On a recent episode of Wholesale Change, we discussed the quarterly results for four publicly-held distribution companies: Motion Industries, MSC Industrial Supply, Grainger and Fastenal. While some have managed the COVID-19 recession better than others, Fastenal is outperforming its distribution peers, but this is nothing new. The company has built an enviable combination of high margins, a great omnichannel model, a product mix that’s hard for pure online players to attack and a fantastic culture.
Distributors’ Third-Quarter Performance at a Glance:
These companies show wildly differing price-to-earnings (PE) ratios that likely reflect the nature of their end-markets, but also how each distributor has handled specific challenges.
Motion Industries appears to have gained a little leverage in cost savings and a bump in profit margin.
MSC Industrial Supply saw the steepest sales decline among these four, which must be driven by their end-markets as they are not a branch-based distributor. But they’re moving forward with thoughtful value-add strategies that have potential to provide real differentiation. Some analysts are skeptical of MSC’s ability to execute major initiatives.
Overall, Grainger’s report was impressive. They brought margins down to a competitive level (which we think is a good thing – it’s not necessarily always true that the higher the margin, the better), especially with their growth this year in lower-margin Personal Protective Equipment (PPE) and jan-san. They’ve maintained high barriers for customers to exit with 60% of revenue coming from embedded solutions like vending machines. And they’ve improved the digital customer experience by adding item-recognition to the company’s mobile app and doubling down on digital marketing.
Fastenal stands above its peers with an astoundingly high market cap and gross margins reflective of its lucrative fastener business. Fastenal is essentially the Energizer Bunny of distribution right now. A lot of distributors are managing profit during the pandemic by reducing their selling, general and administrative (SG&A) expenses, but Fastenal has avoided furloughs, and continues to outgrow most competitors.
How can Fastenal weather the downturn so well? Here are some of our takeaways:
Return on Culture
A lot of companies brag about company culture but Fastenal lives up to the claims. Dan Florness, Fastenal’s CEO, celebrated his employees in his recent earnings call with a refreshing humility and transparency. In his reporting, he takes care to mention long-time employees by name. He brags about field employees being focused on customers and taking the company to task for added costs.
Despite the nasty pandemic-driven downturn, Fastenal has prioritized protecting talent so they would be able to move quickly when conditions returned. Now, with demand getting gradually better and customers increasingly re-engaging in conversations, they’re glad they did. They have not only the inventory, but they have the people to provide the service leading to a potentially significant rebound.
Fastenal has a vibrant culture. Management guru Peter Drucker is alleged to have said, “Culture eats strategy for breakfast.” Companies like Fastenal bear this out. If you can barely tell your employees from customers on a job site, there’s a rare melding of intent, aspiration, culture and values converging, and it seems like that’s what’s happening at Fastenal. This kind of boots-on-the-ground culture that we see at many distributors brings out a will to win and healthy pride in the brand through being side by side with customers. It’s hard to define this type of culture and impossible to measure the results.
Capitalizing on Existing Advantages
Fastenal has already experienced a V-shaped recovery from the first quarter, still on track to add up to 25,000 new vending machines this year – a business model that only gets stickier over time.
They also continued to yield value from the 1000s of small Fastenal stores across the country because fasteners are very difficult to sell online. They’re also small and inexpensive, so Fastenal has been able to maintain an enormous amount of assortment and depth for a relatively low cost per location. In addition to this, Fastenal has strong ecommerce capabilities.
As vaccines hit the market and we can all see an end to this pandemic sometime in the first half of 2021, we recommend that distributors use this time to double down on measuring and optimizing the customer experience. And if you weren’t embracing value-added services pre-COVID, you’re only going to fall further behind after the upheaval of 2020.
Watch the episode now: