs.

Meanwhile, Grainger has pursued a lackluster strategy involving price cuts, launching another linear e-commerce site, and restructuring some of the company’s operations. Another challenge for the company: it’s conducting an external search for another CFO.

Breaking Down the Mess

Let’s dig into the numbers from Grainger’s earnings call.

Sales

• Total sales hit $2.62 billion, a 2% increase against last year
• US sales grew to $2 billion, a 1% rise compared to Q2 2016
• Canada sales fell to $189 million, a 2.7% decrease
• Other Business (outside North America) rose to $527 million, an 11% bump

Sales in Grainger’s largest market were essentially flat, with growth only really occurring overseas. Canada is proving to be a drain, prompting the company to close 59 branches, nearly half of its presence there. Total sales missed expectations, which were $2.63 billion.

Profits

• Operating profit: down 24%
• Total profit: down 43%

Restructuring was pegged as one of the largest drains on margins. Earnings per share (EPS) were $2.74, higher than the expected $2.65 yet lower than last year’s $2.89.

None of this looks too good. Grainger’s growth is mostly stunted, keeping pace with the US economy, and the company stuck to its very uninspiring guidance for the year.

The Specter of Amazon

Looking at Grainger’s market performance in 2017, the stock price is down 30% and it even reached a 5-year low after the announcement.

CFO Ron Jadin’s retirement looks like he’s running from a dumpster fire of stock options. I wouldn’t be surprised if he sells out almost immediately after he leaves the company.

As we predicted in March, the distributor’s market cap would take a hit. Since the last earnings call, the market cap plummeted from over $12.5 billion down to about $9.8 billion. The downward trend of 2017 doesn’t seem to have an end in sight.

Meanwhile, Amazon’s business-facing marketplace is booming. When considering the information shared last year on Amazon Business’s growth ($1 billion in sales and a 20% monthly growth rate in April 2016), it should be on track do around $4 billion by the end of 2017.

And that’s assuming the rate of growth remains the same. Based on the aggressive expansions into new verticals, like electrical and medical supply and food distribution, and a growing product catalog, it should be anticipated that Amazon Business will only have grown faster, potentially reaching $6 billion in sales on a conservative estimate.

Given that Amazon CEO Jeff Bezos is spending his time building rocket ships, while Jadin is leaving and Grainger CEO D.G. Macpherson is spending his time assuring analysts and investors alike that Grainger will be back on track for growth in the next three years, it should be clear whose situation is more worrying.

More likely, Amazon will supplant Grainger as the market leader for MROs and spread its tentacles into more and more verticals, spreading its on-brand disruption at prices that won’t be beat.

To witness Amazon’s consistent victories in the price war, sign up for Applico’s B2B-focused newsletter.

What Can Grainger Do?

In short, it looks like Grainger is doubling down on a losing strategy. Amazon beats Grainger on prices and can easily begin replicating its added services, Gamut seems to be a waste of money and time, and the hits will keep coming for Grainger and all linear distributors.

The best path to profit, the best response to Amazon’s disruption is to deploy its own marketplace strategies against it. Grainger (and ALL distributors) need to evaluate marketplace strategies and find the ideal application for the circumstances.

It’s probably far too late for Grainger to build its own marketplace in a silo, so it would be wise for executives to begin speaking with their counterparts at other companies like McMaster-Carr, Fastenal, and Motion Industries about building a marketplace as a joint venture.

All of these companies and many more have skin in the game when it comes to competing with Amazon – they should take it seriously with an innovative approach, not outdated and outmoded tactics.

Marketplaces are superior because they make great use of network effects and earn significantly higher multiples. Public markets love them more, too, by a significant margin.

Grainger’s projected linear path to growth would be extremely expensive, buying inventory, building and expanding distribution centers, and hiring all of the staff. For Amazon Business to grow, it simply needs more product listings from distributors, a relatively inexpensive process with near-zero marginal costs.

Since 2017, Amazon’s stock price has shot up 33%. By contrast, GWW shares fell 30%. You tell me who’s winning the competition.

---

Filed under: Platform Innovation | Topics: