W.W. Grainger Inc.’s move to cut prices on about one-third of its products last year got the attention of a key target customer segment: mid-sized companies.
“Last year we altered our pricing structure to attract middle-tier companies, and that’s working well,” CEO D.G. Macpherson said Monday in a media briefing at Grainger Show 2018, the company’s annual customer and vendor meeting in Orlando, Fla.
Pricing “went to where we are more competitive, not the lowest,” Macpherson said. “Mid-size customers had been shrinking for years. Now mid-size is growing, and lapsed customers are coming back.”
Some stock analysts laid the price cuts squarely at the feet of pressure from Amazon.com Inc.’s growing presence in the industrial products distribution space, but Macpherson told media representatives the company was overdue for a price check. And while he acknowledged Amazon’s influence, he said pricing pressure also is coming from other competitors.
“The price change strategy last year was more about us than the market, despite what the media and other people are saying,” Macpherson said. “We were too high on price.”
The price cuts announced in early 2017 targeted some larger Grainger clients as well as mid-sized and lapsed customers.
On Grainger’s year-end earnings call in January Macpherson noted sales volume increases among mid-sized and large customers. “U.S. mid-size customers continue to exceed our expectations–mid-size customer volume increased 26% over the prior year at 800 basis points sequentially,” he told analysts, according to a transcript from Seeking Alpha. “We’re seeing progress with our marketing efforts and progress against all mid-size customer groups. For the first time in a long time, we are seeing significant mid-size volume growth at attractive margins.”
Large customer sales volume increased 8% from Q4 in 2017, he noted.
The pricing strategy, which Grainger noted in its Q2 2017 earnings call deflated prices overall by about 4%, helped to increase total sales volume by 5% in that quarter, Macpherson said on a July conference call. Most of the increased volume came from new or expanded contracts with mid-sized companies, plus an increase in off-contract “spot” buys by larger companies, he said. He noted that the reduced prices didn’t affect on-contract purchasing by large customers, who already benefit from discounts on high-volume contracts.
The company’s Other Businesses segment, which includes its Zoro.com and Japan-based MonotaRO.com B2B e-commerce sites, grew 12.5%, to $2.12 billion, for the year and 16%, to $559.4 million, in the fourth quarter. Macpherson attributed most of that Q4 growth to higher sales volume, in January’s earnings call with analysts. Sales growth was primarily driven by MonotaRO.com, which offers industrial products, and Zoro.com in the United States, which offers off-price products, he said.
For the fourth quarter ended Dec. 31, Grainger reported:
- Net sales of $2.632 billion, up 6.6% from $2.470 billion a year earlier.
- Sales in its “Other Businesses” segment increased 16% to $559.4 million, attributed mostly to Zoro.com, Grainger’s relative low-price specialty site for tradesmen and small businesses, and Japan-based MonotaRO.com;
- Gross profit of $1.021 billion, up 3.2% from $989.69 million.
- Net earnings of $151.1 million, up 149.0% from $60.7 million. Most of the earnings jump came from increased U.S. sales volume and reduced expenses, Macpherson said
For the fiscal year ended Dec. 31, Grainger, No. 32 in the 2018 B2B E-Commerce 300, reported:
- Net sales of $10.42 billion, up 2.8% from $10.14 billion a year earlier.
- Sales in its Other Businesses segment increased 12.5% to $2.12 billion;
- Gross profit of $4.097 billion, down 0.4% from $4.114 billion.
- Net earnings of $585.7 million, down 3.3% from $605.9 million.
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