Good morning, everybody. First, I want to just start out thanking everyone for joining us today. The way it's going to go today is we're going to spend about two and a half hours talking about Fastenal, but the last 30 to 45 minutes will be Q&A. We're going to try and leave plenty of time for questions and answers. I'm going to start out talking about the operational part of the company, talk about some of our growth drivers, and then Dan's going to finish up talking about the financial stuff. We really believe that most of you are more interested in how we make the finances come about than just listening about how we're going to, or what we're going to do with the money when we get it. We're going to start out, I'm going to start out with a Fastenal infomercial, for no better term.
It's a video that we did for our driver.
Hi, I'm Carl Edwards, driver of the number 60 Fastenal Ford. I'm at the Fastenal store here in my hometown in Columbia, Missouri. This store means a lot to me because they gave me one of my first sponsorships back when I was still racing at my local dirt track. It wasn't until Fastenal became my sponsor in the Nationwide Series that I realized what an impressive company they are and all of the things they do for their customers. At Fastenal, everything is built around the local store. Come on, I'll show you around. The first thing you'll see when you walk into any Fastenal store is rows and rows of products that you can buy right off the shelves, from tools and general maintenance supplies to safety gear and material handling items. Of course, Fastenal is also the largest fastener distributor in North America.
If you're looking for a single source to meet your OEM, MRO, and construction product needs, look no further than your local Fastenal store. What really makes Fastenal unique is that they allow each store to tailor its inventory to meet the needs of local customers. If it makes business sense, they can custom stock your high-use and critical products locally so you don't have to. Your local store is also home-based for your dedicated Fastenal rep, a go-to relationship you can count on to make regular service calls, rush over emergency deliveries, track down products, stock your bins, and go the extra mile to make it all happen. It's the kind of service and knowledge you'd expect from your favorite mom-and-pop store. The difference is that your local Fastenal store is backed by the resources of a major national supplier.
That includes a vast distribution network that's constantly working to put the right product at the right place right when you need it. More than 2,500 local stores, 14 regional distribution centers, and a fleet of nearly 6,000 big trucks and local delivery vehicles allow Fastenal to move product faster and pass along lower freight costs to the customer. Fastenal's distribution centers receive orders from surrounding stores during the day, then pack and ship them out at night. If it's not already on the shelf at your local store, chances are they can get it there on a Fastenal truck by early the next morning. Over time, as usage patterns emerge, more product can be stocked locally and regionally to anticipate your demand. In fact, the majority of all Fastenal transactions are for product pulled right off a local store shelf, representing same-day service for customers.
Having that product stocked at your local Fastenal store is key. The next step is having enough of the product when and where you need it in your facility. That's where Fastenal's inventory control solutions come in. Fastenal solutions can range from a dock-to-dock program where a product is delivered according to a set schedule to a vendor-managed or VMI program where Fastenal comes in, sets up a custom storage system, and makes sure your inventory always stays within your targeted levels. Not too much, not too little. That might mean coming in once a month, once a week, every day, all the way up to managing a Fastenal crib right within your facility. Fastenal also provides job site solutions for remote projects. No matter where the job takes you, Fastenal can keep the product flowing.
For me, one of the coolest things Fastenal offers is its automated supply technology, like this Fast 5000 vending machine and locker set. It's like having a secure 24/7 Fastenal store right in your facility, custom stocked with your high-use and critical supplies. You can set controls so that workers only have access to the products they need for their jobs, and you can track usage by individual, group, project, any way you want to see it. As a result of this accountability and visibility, Fastenal customers have been able to reduce their product consumption by 30% or more. Imagine how much that would help your bottom line. You only pay for what you use, and when stock runs low, your local Fastenal store receives an automated order. No stock outs and no POs to cut. Want to learn more?
Fastenal can bring the technology right to your doorstep for a live demonstration. Call your local store to schedule an appointment today. As you can see, at Fastenal, it isn't just about the products; it's about services and solutions. Need band saws welded to length? Your Fastenal store can handle it. Same with tool and hoist repairs, custom fabricated hose, standard or special chain slings, cut-to-length metal, chain, or cable, and tool and cutter regrinds, extending the life of your cutting tools. Products can be custom packaged to meet your needs. If you need help with product sourcing, just call your local store to tap into Fastenal's network of domestic and global suppliers. Fastenal also offers expert fastener support through their in-house team of engineers, from consultations and trainings to testing and assembly process reviews. One of the most important services Fastenal offers is custom manufacturing.
If you can't find it on Fastenal shelves, they'll make it for you. Through its various manufacturing facilities, Fastenal produces more than 1,000 jobs a week, many of them shipped within 24 hours to meet the needs of customers. Whether you need machined or cold-formed parts, Fastenal can provide a solution with quality ensured through Fastenal's ISO 9001:2008 operations and in-house A2LA labs. It's all available at your local Fastenal store. If you need services or custom parts, just call them up. Remember, you can always connect with your local store via fastenal.com, your 24/7 source for hundreds of thousands of products. Register with your store account to view your pricing and route orders to your local store for delivery or pickup. If the product's in stock locally, you can have it in your hands in a matter of minutes. How many websites can you say that about?
If you have any questions about anything I've touched on today, just talk to the folks at your local Fastenal store. As always, they're right there to answer your questions and to help you out. Once you make that contact, I think you'll agree that the thing that really sets Fastenal apart is its people, hardworking people who live in your community and consider it their job to not only look up parts and pack orders, but to really go the extra mile to help you succeed. The result is a level of customer service that's second to none. Don't just take my word for it. Listen to what Fastenal's customers have to say.
One, I like the idea of Fastenal as a hometown company. We like doing business in town. They support us. It's only right that we support them. The other thing is, if we have a question, we can come here. They can answer it right on the spot. We're not playing telephone tag like you do with your catalog vendors. The fact that they have folks here who know what's going on, they can anticipate your needs. You call them on the phone and say, "Here's what I'm looking for. Do you have something like that?" They'd say, "Sure, come on out.
We sometimes have to work, you know, in a maintenance environment after hours. One Saturday morning, we came in at 5:00 A.M. to do a job and realized we didn't have enough of a particular fastener, and it was really important and critical that we get this operation up and going. I called my Fastenal rep at his house, and he came back into town for us that morning, had them on the store shelves, brought them in before any other store would have been open, and delivered them to me. Very helpful.
We needed some screws for the exterior of the trailer painted black at the top, and we needed them fast, and Joe Chop, our local rep, painted them by hand for us and got them to us the next day and kept us going, which was pretty amazing because most companies wouldn't do that.
Two reasons. One, they're right down the street, literally. The second is I can call my Fastenal representative, and she takes care of a lot of problems and takes it off of my back. She just tells her what I need, and she handles it.
have been several occasions where we've ordered a part, and Mark has actually been on the road with those items in less than an hour. To have that type of customer service is just unheard of. Normally, we would expect two or three days to receive these items, and to have them off the truck in our hands within 60 minutes is just phenomenal.
Hopefully that gave you a good overview of what we do. Carl is just a great representative for Fastenal. If anyone follows NASCAR, he's like the spokesperson for NASCAR this year, leading in the points, and an all-around really, really good guy. The way we'd like it to go today is more conversational than presentation. I'm going to try and go through my notes. I have everything here, but I want to make sure that I hit some real good points. I'm going to start out talking about, actually, I'm going to start out with a forward-looking statement, Fair Harbor. I'm going to start out talking about our business model, and the basic part of our business model is bringing more product closer to more customers. That's really what we've been doing for a long time.
Right now, what we're really focused on, other than growing our business, or what I'm really focused on, is trying to build Fastenal into a more efficient machine. I'm a real visual person. I've been thinking about this for a long time, for years. I have this picture in my head. It's like the car, the clay model in the wind tunnel. You're in there working on this clay model to make it more efficient and more efficient, and that's the Fastenal business. I don't mean just moving product from point A to point B, because at the end of the day, that's really what we do. If you boil it down to the simplest form, we have a manufacturer one place in the world, and we move product to a customer somewhere else in the world.
The straighter we make that line with fewer touches in between, the better value we bring to the customer and the more money we bring in opportunities for ourselves and the shareholders. It's that simple. This wind tunnel vision that I have, and I have a group of basically a bunch of my direct reports, all the non-salespeople, Dan and I have been working with a group. It's not just moving. We work really, really hard to talk about our vision, our values, and our culture, ambition, innovation, integrity, and teamwork. Almost every Monday morning at 7:30 A.M., I speak with our new employees. This is exact. This is really all I talk about for a half hour, explaining what we're doing. We talk about how important it is, and we just continue to pound it.
One of the things that people asked me three or four or five years ago, or even 10 years ago, is how will you retain your culture as a company gets bigger? We do it by pushing it further out. Another way we do it is by retaining our people, and I'm going to touch on that in a minute. The culture is very important. Promoting it and living it is really what it's all about. I really believe we've done a good job with that. I think you'll see it when you go out here today and see all the Fastenal employees. It's not going to get any easier, but I think we can do it for many years to come if we continue to believe that everyone in the system is responsible. It's not just myself or my reports.
Every person on the team is responsible to push this culture and try and make sure it happens. Experienced leadership. It's really about building for the future. If you look at this, my team has 20+ years' experience, and I just have a fantastic team that I work directly with. We have a fantastic team on the field all over. The group that I work with, basically, if I got hit by a truck, they would go on without me for years, I think, probably happily. Great people doing their jobs, all of them with a tremendous amount of experience. Our Regional Vice Presidents, we have 30 of them now. That includes some of the international people, 18 years' experience. The exciting thing about that is that the average age is still young. I believe the average age for that group is about 40 years to 42 years old.
We have lots of time for them to get better over the years. Most of them are going to be working 10 years or 15 years from now, and they'll be just that much better as we go forward. Our District Managers, 230 of them, 12 years' experience, average age under 35 years old. They have a lot of room to grow and become better. Our Store Managers, and they're getting, I think any of them are going to drop substantially. I think those ones are going to grow, and everybody else is going to give up a little ground over the next one to five years. Manufacturing will remain the largest, by far the largest portion for several years is what I see happening. Product overview, what are we selling? Fasteners, 49%. Ten years ago, that was about probably 75%- 80%. It's slowly squeezing down.
The concern in this room usually is about margin. I think fasteners will continue to decline probably at a rate, I don't know, we give up one or two points a year. It might even be a little more than that because we're pushing a lot of other things. I'm not that concerned about the margin because what we're finding, the other product margins move up when we have the volume. Part of it is that fasteners are really, really good product. Part of it is that the other products we just don't have critical volume. As we become better at the cutting tools, at the material handling, at the other things, we believe we can raise that margin to offset decline in fasteners as a percentage of revenue.
Future predictions, if I had to look at this or what I believe this is going to look like in five years, I think the two areas that we're going to see the greatest increase or the greatest growth would be cutting tools and safety. The reason for that, we're going to talk more about cutting tools later. We're working very hard on that as a big initiative. Safety fits so well with our vending program. It just really, really lines up well. I think the other products will basically remain the same. Fasteners will give up a little ground. We may give up a little ground in tools. That's really about our push on margin. Tools aren't the highest margin product we sell. There's pressure on that product line at all times. It hasn't been growing a lot. A big opportunity for us are our private labels.
You look at Fastenal on top. Fastenal is really more of a commodity product. We put it up here because we have it on everything we own. When we're talking private label internally and even externally, we're really talking about everything on there except for the Fastenal name because these are the brands that we've developed. I have some examples here of Rock River. I'll set them up. Of the packaging and the quality of the brands, we can see them. The deal is really about margin. It's about improving our margin. I went out to the product development team, and you'll see them out there today. I said, "Pick some items randomly." We just started pointing at some items, and I pointed out six items yesterday, not to say that one, that one, that one.
I said, "Look up the costs on those and let me know what the savings is." I got an email last night. The six items we picked out had an average 38% lower cost than the branded equivalent. They actually sent me a whole bunch of information, so I'm an expert on these six items now. Same quality, in many cases, they actually say the quality is better. It meets a higher standard. Like one of the gloves not only meets the US standard, but it meets the European standard, which I didn't know how different it was, but they said that's a pretty big deal because it reduces the SKUs that we have to have. Today, private labels make up 6% of our revenue and 12% of the non-fastener revenue. That's really what we're looking at.
The upside opportunity, we're not sure exactly how big it can be, but we're not getting any or very little pushback from the customer. It's really about us doing a better job of marketing it. We should be able to grow that as a percentage of our non-fastener revenue by 2 points to 3 points every year for the next 4 years to 5 years, 6 years. I don't know how far that would go out because the potential is there and we really have to work it. With a 38% savings, there's a good incentive for the stores to go out and push that product and really, really work with their customers. This is going to be a big part of our future. If you have the time today when you're out at the show, go into the booth or the area. There's a bunch of young product people out there.
I say young because most of them are right out of college. There's a 30-something crowd or 20-something crowd, but they really know the product. I really enjoy visiting with them because they're into it. They know the quality. They know the differences. They understand why this will work and what the opportunity is for us. Stay tuned on this. Private label will be a big part of what we're doing. Sticking with one private label, and there's two reasons I'm showing this. One is to show the private label, but really, I want to make a bigger point on this. There seems to be an arms race out there on SKU proliferation. If you talk to old Fastenal, it's adding 1 million parts, and the other guy's adding 2 million parts. I think there's some misunderstanding on that.
I know there's some, I don't know with this group, but in questions on one-on-one, those guys added 20,000 parts, so their revenue is going to go up X. It's not straight line math because all of us already have all the good parts. What we're adding are, I mean, incrementally, they're not nearly as good as you go forward. If you go from 100,000 to 1 million parts, you probably don't double your opportunity as a distributor because about 35% of our business comes from the first 10,000 parts that we sell, and it drops off from there. What I did is I really challenged our product managers. I was online one night, I don't know, just looking because I was bored. I was looking up safety glasses, and I realized we had 1,029 different safety glasses on fastenal.com.
I looked up the other guys, and I found out that the other two big public companies have about the same, between 800 and 1,200 safety glasses. I'm just scratching my head going, "This is ridiculous. How could we possibly need 1,000 safety glasses?" I went to our product manager, a sharp young man, and I challenged him. We spent some time on it. He came back and he said, "We need 360 safety glasses." He took it from 1,029- 360, and he said that would make up 93% of our sales, 96% of our invoices. The interesting part is that our brand down on the bottom, Bodyguard, with 38 sizes, makes up 45% of the sales and 62% of the transactions. I dug deeper. The margin on those Bodyguard glasses is 59%. The margin on the other 55% is 41%.
If you think about it and you say our SVNA is 30%, 31%, the profit opportunity, to just use straight line thinking, about 10% pre-tax you'd make on the other stuff. You'd make 29% on the Bodyguard. To me, it's a compelling argument to say maybe we need about 38 safety glasses, not 360. I don't think we're going to get there because there are other reasons that he knows and I don't. My point here is it's not about just adding everything because, and the reason I believe this is happening is because it's easy. It's electronic. You don't have to print it anymore. You just print it or put it up, put it up, put it up. There are two really important things here. One is we can make more money selling our brands and narrowing it down.
More importantly is we can provide better service for our customer if we offer them less on a product line like this. If we offer 1,000, but it's really hard to service 1,000 because you don't have enough sales to have them. A customer goes on, buys the, you know, number 1,028 part, the least selling, buys it. We're not going to have it in stock. Our store is going to have to buy it. It might take a week to get it. Their margin is slim. The customer gets bad service. We put our store in that position. We narrow it down. We stock what we present. We're going to provide great service. They're all going to do the same thing. Basically, it's only a few different functions, except for I found a pair this morning that has readers in them.
Now I have a new reason to have them. I took them. I can read when I do unsafe things, but not real unsafe things, like working in my shop, David. I really think about this because, as I said, everyone's out there talking. It's not just our industry. I read it all the time. It's someone who sells $2 million parts. It's not about having all the parts. It's having the solution. If I could come up with a part like the Swiss Army knife of parts, and it would solve thousands of solutions with only one part, we would be a more profitable, better distributor. We're going to work hard on that.
I'm going to pound our guys on this because the push on this is all the branded suppliers you're going to see out there are all going, "No way, he doesn't know what he's talking about," because they all want to get all their parts into our catalog because that's how they're going to drive their sales. It's going to be a tug of war, but it's going to be a good fight for us. Product focus and growth drivers. I'm going to hit more growth drivers later, but I wanted to come on to this one. We've been growing our products, other products other than Fastenal for a long time, other than fasteners for a long time.
Starting at the beginning of last year, we really started breaking down and saying, "If we could only invest in one product or if we could overinvest in one product line, what product line should that be?" We looked at all the products. We looked at the electrical, the cutting tools, material handling, safety. We broke it all down. At the end of the day, we came back that we really believe metalworking was our best focus. It was based on a lot of things. One is probably the most important one is we have a very large customer base of industrial companies. If you look at the earlier chart, 46% of our business is sold to manufacturing. Manufacturing is the main focus for metalworking. Those are the people that use the tools. Second is we believe it's a fragmented distribution system, just like the fastener business.
There are a few really good big guys out there, really only one real good big one out there, and then some good medium-sized. For the most part, there's a lot of small people that are pretty good at it, but we think we can take share because we have relationships. We understand manufacturing because of our own current, we own a bunch of manufacturing plants. We understand how this product is used. We have basically an in-house test lab. We have about 400 people using this product every day, and they are more than happy to share their knowledge and what works and what doesn't work. We have an inside track that many companies would not have because we have some really good manufacturing engineers and people running machines to help us with that.
We also know that the margin, we believe the margin is maybe not at our fastener levels, but very acceptable. If you look at the bigger public companies that sell a lot of cutting tools, our margins are pretty close to ours. We look at that and say, "Maybe we can't get there because we don't have the volume, but say we could operate in the low to mid-40%." Considering we already have the brick and mortar, we already have the trucks, the distribution, the people, and the customers, we would operate very profitably at that level with a product like this if we could grow the business doing that. We're already doing about $100 million a year, so we know that we can operate in that range, and we believe we can. We backed up and we said, "Okay, why aren't we doing it now?
What do we need as an organization?" We brought in our best suppliers and we said, "You know, what are we missing?" We brought in some of our best customers too and said, "What are we missing?" First thing they said in our stores, they said, "We need a better inventory selection. You can't go on and find half of it and then have the store go out and have to source the rest of it because it's just too much work for the store and they don't buy it well. If they're buying it a pack at a time, we don't get the right cost, margin gets beat up, and we don't make the money we need." We decided we made a commitment. We met with Dan in the group and we said, "You know, how much can we commit to this in 2011?
How many dollars can we put in cutting tools?" We said, "Okay, let's set the money aside, Dan. We're going to move on. We're going to do this." The other thing we found out is we need sales specialists. We were told that, you know, your 26-year-old manager is a great young man, a great young woman, but they don't know what they're talking about. They can't walk up to a CNC and say, "Turn up the speed, turn in the feed," whatever the talk is. We made a commitment and we said that we're going to hire between 40 and 50 sales specialists this year to go out, people that either work for us today and we're going to train them, or they came from the industry. Our first choice is people that work for us today.
We believe that any smart person or the smart person with a mechanical aptitude can be trained. We believe culture is key. We're at about 35 right now of these sales specialists, and I think about 30 of them have come from within the Fastenal system. We've hired four or five on the outside. We also signed up with a company called Tooling U, which is an educational firm that teaches companies like Caterpillar and other large industrial companies about these products because we didn't think we could ramp up Fastenal's school of business fast enough to get to where we needed to be to roll this out. We've hired outside training. We have trainings going with our suppliers, and it's actually going very well. I've talked to a lot of people about it this week. We also needed new suppliers.
We didn't have a full line, and that was kind of the million-dollar question. Could we get that to happen? It's a little world of carbide companies. There's only a small group of them out there that are really marquee. Our product manager who runs this, Mike Rusk, he's a long-time employee, he said, "Without this, this is like a cornerstone to make this work. We have to make this work." I took it upon myself. I made a bunch of calls. I met with the presidents of some of these companies. The one we ended up getting was the one he went after. I guess he's the better sales guy. We ended up announcing this week that we're going to roll out with a company named Vidya. Vidya is basically half of Kennametal.
The story is about 18 months or about 14 months ago, Kennametal made a decision that they were going to divide their business in half. Kennametal would go one direction, and Vidya, which has very similar but different products, was going to be taken in another direction. They had combined when Kennametal bought Vidya, which was a German company several years ago. They were getting too close, and they felt they weren't getting the benefits of two very good brands because they were just kind of merging together. They made a decision they were going to separate them, and the distributors could make a choice. The largest distributor is MSC. There's no secret about that. Made the choice to go with Kennametal. They will lose the Vidya brands. That's all public. I'm not saying anything that everyone doesn't know, I guess. We will be the national distributor for Vidya.
Our people that are in the product side of it, our manufacturing people are saying, "Fantastic decision, great company, good support, and we will be their only national distributor for these products." We have full support. They were here all week and a very good opportunity. It's not just Vidya. They're just the big one that we needed. We also have access to a lot of other brands, but they're going to be our cornerstone for the carbide inserts. We have a long list of other high-quality suppliers. Do we have as good a product line as the best guys out there? Probably not today. I'm willing to stand here and say that. Do we have enough to go out and sell to do serious damage in the market and grow our business? I really believe we do. We're real excited about this.
We have all the people and all the pieces in place. The other part of it is the local store. What we're hearing from customers out here today is that some of the best ones, if you're a small user of these products, you're not getting a lot of TLC from the big companies because everyone's after the big distributors. With our stores, we already have relationships, and these companies are out there delivering every day. We believe we can go in and pick up incremental business because of our product line, our sales expertise, and the last thing is our vending. The vending machines that we have are really going to make this work. We believe they're going to make it work very well. We're real excited about this.
A lot of energy, a big commitment on the companies from the company standpoint, and the stores are very excited about it. Really, we're expanding the market for every store by doing this. Switching gears and talking about distribution a little bit. Distribution centers, we currently have 14 DCs throughout North America. We recently promoted a gentleman to be the Regional Operations Manager for East Asia. We have no current plans for opening distribution, but this person's job is to research it. He ran our facility in Scranton, Pennsylvania, a sharp young man, and he's moved his family to Shanghai, and he's trying to figure out how we become more efficient in Asia. We're doing very well. We have a tremendous opportunity to improve over there. From what I understand, we'll probably be looking at a similar role in Europe in early 2012 if we can find the right person.
As I said, when I first started out, it's about an efficient machine. The products that we sell, 50% of the products we sell are processed steel. They're inexpensive by the pound. If you don't move them efficiently, you don't make a lot of money or you don't sell competitively. Neither one of those is a very good option for us. We have invested heavily in these. We continue to invest in automation. You'll see that when you go out today. We currently have two automated warehouses, like you'll see the one here today. We have plans to add in another one in Winona or add on to our facility in Winona, probably starting this fall. Over the next five to seven years, most of our facilities will become automated over that time period.
I'm guessing each time we do it, we will make improvements from what we've learned the time before. That's kind of the Fastenal model. This is a very, very important part of our system, getting a wide range of products to the customers very quickly. I'm not going to stay too long on this because when you're out on the tour, ask questions. You'll learn a lot more. The people giving the tours know a lot more about how this is functioning than I will probably ever know. It's really exciting what they're doing out there. Number of picks at the distribution centers, you can see it's kind of like our sales graph. We were at 95,000, dropped down, and today we're at about 100,000 picks a day. Almost a third of them come out of this facility because it has so much more inventory than the other facilities.
The next bar chart is the one I really like. This shows what we've been able to do with the automation. We were at basically 3.5% of revenue. Our expenses were over the last two years, we've dropped it and picked up about 100 basis points. It's really about two things. One is about the automation, and the other is about a strong focus on efficiency. They're probably equal if we hadn't been focused on it because a lot of this reduction came in hubs that we had changed no automation. We just started looking at how everything flows, inbound, outbound, and minimizing the touch is basically the lean process. We just continue to get better. Our goal, the group that leads this, their goal is to get that down under 2% of revenue. It probably will take, we're not going to do nearly this fast.
There's probably over the next three to four years is our goal to keep chipping away at it. We know we can get there because we have hubs that operate at that level.
How about right here?
Pardon?
How about this?
This distribution center actually isn't one of the lowest ones. The reason it isn't is because it manages so many SKUs. It's a different model. We have 160,000, about 160,000 SKUs. They don't, versus Winona that has 25, they get a lot more velocity per part. Winona is actually our most efficient warehouse without automation. This one has come down by about 150 basis points since we did it. It's not a fair comparison. It's not a real comparison here in the rest of the system because we're doing other things. Here we pick for 2,500 stores every day, which just inherently is less efficient than picking for 100 stores. Go ahead.
Do you wish me to roll out the metal? I don't know why you didn't invest heavily to sort that out.
One thing I didn't say on the metalworking that maybe will answer your question, we're not going to put the product out in the stores. The metalworking product that sort of brought this up is it's a huge point. The metalworking product we plan to keep almost entirely in this facility right here in a pick module we've cleaned out. What we, and I was supposed to hit on that in the inventory, it's in my notes. When we looked at it, we said, "What do the best companies do?" The best companies don't deliver cutting tools the same day. The best companies ship them overnight. We're going to control the inventory here. We're going to put in a program where we'll give the stores free freight, even free second-day air to get the product quickly.
If they stock it, we're going to be working with them going, "Why do you have it?" We don't believe we need it at the store sites. We also know that the investment will be too heavy if we have it at the store sites. With the amount we're willing to invest, we can have one of two things. We can have a bunch out at the store, or we can have one really, really good inventory. We're going with a really good inventory. We've segregated a pick module here that we emptied out earlier in the year. We've assigned a person to be, it's his job, and he'll have his own staff to manage this cutting tool inventory. We're actually a warehouse within a warehouse is what we call it because we want to control it. They'll pick it separately, they'll pack it, and they'll ship it separately.
That will allow us to roll it out where we have the sales specialists. If other stores want it and have access to it or have a need for it, they will have access. That's a real key point in this initiative is trying to control the inventory as much as possible right here. As time grows, we might add it into the other warehouses. I'm not convinced we will ever have to do that if we have the transportation set up because the key to cutting tools, especially the carbide, is it's very, very expensive by the pound. A 50-pound box of carbide is probably a $5,000- $10,000 cost. The transportation or next-day air is a very small portion compared to the sale.
Even in vending machines, you wouldn't consider it like that?
Yes, we will have cutting tools in the vending machines, but that'll only be at the customer site. We believe a lot of our cutting tools will be in vending machines. We're going to show you the machines this afternoon. It will be vending machine, Indianapolis, and a line in between. That's our vision of how this will work.
How do you market yourself against Kennametal? Is this a higher-end German-made product, higher price point? How are you going to?
Oh, I'm sorry. The question is how do we market ourselves or compete with the Kennametals and other brands? It's not a higher-end model. It's a very similar line. I'm not an expert in carbide, but I've learned a lot in the last three or four months. It seems like every carbide company has a strength. ISCAR is big. It's, you know, Berkshire Company. Sandvik is big. Kennametal, Vidya is big. They're all large businesses. Each one of them has a specialty. Some of them are good at cutoff. Some are good at threading. Some are good at other types of machining. Some are good at black iron. Some are good at stainless. Most shops are going to use multiple lines.
What we're willing to do, because we aren't the incumbent, we're willing to let our customer put the other guy's stuff in our vending machine if they want to use our vending machine. If I go in and I say, "We'd like you to, I'm the salesperson. We have a Fast 4000 we'd like you to use here." They say, "I use these three Sandvik cutoff tools. I'm not going to get rid of them. I test them. They're the one I use." No problem. If I could get your round tools, your drill bits, and whatever scraps I can get, and I get my $4,000 a month in revenue through my machine, you can have some of my real estate to make your shop run better. We think it's a really easy way. If I had 60% market share, I wouldn't be nearly as nice about that.
I don't have 60% market share. If I can grow our business, the really good thing about it is, in fact, I was talking to a company yesterday about it because they were excited about that concept. They said, "Yeah, but eventually you'll get all of our business because you'll see all the usage. You will have, basically, it's home court. We're going to have home court on it because we're going to see the usage." The response has been good. It has not been tested, but that is what our plan is. We're pretty much convinced, and I think everyone else is, that it's hard to switch quickly. If you come in and say, "I can sell you this for a dollar less," they're going to say no because it's all about production. It's about quality.
Most shops, our shop, we do about, I think, about $50,000, $60,000 a month in carbide. There are two or three Kennametal tools that he already said, "I'm not going to switch to whatever we buy." I go, "Man, you work for us and you won't switch." It kind of says how difficult it is. Transportation, everyone in the room, if you've ever heard me speak, talk about our transportation, I'm proud of what we've done. Real simple, better service, lower cost. We run our trucks because we can get to our stores earlier. Most of our deliveries are before 8:00 A.M., more than 80% of them. About 72%, I believe it is, before 7:00 A.M. That's my measure. It's because we use nights, weekends, and dedicated runs. If you look at the, you know, my next one, I'm going to show you some numbers.
If you look at the numbers, our internal transportation expense, that's our semis, over-the-road trucks, runs about 170 basis points. Our external freight expense, roughly 20 basis points. Our freight expense credits, 360 basis points. This is what we charge our customers, plus what our suppliers pay us to haul their freight into our system, which netted last month about $1.5 million in profit after all the expenses. This is another reason that we do it. We offer great service. Not to say we're going to make a lot of money, but if you can break even in this model, it really brings down the distribution costs. If you would have looked at this back in 2000, I think this presentation in 2007 is when we first started talking about this. The external freight expense was over 200 basis points, and the internal was about 160 basis points.
That's really where the difference is, is we start hauling more on our own trucks by increasing the frequency and using those small Sprinter trucks to increase the frequency. A little bit greater internal freight expense, a lot lower external. External is UPS, FedEx, Yellow Freight, and all the other guys. This is one of the real keys to our efficiency, great service at a low cost. Information systems, all distributors need them. Not going to stay long here. Talk a little bit about fastenal.com. We're real honest with ourselves and our shareholders. We got behind on fastenal.com on web sales. Some of our competitors were way ahead of us. Back in December, we launched a new Fastenal website, and it's a very, very good website. I would encourage all of you to go try it out.
What our people that are timing it say, you can find parts faster on our website than basically anyone else's website, especially if you go to the fasteners. We are far better at the fasteners because of the way the system works. I challenge you to come back and say, "Will, you're wrong because I tried it and here's what I found." I don't think that's going to happen. In December, we had 4,000 customers buying from us online. By April, that's gone up to just over 15,000. Over a four-month period, we've grown our business by fourfold coming on fastenal.com. Part of it is to do with a push, and part of it, you know, we're pushing internally to make that happen. Part of it has to do with we have a better website that customers are saying works very well.
Just a personal observation on web business in our industry, I think it's going to continue to grow for a long time. I also believe there's a very slow adoption rate because if you look at our best competitors that have catalogs and don't have local service, even those companies only have between 25% and maybe 35% of their business coming in online. That's the numbers they're stating, which tells me our industry is slow to adopt because, if you, why would you pick up the phone when you can go online? I think that will accelerate as more of us get good at it. Right now, I would have guessed if I was just a catalog company, that more customers would have migrated to the web. I think we're going to kind of have to punch our way through this with our customers.
I had one stop me in the lobby this morning and kind of scold me because we don't have enough catalogs available. I'm going, "What's wrong with the web? I like the catalog." It's going to take longer for our industry, but we're eventually going to go there. Our web business is different. We don't think of it as a separate business from the Fastenal store. It is another channel to drive business into the Fastenal store. Phone, fax, web, stop in, whatever it is, just send us an order. Our stores get paid off every web order that comes out of their market because there's no competition there. Yes.
I just kind of for sale, how does it work with your national account business? Just say a national account salesperson who goes to the cell phones and eventually gets dropped off by the field.
Yeah. Yeah, both people. The question is, the question is if a national account person sells something, who gets credit for the sale when it goes through a store? The national accounts people get credit for all the customers they are assigned to. If I work in Northern Ohio and I have Eaton and this list of customers, anywhere they buy in the country, I get paid for them. My job is to grow, say, Eaton. We'll just use them as they're a large national account of ours. Whether Eaton buys from us in Puerto Rico or China, the national account person who lives in Cleveland gets paid off that account. That's their job to grow it. The store doesn't lose any commission. We basically double, we get double dipped. We pay double commission. The business is more efficient.
At the end of the day, from an operating expense, it's still a very profitable business. We don't want our people competing with each other. That was my sale. That was your sale. No. The stores get paid off everything. Then like the cutting tool people will get paid off the accounts that they're working on. They might also get paid off Eaton if we drive cutting tools there, if that example. Sales specialists. Switching gears a little bit, again, talk about some growth drivers, what we're working on. In the end of 2009, we were kind of soul searching, trying to say, "Hey, we want to get our growth back, but we're not real comfortable with what the economy is going to do.
Where do we invest to grow our business at the most efficient place?" As a group, we got together and we decided that it was going to be sales specialists. We believe putting in high-level salespeople, like the cutting tool specialists, like government sales specialists, national accounts, would be the most efficient way that we could go about growing our business going forward. In 2011, we added about 50 product specialists, another 50 national accounts reps, 38 government reps, and about 70 vending sales reps to grow our business faster. So far, we're very happy with the decision and all of that. That's why I put this slide up again, gets driven through the store. Another growth driver is the Fastenal stores. Still an important part of what we do.
We still believe there's somewhere around 800 or 900, maybe 1,000 stores to open over the next five to six years. Somewhere around 3,500 in North America. We have an international opportunity. Switch to government sales. Government sales is an area that we, another area that we've got behind some of our competitors. Our group got together. They came to me. Our leaders, Nick and Lee and Raz, came to me. Our guys who run sales said, "We need to centralize this. We have to go against what we always do. We need to centralize our government sales, take it out of the field. We need to hire a top-level individual to drive this program." Our Regional Vice President in Seattle, his name is John Soderberg, had a great history selling to government. We called him, said, "Hey, how would you like to move to sunny Winona?" He did.
He raised his hand, and he's done a fantastic job of building his team. He's focused on federal, state, political subdivision, healthcare, which is a little bit different. We threw that in there because it's also bought through cooperatives, and he's good at the cooperative side, education, and then emergency preparedness. John has had, oh yeah, this is the tricky slide. Okay. John has had a very, very good success over just the last 12 months. He's been in the role for just over 12 months. I think this is the 13th month. He's built a team of 37 people up from about three in the first year. The first large contract that he signed, it's a purchasing cooperative, TCPN. It's The Cooperative Purchasing Network, is the acronym, signed in 2010. It's for political subdivisions throughout the country. These are all the different entities that we can sell to.
The way to think about this is a license to be involved or a permit to go in and sell to all these different entities. It's a national agreement, and there are several states. I don't know the exact number of states, but several states use this as a buying group. We're seeing some tremendous growth through this contract. The second one, and much larger, is a Western States Contracting Alliance. They're the largest purchasing alliance for state and political subgroups, state departments and political subgroups. Up until recently, Grainger held this as a single holder. They had the WSCA contract, and they had done a very nice job of growing the business. WSCA shared some of the numbers with us, and we were shaking our head, "Wow, that's nice stuff." WSCA made a decision to award a multiple award, and they divided it between Fastenal, Grainger, and MSC.
Basically, we're all out there competing with each other. All the pricing is public. It is our job now to go state by state by state and get that state to sign up. Each state has to decide, "Am I going to buy from all three, from one, or from none?" Those are the choices they can make. We've currently signed up 21 states where we have the agreement with WSCA. Most of those are multiple. We have a bunch more that we're working on. With the other contracts that we have, individual contracts, we currently have 27 state contracts, up from about three to four that we had a year ago when we started this program. The way to really think about this is we have expanded the market in over half of our store locations.
You know, it's really hard to say how much is spent at the state and local level. If you look at the taxing and you look at the GDP, how much is spent by government, it's a tremendous opportunity. We think this will be a growth driver for years to come. One of the things that positions us really well is most of these entities like to buy local. If they can buy local, they will because they want to support their community. If it's the county garage or the state garage and we go in and we're the local people, we definitely have an advantage over the other companies. We believe we definitely have an advantage. That is why we're getting so many states signed up. It's exciting. It's a tremendous opportunity. We're going to continue to build on the team.
The 37 people basically are assigned in the 27 states, plus supervision over that, selling into those states. We're seeing just very, very good growth out of this program. John also took on a project of emergency preparedness. This is an area that we've looked at for years, and this has to do with the flooding in Memphis or whatever's going on. There's a tremendous opportunity to go in and help people when there's an emergency. My concern with doing it at all times is I don't want to have warehouses full of stuff that you might sell if it floods and you might not. They came back with a plan and said, "We don't need to buy anything, Will. All we need to do is use our electronics and tap into the warehouses. Where are all the generators sitting? Where are the rubber boots?
Where are the tarps?" We have it all electronically. We tapped a young man. He has a military, actually, military operations background, real bright guy. He was working for Dan in finance. He raised his hand for the job. He is basically putting together this big hub. He is going to have a command center, and he is working on putting in people basically like volunteer firefighters or minute men. All the people within Fastenal that are doing jobs that could wait a week if they had to, like you see the mobile command centers, those are our vending sales trucks. All those people are going to be trained, and they're going to be able to go to the site. He will get his network going. Boom, you need to be in Nashville this afternoon. Here is your contact with FEMA. Here is what we're going to do.
We have hundreds of people that we could deploy this afternoon. He doesn't have it all together. We have hundreds of suppliers that would be happy for us to drain their warehouse of all the generators or tarps and those things. We have hundreds of semis and thousands of delivery vehicles that can be used to deliver that product. We have all the pieces. We're not going to use any of the pieces until something happens, except for Dave and his small team. They're going to be sitting there centrally going, "Okay, here's what we need to do." The other thing that we have that makes, and I didn't understand this part of it until recently, when something happens and someone goes out to get, so a flood happens, a county goes out and buys product.
If they want to get reimbursed by FEMA, the product, the customer, or supplier they buy from has to have been competitively bid. The WSCA contract is a competitively bid contract. We have the competitive bid. Fastenal will be, along with a few other companies, one of them that's authorized for FEMA reimbursement, which is a huge piece because they can go out, buy it from us, we can deliver it, and the county or the state, whatever the entity is, political subgroup, will get reimbursed for that product. That was a part that came together. John's team knew that, and they were explaining to me in a meeting about two weeks ago that really makes it work. We have all these people and pieces in place.
We're taking something we've already done that we're already paying for, coordinating the efforts to drive revenue and create another market opportunity for our stores. We are very excited about this. The meeting when Dave reported, who runs this a couple of weeks ago, he has lots of pieces in place, doing a lot of training and making contact with every state. They'll have a database of who are the contacts at every state, every county. We'll know where to go when it happens. International opportunity. We're excited about the international opportunity. Steve Orcinski heads this up. He's our Executive Vice President. Today, our international business, it's everything outside of the U.S. because they shouldn't have Fastenal or U.S. in blue because that's not international. It makes up about 10% of our revenue.
The exciting thing about it is that it's growing at double the rate of Fastenal's growth right now, our international businesses. It's very profitable, not quite as profitable as a company average, but that's really due to the time. They're newer stores, so the profitability is slightly lower, but still very profitable. In the First Quarter, the only area of the world that we weren't profitable in was Panama, small country, and we only missed by $15,000. Europe, China, Malaysia, Singapore, all those areas were profitable for us. We're not doing this and just crossing our fingers going forward. We're making money as we go, and the business is paying us, and it's growing very rapidly. I had the opportunity a couple of weeks ago and visited our facility in Malaysia, Singapore, and Shanghai, our sales office. Great people.
Same kind of people you'd see anywhere else in the company, excited about their opportunities, talking about their customers. Took me on a customer or two customer sales calls, and we're doing basically the same thing. The difference in this model outside of U.S. and outside of Canada is it's almost all OEM fastener business. The market opportunity today is not as big. Our plan going forward for MRO is to develop a product line of 800 to 1,000 very standard MRO items that we can run through the vending machines because we don't believe we're going to be able to go out with a big catalog into a small country and support that catalog. We think that would be a rope around our neck, and we'd be representing something we couldn't do a good job of, and we're not willing to do that.
I probably had 10 customers approach me this week saying, "When can I buy my MRO from you in China?" We're saying, "In a narrow scope, within 12 months to 18 months." Broadly, we don't know the answer to that because we're not going to go out there and try and support 10,000 or 100,000 items in a market that's doing $20 million a year. The math does not work for us. The question is, how do we handle the logistics for other areas of the world? What we're doing is they're handling it themselves.
As I said earlier, we just put in a Regional Vice President for operations for East Asia, and he's trying to understand that today we have a store in, say, Singapore, and they have a warehouse of their own, and they're buying and selling product as if Fastenal did when there were only five or six stores. They're doing a great job of it. They're doing it and making money, figuring in their costs. They get fully booked for all the expense. They run a P&L, and the person who runs it, the young man who runs it, that's his business, and he's very proud. It's growing at very, very high rates. We think we can improve upon that. The question is how many stores we have outside of the U.S. and Canada, and I don't have a count on that, but I'll give you an idea.
Mexico, we have about 30 or 40, and Mexico is growing very well for us. We're doing very well in Mexico. We have about five in China, two in Singapore and Malaysia, and about five in Europe in four or five different countries. That's a good rough number. I'm very close to that, but probably not exact. We just opened one in Brazil, but it's not opened for sales yet. We have our business license, and we believe we'll be selling out of that by the end of this quarter. We located that in Sorocaba, Brazil. The reason we located there is we have a handful of big customers that are going, "When can I buy from you?" We're going to turn immediate business on in Sorocaba, and then we'll roll out from there.
Brazil is probably the one country, maybe Brazil and China are the two countries that we think we can open 50, 100 stores over a long period of time because they're just large countries. The other one that looks somewhat similar to like a Canada is Malaysia. Good highway system and a lot of medium to large cities. Another opportunity. What I'm going to do now, and I'm almost right on time, is take about a 10-minute break. If anyone needs to use the bathroom or check your phones, then we're going to come back, talk a little bit about Fast Solutions, and then wind it up with Dan. I kind of sped it up at the end. Go.
I'll wait till I'm done. Okay, wait. Going to get started again. Oh, thanks for the water, Simon. I'm going to do another little info more. One thing I forgot to mention last time is the video that we showed to begin with, the video that I'm going to show here, were developed completely with our in-house marketing group. I think you can see the quality is really good. This group just does a fantastic job for us. What they spent a lot of their time on is developing training videos. That's really why we built the team.
Hey, everyone. I'm Carl Edwards, driver of the number 60 Fastenal Ford. If you're looking for a simple, affordable way to reduce costs, here it is, the Fast 5000. Let me show you how it works. A good way to think of it is that it's like having a fully automated 24/7 Fastenal store right in your facility with product close to the people who need it. The machines can be custom stocked with all of your high-use and critical supplies, whether that's safety products, cutting tools, MRO supplies, or general maintenance items like batteries, tape, or thread locker. Fastenal has thousands of ready-to-vend products to meet your needs. There's also an optional locker setup to manage larger or check-in, check-out type items. Because product is immediately available at the point of use, workers spend less time standing and handing at the crib.
There's no reason to hoard products because it's so easy to get more if you need it. That's really what the system is all about, helping you control consumption and put an end to all those wasted costs. To access products, workers swipe their ID card or enter their code, making them accountable for what they use. You can also set controls so they only have access to products they need for their jobs, with consumption limits over time. Here's another cool feature. Before vending, employees can be prompted to enter up to five levels of the information you want to track. Not only can you track usage by individual, you can track it by department, group, work order, whatever you want to know about the transaction. Because the software that runs the machines is internet-based, there's no software to install or manage, making it easy on your IT personnel.
You can go online anytime to view usage activity the way you want to see it. The system can also generate automated reports as well as automated alerts that allow you to stay on top of any activities you want to know about without having to dig through a lot of data. As a result of all this control and visibility, many Fastenal customers have been able to reduce their product consumption by 30% or more at a total operating cost of just pennies an hour. As you can see, the technology is pretty impressive. What really sets the Fast 5000 program apart is all of the things Fastenal does to support the program, from installing and servicing the machines to packaging products and keeping the machines filled. Let's take a look at the machine behind the machine.
It all starts with Fastenal's ability to provide hands-on inventory management services through its network of 2,500 plus stores. When stock runs low for an item, your local store receives an automated alert and comes out to fill the machine. For you, this means no stockouts, no need to tie up cash with excess inventory, and no need to cut purchase orders. You can further minimize inventory through an optional consignment program. Fastenal owns it until you vend it. Fastenal also operates regional tech centers, providing fast machine delivery, installation, and service, along with product packaging and testing to ensure that your machine is optimized for error-free vending. There is even a national hardware and software call center to provide immediate support if you're having any issues. Want to learn more or convince decision makers in your company?
Fastenal's team of Fast Sales Specialists can bring the technology right to your doorstep to show you how it works and answer your questions. Talk to your local store to learn how affordable the program is, then schedule your Onsite demo today. Thanks for taking time to learn about the Fast 5000. Now let's hear what Fastenal's customers are saying about the program.
It's been a good system for us. We've saved about, I would say, conservatively 60%- 75% over our expenditures from last year. We've reduced them that much. It has been a good thing. It's been phenomenal. We've actually looked into it for probably about two years before we actually did it. As our company, as we're growing, we were faced with the issue that our maintenance guy was having to essentially stand in the tool crib and hand out drill bits and grinders and safety glasses and welding jackets instead of actually on the line repairing items or doing preventative maintenance. With this item, it essentially eliminates about 80% of the things that guys come to the tool crib to grab.
We were going through a lot of hand tools and supplies, and we wanted to track where they were all going. Our turns on tools and supplies have gone down 40%- 50% since we installed the machines. Now we're looking at installing more machines in more satellite areas throughout our facility to make it more convenient.
Being able to track what employees are using, how many they're using, I think also is reducing the amount of waste our employees have with drill bits and so forth, because they know that we are keeping track of how many they're using.
I don't have to worry about regulating inventory. I don't have to look at who uses what and how much. It does it for me. It couldn't be a better system.
I wish I could speak as well as Carl, but more importantly, I wish I could drive the way he does. Take a quick look. I'm going to move through these slides fairly quickly because you're going to be out with the vending people this afternoon. Before I start, I'd like to introduce Russ Rubie. Russ, you'd stand up. Russ is in charge. He's Vice President in Charge. When we really got serious about this thing, I went to Russ and said, "How would you like a new opportunity?" He's, I think, a 19-year or 20-year employee, 21-year employee. Started when he was seven. He's running the program. He's literally the muscle behind it. Quick look at the competitive landscape from where our get back on my notes here. What's going on out there besides Fastenal?
There are really four companies that have been in this for a long time: SupplyPro, Tool Boss, Cribmaster, and Nexian. As you can see up there, we've done some research on them. If you look at the information on their website, they talk a little bit about how many machines they've put out. It's really a pretty small industry when you look at those numbers. Right now, we've actually put out, or we're putting out more machines in a month than all four of them combined. They're the people who supply our competitors. The reason we believe it's moving slow is it's not a cost-effective solution. They're just more expensive. When we started this entire project or this whole initiative, we started looking at it back in 2000, I guess 2008. I kept saying these machines are too expensive. The software fees are too expensive.
They were trying to build the business model on high software fees. That's really what their business model was to dispense this product. I challenged our people. In fact, we met with three of these companies: SupplyPro, Cribmaster, Nexian, all over a three-day period at the end of 2008. After the last meeting, I grabbed the group in the room and I said, "Let's go down to the lunchroom." We walked down to the lunchroom and I said, "Look at all these candy machines. These are not $15,000 and $20,000 machines. They're probably three or four. I don't know. They look like refrigerators with wheels in them." I said, "We need to find the manufacturer of these machines." They took the challenge and they went out and found a company, and I'll talk a little bit more about the company that would build affordable machines, would sell them direct.
Just by chance, they had a set, this internet-based software program that was designed for the healthcare industry that fit almost perfectly. There was a stroke of luck here. A lot, you know, the harder I work, the luckier I get is kind of the line. Our people worked hard. They found this and they developed this relationship. Basically, we just have a more cost-effective model right now. Why do we believe this will work? Our local stores and the fulfillment. We are the only national distributor that has local stores that can fulfill them or fill the machines. If you think about the machines in your place of work, somebody locally is coming with a truck every day or every week to fill those machines. It doesn't work very well if you're 500 mi away. It's more difficult, not that it can't be done.
We think we really have an opportunity with the small to mid-customers because it'll even be harder for them to fulfill those machines. If it's a large plant with 10,000 employees, anyone could figure out how to do that because there's huge volume. Another reason we believe it will work is because our customers really want to reduce spend, and we've proven that we can do that. We have great partners with the people, both the software and the manufacturer. We have a huge company commitment. We are committed as a company. You're going to see it today. We really believe that we have the pieces in place to make this system work. Our goal going forward as we grow this is to design and build more devices, machines, so that we can vend almost anything that we sell within physical constraints.
If it's smaller than maybe a basketball, we should be able to vend it. We have a team that's working on designing more equipment, more machines that are cost-effective solutions to distribute these products. What do we think the market opportunity is? We've done a lot of work on it. We've looked at the customers that have it. We believe that in the manufacturing side, what we know today, it's at least 100,000. We have 107,000 machines here. This is how it breaks down by the size of the customer. We also believe that as we add more devices or machines, this number will grow. We think it's a pretty big opportunity, but this is just a part of it. If you look at the other opportunities for the machines, we have mining, utilities, construction services, government, educational services, and healthcare.
When you add all those on, we believe the market for this type of solution is about a quarter of 1 million machines. I started, I'm trying to think about it. I'm going, you know, what do we see today? What do we know? How big could it be? If you were sitting in this presentation in 1990, and a couple of you were, at least I can think of one for sure, Rob, we stood up. Bob Kohlen would stand up and say if we did a great job over the next several years that we may have 500 stores someday. That was our vision that day. We realized that and say that this could be bigger. The customers that have vending today, about 14% of what they buy from us goes through the vending machines. With new devices, we think we could raise that to 20%, maybe more.
You look at an industrial marketplace of $140 billion- $150 billion. If you could get to 20% of that, I'm not saying you will. I'm just talking or thinking out loud. That would require over 1 million machines to service a market that big. I'm really trying to get you to do is think about the opportunity. Look at all the other things in our industry, not in our industry, but in the world that we're doing every day that's automated supply, from going through toll booths to ATMs to auto check at the airport to red boxes and live crab machines we saw in China last or two weeks ago. There are all these things that are out there. It's automated supply. There's one that I saw recently, a gold bar machine in Florida, where you can go in and buy ounces with your credit card.
It's probably an efficient way to do it, and it updates. It's real-time gold pricing. The solutions are out there. You see them in the airports. We think the market opportunity is big enough to throw a lot of our weight into it because we're positioned so well with our brick and mortar out there in the field. Technology partners, the Wittering Group is the world's largest manufacturer of point-of-use automation dispensers. They're a private company based in Des Moines, Iowa. They've given us this information, so we trust that it's true. Founded in 1931, the founder of the company is actually the gentleman that invented the cigarette machine. It's pretty interesting. His son, who I've gotten to know well, is very driven or very much driven by the engineering and has taught us a lot about how all of this works.
The software side of it is a company called Apex Technologies, a small company that was actually funded from the start by the Wittering Group. The founder of Wittering or the owner of Wittering thought there was an opportunity here, and so he funded this project, and we became their largest customer. We have a long-term supply agreement with them that they're going to support us as their major partner going into the industrial business. We're real excited about the opportunity. The fact that it's internet-based is a big deal because we all have PC problems, and we have PCs sitting all over an industrial plant. Some of them aren't going to work. That big blue sign in our warehouse or in the customer site is a fantastic selling tool when it works really well. When it shuts down, it's the worst thing.
It's like we would, if we could, grade something over the name when it isn't working. We've had great luck because they're internet-based. I'm not going to spend much time on the machines because you're going to have the opportunity to talk about that with our group. The Fast 5000 is our workhorse. It's the Fast 5000 with the lockers. It's the one that's really designed for high-volume product. The gloves, the safety glasses, and all those things. It's the real driver of this program. We have a lot of other pieces, and it's very dependable. The new ones I mentioned earlier, the Fast 4000 CT and the Fast 2000 CT, they're both cutting tool machines. They're specifically designed for carbide inserts and round tools. You'll see how they work. The 4000 holds 40 parts. We're not very creative. I challenge them because the 2000 only holds 18 parts.
There's a disconnect there. I was going to call it the Fast 1800, but marketing said that was not a good idea. These are the two machines we have. They'll be coming out in June. We've done a tremendous amount of testing, as I mentioned to some of you earlier. We have three of the 4000, three of the Fast 4000s in our manufacturing facility. We're getting great feedback on them. We're running about $10,000 a month through each machine, so we're getting the volume. The interesting thing there is our shop, their manufacturing guys are tough guys. We almost had to fight to get them in there. They're going, "We don't need this stuff." They are our best salespeople now. They just believe in the technology. I have several of the Fast 5000s also. It is a showplace for us or a great place to demo our machines.
These are the greatest believers too. We were not going to force it on them, although we felt like it, but they ended up adopting it and love what they have. The new one we are introducing is supposed to be out in the fall. I think it will be out in the fall. Is that trick? This fall, probably November, we call it the Fast Mega Store. What this is, I kind of think of it as a kitchen pantry. If you have some time to look at that, there are a lot of different devices. It is really about looking at a wide range of products and how you can store them electronically. I have spent a lot of time playing with these because I like the technology. Some of it is very simple.
If you just think of the door, the light in your refrigerator, there is a place to put a can of paint. You put it in. It pushes down the light switch, just like when you close your refrigerator door. When you pick it up, you just bought it. I walk up to the machine. I scan my name. It says I am authorized. I pick up the can of paint. The light switch goes off, sends a signal to Fastenal. It says, "We need another can of paint." Simple technology. The company that is doing this is wrapping a lot of IP around it so that we can keep this as long as possible without people chasing us. They are going to be chasing us. They are affordable, very repeatable technology, so we can put the product out there.
We are trying to think of every size and shape and how do we distribute it electronically.
Is this still the Wittering Group doing that?
Yes, the Wittering Group, along with Apex Technologies, is doing this. Apex Technologies is designing the technology initially. Wittering Group is testing the technology and building the devices. If you look, it's the same frame size as everything else. They're smart people. They manufacture a lot of machines over the years. Future machines, things that we're working on, we're working on a Fastener machine. We're not exactly sure how that will work. We have lots of designs, lots of thoughts. The key to this is affordability. We can't make a $4,000 machine if we're only doing $300 a month. What we want to do is we want to develop a machine that we can put into small shops all over the country that electronically sends the signal back.
We figured it out how to do it already with boxed product, but we haven't figured out an affordable way to do it with open stock, loose product. We're working with a bunch of scale technologies. We think we'll get there. They're confident they'll get there. I just haven't seen it. A Hazmat machine, long ways, that's almost ready, I think, two, three months. Hazmat, this is a type of machine that we're probably going to have to charge more for the system because we don't think we'll get the volume. It's a great solution for the customer. We think we'll sell thousands of them. Every factory has a locker where they keep their paint. If they could do it electronically, it would be just that much better. First aid machine would be a small machine.
We think that's a real benefit for OSHA because when someone comes up and uses it, it'll all be recorded. If someone comes up and gets bandages out, the OSHA or the Safety Manager will know that first thing. They'll walk out and say, "Hey, who cut their finger? What's going on?" They'll know who did it because they know who scanned it. It's very, very good reporting. We're getting huge feedback or great feedback from the customers on when can you get this. We're looking at other product-specific solutions. We're focused on this. Things will keep rolling out over the next several years, but some of them will be here. The Fastener machine is what I'm pushing very hard on. Oh, excuse me, I flipped pages too quick. The machine behind the machine, that's what we've coined this.
One thing we learned about a year and a half ago, or we, like the light went on, is the reason it wasn't growing as fast as I thought it should, and many of us thought it should, is it's more complicated than just driving the machine out there and plugging that in. Anybody can do that. There's nothing complicated. The packaging is difficult. I have a bunch of packaging samples up here, and you'll see them today. Most of us have been at a vending machine at some point in our life with both hands on the top trying to get your candy out of it, beating the machine. You're looking around so you make sure no one's watching you. Packaging, if that doesn't fall out, they don't get their gloves. Packaging is a real key. We have a large team.
Russ has a large team that's doing nothing but packaging. You'll see it all over in the show today. That's a big deal. We weren't selling it well enough because it's a technical fail. Last year, in the middle of the year, it was in June, we made a decision to add salespeople. We had one guy, and he was doing a great job. We said, "What if we had more?" Today, I believe we have around 70 full-time salespeople driving around in these industrial assault vehicles, the vans with the machines in the back, and they're selling the product, demonstrating them. You'll see in a minute that we've had some very good results. We were shipping the parts locally. The machine's centrally out of Winona. Too far to ship them. We need to do it locally. Now we have build centers in every distribution center.
We have a person, a middle-level manager responsible, and this is their opportunity to grow this business. They have people in vans that are delivering them. Unlike our competitors who hire someone to do it, the same thing we did for the first two years, we have Fastenal blue shirts going out there, technically trained, and there are people setting the machines up, testing the machines, and making sure they work. That's really a big deal. We have the support and the training. Like we showed in Carl's video, we have a national support center where we have, I don't know the exact 20 people, 28 people full-time on the phones supporting this system, setting them up, and answering. It's basically a hot center to answer customer issues and to set the customers up so we can go grow rapidly.
They work for us in Cincinnati right next to the software group, so they work with the software group at all times. We have the local store fulfillment. We really have the entire model. The machine is important, but without the machine behind the machine, if you think about it, what we've really done or what Russ has done is he's built a business within Fastenal, and it's a vending supply business. Our stores happen to be his fulfillment arm, but he's completely independent from building this business. The product templates I didn't mention, that's about figuring out the right product to get in the machine so that the customer can get what they need. What have we done in sales? As you see, in the First Quarter of 2010, we signed 255 contracts to install machines. In the second quarter, it went up.
The end of second quarter is when we decided to put on the salespeople. Didn't get much traction. Third quarter started coming on strong. The fourth quarter, as you can see, in the First Quarter, we got good traction with this program. I'm happy to say that April numbers have improved over the First Quarter. We believe we'll see similar growth to that in the second quarter if we can continue to stay on track. We believe the market's big, tremendous opportunity. Our goal is to get each store to sign one machine per quarter. If we were to do that and we're not quite there, we would sign about 2,500 machines per quarter. That's our goal for 2011 to get to there and continue to grow the business. The sales data, and you'll have to look at this. I brought it out a couple of different ways.
I use my March information. I use the information from March. The top line is all the customers that have vending. The sales line is not vendable sales. It's total sales from these customers. The customers that have vending represented 23% of our revenue, or, excuse me, $23 million of our revenue, 52.9% sales growth year- over- year, 1,170 customers. They deployed 2,850 machines. The average customer did $19,000 in the month of March. I took out the second line. I took out the top five and the bottom five because some of the very large customers, it may not be driven by vending. If you have a $400,000 a month customer, I don't want to say it's about vending. I took out the top 5% and the bottom 5%. Represents $13 million in revenue, 41.8% sales growth, 1,053 customers, 2,000 machines, but still very large customers.
Remember that our average customer for the company does about $1,000 a month. These customers are 12x as big, and they're growing at 42%. That's maybe the magic number in this slide. We looked at it another way. We took out the top five and bottom five machines installed in the last 12 months. All the machines that were installed after April 1st, 2010, $11 million, almost 70% growth, 690 customers, the number of machines. Large customers, $10,000 customers. That's what it, when I get excited, I'm going, we have customers that are doing $10,000 a month that are growing at almost 70% year- over- year. That's tremendous growth. The last one is that the customers that we had installed previous to that, $6.2 million, about half of the revenue of the second line.
I was actually very happy about this number, that these customers, although they're doing $17,000 a month with us, grew at 20% year- over- year the second year that they had the machine. You'd think, maybe what happens next year was kind of my question. I was waiting to answer that question. As you can see, I'm not saying it's all due to vending. I'm saying it's due to a relationship that we have with these customers and our store employees to grow the business. Now all we have to do is go get many more customers that fit this model.
We believe this business is a very sticky business because when you're in there and you have those big blue signs and you're doing a good job, we're going to have to step on our toe or drop the ball, I believe, to get thrown out, especially if we continue to develop the best technology. That is the key. Who's using the machines? 10% of the Fortune 100 or 1,000 companies, 11 of the 200 largest private companies in the world. This data is actually from the end of March. If we update it, it would actually look better with what we did in April. With that, I'm going to turn it over to Dan. I went through that fairly quickly because I know you have plenty of time with Russ and his crew. When Dan's done, we'll open up for Q&A.
Thank you, Will. Good morning to everybody. Thank you for coming here today or participating via the web. One note I wrote down earlier when Will was talking, he talked about our website and what we've seen with our website as far as additional customers ordering over the website in the first four months of this year. One thing I challenged everybody in this room, as well as everybody listening on the call, try our website out. What I found is to really understand how it works, it works best if you buy something. If you just look, if you just surf around to find stuff, you don't really get the feel for it. If you buy something, either have it shipped to your home or come in our store and pick it up, you really get the feel for the power of the technology.
Back in 2007, I think it was Dave earlier before the meeting started, I commented that back in 2007, I was in this room that we originally introduced the concept of Pathway to Profit. In that presentation, it was a very similar presentation to what you saw today from Will earlier. He went through, talked about the people of Fastenal, our cultural values, ambition, innovation, integrity, and teamwork, things that are very important to our business because they allow us to operate in the decentralized model that we have because we have people that we can fundamentally, at the end of the day, trust. Trust to do right by their customer, trust to do right by each other, and trust to do right for Fastenal and its shareholders. When you have that trust, you can give a tremendous amount of autonomy.
The second piece that we talked about in that presentation, and actually, Jean was able to find that presentation from 2007, and I looked through the topics we covered. The second thing we talked about was the freight model, the introduction of that freight model of really expanding our internal capabilities because what we had seen over time is when we moved it on our truck, it was about 10x cheaper than using a third party because of the expensive nature of expediting product. We could add more resources, and as Will showed in his presentation earlier, add some more expenses as percentage of sales, but reap back that benefit tenfold because it's inherently more efficient. The third thing we talked about was the Indianapolis inventory expansion. It was really twofold.
One was to expand the breadth of inventory that we stocked within the organization, and the other was to expand the depth of that inventory. This distribution center was the appropriate place to talk about that because most of it centers here. One thing you'll see this afternoon when you're walking around the facility is the amount of technology we've put in, introduced into this facility. It was really for two reasons, as Will showed earlier. One was the inherent efficiencies in lowering our cost of distribution. The second one was just sheer throughput. As Will mentioned, 30% of our picks are performed in this distribution center. Getting those boxes in and out the doors is critical, and technology was an important part of that piece. The last thing we talked about was market opportunity. There's a large market out there globally and in the U.S.
We still have a relatively small market share, a piece of both. What was our opportunity going forward into the future? We expanded that today by talking not just about market share and market opportunity, but potential market opportunity within the vending side of the business. The last piece we talked about was the pathway to profit. The pathway to profit was simply this, taking our operating margin, our pre-tax margin from roughly 18% up to 23%. The primary way of doing that was over a five-year period, raising the average store size from a little over $70,000 a month in sales to about $125,000- $130,000 a month in sales. We went through a bit of a recession. We weren't expecting that when we started.
During that time, and I'll touch on more in a few minutes, we were able to lower that eventual benchmark we need from $125,000- $130,000 to about $110,000 in monthly sales. We believe we need today to hit our pathway to profit objective. I thought I'd take a step back and again revisit a little bit of what we talked about in 2007 on the pathway to profit math. The best way to start is to look at the year before we started pathway to profit, 2006. These are right from our annual report. Our gross margin was 50.2% that year. We spent about 32.5% of sales in operating expenses and had a pre-tax margin for the year of 17.7%, just shy of that 18% number I cited.
One thing I would note, I see a lot of note-taking, and these slides and the slides that Will covered are all available on our website. They will be available on our website after the presentation as well. If you start looking at that 32.5% and really try to understand from our store's perspective, what does the math look like? Over the last four or five years, we've been sharing more of that information. Every quarter when we put out our numbers, we show profitability by size of store in monthly sales. The first two numbers are the two key pieces of the equation. If you look at, and this is from a store perspective, so I'll put out the qualifier, these are non-GAAP numbers. Our gross margin we measure at the store is not exactly the gross margin we measure at the company level.
The rest of the expenses are those expenses, but only looking at the store piece. These labor dollars do not incorporate anything related to distribution or anything else. If I'm looking at, as a District Manager, at the store P&L. If you look across the group, our labor and labor-related expenses are about 14%- 15% of sales. In our quarterly information, we talk about the stores doing less than 30%. We talk about the 30%- 60%, 60%- 100%, 100%- 150%, and 150%+ . This is the range across the group based on the mix. If I went from the smallest group of stores to the largest, the first line item ranges from a high of about 33% of sales. Obviously, when you have that 0 to 30 group, you have fixed cost proportion that's going to be pretty large.
Our labor cost in that group is about 33% of sales. By the time you get to the 150%+ , that drops down to about 10%- 11%. Melded across our group, it's about 14%- 15% of sales. When we started the Pathway to Profit, that 500 basis point improvement we talked about, 60% of it, or 300 basis points, was coming from this first line. The second item there, occupancy, it's about 5%- 6% of sales across the group. Again, similar story to what you see on the labor side. If I look at the smallest store, that first category, the 0 to 30, it's about 18% of sales. Works out to about $3,500 a month is what we spend in occupancy. When I go to the largest group of stores, the 150%+ , that 18% drops down to 3%. It's just over $6,000.
That's the second piece of Pathway to Profit. 200 basis points, or about 40% of the improvement, is coming from there. That's what we talked about in 2007. That's what we're still talking about today because the math hasn't changed with one exception. I'll touch on this in a slide in a second. We've been able to improve the pre-tax of the various groups of stores. We haven't seen the benefit of these two pieces of Pathway to Profit. There's still a tremendous amount of runway left on Pathway to Profit because the bulk of the improvement thus far has come from things like the freight initiative, things like the expansion of inventory because we raised our gross margin. That actually, from a store perspective, raised our payroll expense, a great problem.
It means we have a tremendous amount of runway to continue to utilize and see Pathway to Profit efficiency gains as we go forward. That's really what lowered the $125,000- $130,000 number down to about $110,000 a month. The youngest group, we just got better at removing unnecessary expenses. Across the entire spectrum of stores, we improved our margin: freight, product categories, etc. The rest of the math that comes into play, local transportation, those white pickup trucks you see running down the roads in your local markets, and you probably see a few of them out in the parking lot today. A lot of our folks drove in for this event. That's about 1%- 2% of sales. The local other operating expenses, a little less than 1% of sales.
If you take all the stuff outside the store, distribution, the manufacturing, all the support infrastructure, all the district leadership, the regional leadership, the national leadership, you lump all that together, there's about 9% - 10% of sales. That's all the rest. That gives us our 30% - 34% range that you would see in our reported financials, that 32.5%. One thing when Will was first talking about the industrial vending, and we started talking more about the sheer number of units, because you know we're not talking 300 machines. We're not talking 3,000 machines. We're talking tens of thousands of machines being introduced into the marketplace. The first thing that I thought was, what's that going to do to all this? What's that going to do? Forget the CapEx for a second. I'm just talking about the operating expenses as that is being amortized off.
We really started to think about this piece. If you think about it, we're moving forward our deployment of our assets. We're getting them even closer to the customer. We've always felt this one strength of our business model is our stores. Our stores are typically within 10 mi of the customer, the end user. We believe if you can make that model both income tax efficient and cash flow efficient, you will ultimately get the greatest market share out of the entire market because you put yourself in a position with the right people in the stores to be solution providers, not just sellers of product. As we move this equipment physically into our customer site, we believe that only makes that case even stronger, that we ultimately get the greatest market share.
Now, when we look at the cost of the vending equipment physically deployed in our customer's locations, we've done a lot of modeling looking at it over, actually, we've done quite a few years into the future. When I look at it, we think about it as a component of that second item, occupancy. Let's have a scenario where we have a $150,000 store. Five years from now, it's not a hundred, or two years from now, or three years from now, whatever the time frame is, it's a $200,000 store, but let's say $50,000 of it is going through vending solutions. When we look at our internal P&L, when we look at how we think about the business, we've lumped that expense into our occupancy category. What we really have is a $150,000 store that can afford what we spend on occupancy today for a $150,000 store.
We have an incremental layer of business. The real question is, can we do it for less than that 3%? That's the secret of our math today. We believe we can. We believe there's enough of a margin of error in there that even if our glasses are a little too rosy colored today, and it doesn't prove to work out exactly the way we're thinking about it today, there's room for error such that we can maintain the integrity of the Pathway to Profit and ultimately drive our operating leverage into the future, even with the deployment of equipment out there from a P&L perspective. Hopefully, I didn't throw up too many versions of stores and too many ways of thinking about it and lose the crowd. The real question is, does the industrial vending support or take away from our Pathway to Profit?
I believe it completely supports it because the economics are very good.
What's the sales level per machine that the associate is at?
A lot of the modeling we've done is really looked at it from the standpoint of a couple thousand dollars a month per machine. The question was, is there a sales level per machine that really predicates this? However, what we've really done when we looked at it internally, and I think Will's numbers really support this, at the end of the day, we're not completely wed to the dollars have to go through the machine. Does it expand the relationship and allow you to get more product going through that customer? You know, it's not uncommon. Maybe the customer is unsure about, geez, I'm not sure if I can hit that number. However, I have a bunch of other spend over here that's with vendor Y or vendor X. I can turn this business over to you too.
Maybe we get the vending business plus another piece of business over here on top, and we end up with a number well above that. Each individual circumstance will play itself out, but it doesn't have to go through the machine. That's what a lot of the modeling was based on. Again, I believe there's enough margin of error to cover, even if things don't play out exactly the way we think.
It's really interesting talking about it in the low end of the not-so-sophisticated end of the very well-leveraged store.
You know, and when we started Pathway to Profit, the way we described it was we were going to take occupancy. As the average store size grew, the occupancy expense was going to move from about 6% down to about 4% because that's where that $100,000 - $150,000 store is at. It's about 4%. That was 200 basis points of the 500 basis points of improvement.
The cost of the vending is enormous.
Yeah. If the cost of the vending is 6%, it might help you grow your business faster, but it doesn't add to the, it doesn't help you achieve the Pathway to Profit objective because it's counter. You need something else to make up for it. Now, maybe you can find something else to make up for it. We don't need to. It's less than that 3%.
What costs are you allocating to that 3%?
Everything related to the vending. Okay. What costs are we allocating to the 3%? It's the cost of everything associated with the vending machine, of operating that forward-deployed equipment. There are certain details where we will cover and won't cover for competitive reasons. What I can tell you is when you fully load those costs in and you look at it across the business, it's net positive to our pathway to profit. I'd prefer not to get into the specifics of what the machine is and exactly how that works. The second is looking at taking a quick view of our pathway to profit progression. As we had said, we first announced it in the spring of 2007. From 2007 to 2008, we saw a very attractive improvement. The economy took the setback that we saw in 2009, started digging out of that hole in 2010.
I firmly believe now when we look at it, in 2011, we have reemerged into the pathway to profit. Our business as of March 2011 is back to where it was prior to the meltdown. Our daily average is greater than $10 million a day. It puts us in a position for our average store size to start growing again. That's really the secret to the math of pathway to profit. Will touched on quite a bit the investment in resources we've been putting in since we started the pathway to profit. Here's a quick snapshot looking at Q1 2007, the last quarter before pathway to profit, and where we are today. Our sales are about 31% higher than they were at that point in time. That's spread across 22% more stores. We have about 23% more people physically in our stores today than we did back in 2007.
We've invested quite heavily into the non-store sales personnel, folks out in those vehicles promoting vending, the folks supporting our cutting tool initiative, the folks supporting our manufacturing sales, our national accounts personnel. We invested quite heavily, and we're up about 27% from where we were back in 2007. If I look at the other part of the spectrum, the cost associated with supporting it, if you look at distribution, that increase is all attributed to the fact we acquired Halicrom. If you take those 90 people out of the equation, our headcount is essentially flat. That's really what's played out by the introduction of technology and the improvement in the distribution efficiency that Will touched on earlier.
The final administrative personnel, a lot of the support personnel, HR, School of Business, accounting, IS, procurement, a lot of that is very much centered on the number of stores we're supporting, not the dollars of business we're supporting. We've been able to hold that number completely flat in the four-year period. Finally, talk a little bit about cash flow. These are a recap of some of the things we talked about back in 2007. If I look at the first part of this decade, the business model as it was before, operating cash flow averaged about 60% of earnings over that time frame. We spent about 40% of earnings on CapEx, so we had about 20% left over. We actually burned up a little bit of cash in that time frame. We paid out between dividend and buyback about 30% of our earnings.
It's a little distorted because a lot of those dollars came out in the 2003, 2004, 2005 time frame. You can see when we initiated Pathway to Profit, what we really said is that operating cash really thought that could move to about an 80% - 90% of earnings range. The real thing there was with the Pathway to Profit, a lot of inventory went into opening all these stores. As the average store size grows, just like we saw on labor and occupancy, the leverage is tremendous from working capital. We saw that in the last several years. We were running closer to 95% - 100% of earnings generating operating cash. Obviously, 2009 is a bit of an anomaly because of negative sales and the working capital thrown off primarily because of accounts receivable. In 2010, we were at about 91%.
I still believe over time, that's about an 80% - 90% range. One thing that helped it in that time frame, we had made quite a bit of investments into a centralized call center for accounts receivable, and we lowered our days to pay quite dramatically in the 2007, 2008, and 2009 time frame. The final piece is looking at return on assets. These are pre-tax returns. In the early part of the decade, we were running at about 29%. If you take cash off the balance sheet, we were at about 35%. We didn't really cite a range per se, but inherent in what we were talking about, we saw that number for the non-cash return on assets moving north to 40% over time.
When I look at the vending and from a capital expense standpoint and from an inventory, depending on how that deployment works over time, I believe vending is supportive of this model. It will not cause our CapEx to go up from where it has been historically. If you look at over the last 5 years to 10 years, we've made tremendous capital investments into distribution. A lot of those investments are now poised to be utilized in the future. The level of CapEx for distribution that's needed is a lot less. It allows vending to step in and use some of those dollars. The same thing with working capital. The real key for us on the working capital related to the vending, because we will, if you look at the machines, some of the machines that are out there, we own the inventory in the machine.
The real, again, it's forward deployment of your asset. Our model has always been predicated on having inventory in two places, our distribution center and our store. The vending inventory will not be at the store. Our challenge is to move that so it's either in the vending machine or it's in distribution. That's how we manage the working capital piece. With that, I will turn over to what questions you might have. Yes, sir.
Dan, am I heard you right, the goal was 2,500 machines per quarter?
The question is if 2,500 machines per quarter is our goal. It's 2,500 contracts signed by quarter, but essentially 2,500 machines per quarter.
We are going to work from the First Quarter of the month.
Yep.
What allows you to accelerate it to roughly 1,000 machines?
The question is, why do we believe we can accelerate the number from 1,400 - 2,500 machines per quarter? It's really about adding the additional salespeople. I believe we were at about 40 salespeople at the beginning of the year. I understand we went from one salesperson in June to 40 by the end of the year, and now we're at 70. We're probably holding between 70 and 75, maybe go as high as 80. Those people, their learning curve is ramping up very rapidly. We're comfortable that we can get, I didn't say to that number, we're comfortable we can get close to that number for the next three quarters.
Mainly through rationalization efforts. As I recall, the compensation is structured around earnings. It's changed the incentive draft in order to incentivize people to focus on working capital management.
Drawing a blank. Let's go to the second one. Oh, cannibalization. The question is cannibalization by the vending machines. I assume you mean because they're using less product, what is it doing to our sales?
By installing a machine.
Right. Use less. Yeah. About 20% of our active vending customers did less with us in March than they did the previous March. 80% of them showed growth, 20% of them were down. Cannibalization is a concern, but we're not willing to, and we have our branches saying, "I don't want to put it in there because they have all their business." We're saying, "No, either we do or someone else does." We're looking the other way on that subject because we believe if it's a good solution for our customer and we don't introduce it, they will be someone else's customer in the future. It's technology. The other one, as far as rationalization of products, no, the products that we're rationalizing to are the ones that are already in the store.
The store is actually being able to make more money by selling the ones that we're suggesting and provide a higher level of service. There's really no issue about the stores not wanting to do this. It's actually a net benefit for the store. We make life difficult for the store when we show a thousand different items, and they have to go out and buy them on their own. They want to sell right down the middle of the track if they can because life's easy. Customer walks in, grabs it off the shelf, makes a sale high margin. Bruce?
Is the cost of changing the software, so forth? You talk a little bit about how much you saved on the labor side, but I'd say nothing is secured.
The question is, does the vending machine bring certain efficiencies to our business? We believe it does, but at this point, we don't have enough data. We don't have enough stores that are driving. It's spread out. We have roughly 3,000 machines deployed in 2,500 stores. We don't have enough critical mass to really understand that. We do know that it takes less time to fulfill the machines. Our long-term strategy is that all the orders will be fulfilled from the warehouse, not from the store. The orders will be, or inventory will be stocked at the warehouse, picked, shipped to the store in a tote marked per customer. The store will take the tote, drive right out to the customer, and refill the machine. It's really just a pass-through at the point of sale at the store.
What I tell the store is you fill it and you collect the commission. That's all you have to do. Sell it, fill it, collect commission. You don't have to pack the orders, and they like the sound of that because it's very efficient for them. We believe it's an extremely efficient model because you know exactly what's coming in, and the internet sends you the order. The order gets sent via the internet. Do we have another mic? Maybe it would just be easier if we just.
What are the contracts like that the clients are signing? Have you had to take any machines out because they weren't doing sufficient volume in certain locations?
We have removed some machines. It hasn't been due to volume. Some of the customers just didn't adopt to it. The employees didn't like it. We had a few union issues. I would guess, Russ, do you know the number of machines that we've taken out? We've taken out less than 10. We've installed 3,000 roughly, and we've taken out less than 10. We do have, and one of the problems we have is the growth. Our backlog of getting the machines installed is growing, and that's why we put the machines out. We have a big, we have almost 2,000 machines that have been signed over the last, say, 10 weeks that we have to get installed. This is a good problem, but we want to speed it up because that's sales just waiting to happen. Excuse me.
The contract is really a very simple one-page contract that says, "We expect you to do $2,000 a month. If you don't do $2,000 a month, we have the right to take the machine with, I believe, 60-day notice." Real simple. We've redone the contract probably 10x , and every time we make it simpler because this is pretty basic stuff. If you don't buy from us, if they don't want to buy from us, they don't have to buy from us. If they don't buy from us, we get our machine back. That's really what we look them in the eye. I always talk to customers. I've been talking to big customers saying, "You know what? Take the risk out of it. If you don't find the savings in a year, I'll come and pick up all my stuff and go home.
No problem." If they don't want to buy from you, they'll figure out a way to not buy from you as a supplier. We understand that in all of our business relationships. Real simple contract. We're expecting $2,000 per machine. One thing we didn't mention is we do charge a software fee. About 75% of our contracts, we're charging $300 a month for software and service for the machine, which offsets a pretty high percentage of our depreciation. That's why Dan's math on the 3% occupancy makes, we believe it's very comfortable that it will work. No, excuse me, per year. I did say a month. Per year, we're charging $300 per year, and we're looking at how that works. We're on the move, and we're changing things.
Will, what kind of EBIT margins are you making on the vending machines?
We don't track it that way per se. What we do track is the occupancy cost, the cost of the vending equipment. We do not track labor specific to the account, so I can't give you an answer. That's why in the presentation, I really tried to focus on how does it play out in our P&L? How does that support or detract from our P&L as opposed to trying to dial it right in?
One thing I didn't mention in the presentation I didn't show on is the gross margin. The gross margin for the customers that have vending has not changed. I looked at the ones that had had it for more than 12 months. The gross margin of this group of customers runs lower than our company average because they're 10x or more bigger. It has not changed positively or negatively since we installed vending. I was hoping we might see an uptick. We haven't. That is comforting, the fact that it's not like driving the margin down. It's basically company average for the account size.
A question for Dan. If freight initiatives and the expansion of inventory have largely driven the margin improvement that we've seen to date in Pathway to Profit and the store labor and occupancy still have room, it kind of begs the question, is 23% the right number?
It tells me the comfort level in hitting the number is really good. You know, when I look at our stores, 100 to 100, you know I'm not going to answer that, Rob. When I look at our stores, 100 to 150, as you see in the table we put in our press releases, that group is above 23%. The wild card is, you know, portions of our business and what portions drive growth and how that manifests itself. The gross margin, for example, in our international business isn't the same as the gross margin in our domestic business because it's very OEM-centered. There, what we've done is we've managed the pre-tax by managing the operating expenses. It really depends on over time how the gross margin plays out.
If we're growing faster than we expect because we're adding OEM business faster than we expect, that falls under the category of a good problem.
Thanks. I had a couple of quick ones and then one on the revenue. One is, could you tell us how much you're spending to buy the machines, what the capital cost is? Second, if you could talk about the receivables, I thought that some of these customers were actually paying in a pretty short time for things consumed through the vending machine. It sounds like there's a real receivable opportunity. I wanted to understand better how to think about modeling the revenue opportunity because it sounds like whenever you put the machine in, the customers are realizing this 25% - 35% reduction in spend on the product they're currently buying from you, but are now buying through the machine. Is that? You're picking up share to offset that. Is that?
I guess the question then broadly is how to think about what are the key puts and takes because things that move into the machine, it sounds like they are consuming less of. I'm not sure how much of what's moving in there is stuff you currently sell them. Maybe that's the math that you're picking up a lot of stuff that you're not currently selling them. Is that $2,000 a month kind of a net of all that, or how do we think about that? Sorry the question was so long.
I'll take the last question first and hand it to Dan. Hopefully, you can remember the questions. The question on really, we're looking at customer growth. If you look at, if you pull up the graph that I put up earlier, you'll be able to find that on that. It shows that our customers are growing much faster and that the revenue per machine, if you do the math, is higher than our $2,000 goal. We can't really measure the cannibalization. We don't have the data to do that. We're looking and saying, "Hey, we added these machines. We're getting more than our goal. The return is good." Really, it's about we have a small market share today. We're expanding market share. What I call it is the halo effect.
There's a whole bunch of business around that machine that we didn't have before that's coming because the machine is sitting there. I think the other question, Dan, was on the cost of the machine and that we're not talking about.
I'll add one point to what Will talked on. You know, a lot of companies feel there's a value. When I'm leaving tomorrow morning, heading up to West Lafayette, my nephew's graduating from Purdue this weekend, I'm sure I'll see a few billboards on the way. A lot of companies see value in that, both from a branding standpoint and supporting their business and their sales. We're putting billboards in customer locations. That's a piece of the halo effect that Will was talking about, is when people are walking around, you see that big blue box that says Fastenal on it. It's no different than Coke or Pepsi putting their name on their vending machines. They do that to promote their brand and their business.
As it relates to the actual cost of the equipment, what I can tell you is the solutions that were out there when we were looking at this a couple of years ago, a lot of those solutions are $15,000 to $20,000 to $25,000, maybe $30,000 a machine. That's one of the reasons the market is
Relatively small because it's too expensive a solution for 99% of the customers out there. Our cost is less than that. What I can tell you is when we spread it across the business, it will support and enhance our Pathway to Profit. I won't go to where what we're paying for a machine.
We don't think.
We don't think, for competitive reasons, it's good to share.
I'll take the receivable one. We do have some customers who are paying us Net 5. We've had a more difficult time implementing that than we thought we would because what the customer says is we want one set of terms. Our business is Net 30. Our business is Net 20. We do have an opportunity there, but it's a lot smaller than we once thought. As we backed up, as we've been working this thing for about 30 months, we determined the real way to work in capital is take the product out of the store, forward deploy it to the customer so we get better inventory turn. Essentially, the same inventory turn. We actually think the inventory turns are going to be much better because we're going to drive a lot higher percentage of our sales through a narrower group of SKUs, the vendable SKUs.
We'll accelerate the turns on those products. We're doing it with more Fastenal branded product. As we get that, we've really just started that. The margin on that will be probably 20% higher. We have a margin opportunity. Inventory probably nets itself out. Receivable probably no change. Does that help you?
Yeah, thanks. Just wondering if you've got any comments on the vending and changing your international business model and opportunities at all.
Have you received?
Just on the vending machines, do they change the way you're thinking about your international model or opportunities at all?
I don't think so.
Okay. I'll take the question. I'm Steve Ru cinski. I'm the Executive V P of International Sales. Will did ask me to come in in case a question probably just like this came up. I'm sure I have a good understanding of what Will talked to you about our international model today. We are also at the point we are getting to a critical mass issue internationally where we're now investing in that model to go MRO is going to go with vending. We are not looking at a full today, we are not looking at a full big blue, let's say, but we're looking at a range of 800 to 1,000 SKUs that will be vendable and that will be in close proximity to our OEM customers, our multinationals, large nationals, regionals. We are going to build those SKUs around the vending solutions program that we have.
It's in its infancy internationally, not so much for Canada and Mexico, but truly across the seas. We're expecting to deploy. We've actually just deployed a few in Malaysia, Singapore. We're now focusing on developing that for China and taking it out to the rest of the international market as we know it or as we work in it. It doesn't change it. It adds to what we're doing internationally around that 800 to 1,000 vendable MRO SKUs. Make sense? Thank you for the question.
We anticipate most of those 800 to 1,000 SKUs to be Fastenal branded product because that allows us to package them internationally so they'll work in almost all the countries Steve's working in.
Thanks, Will. Steve's question, while we're talking about international, it was said earlier that the international opportunity is not quite as profitable as the core, but I wasn't clear on is that is it just because?
Oh, it's that.
Okay. If you adjust for the age of the stores, if you adjust for the mix, does that then put them on an even playing field? I have one other question.
You only have to adjust for the age. It's not at company pre-tax profit today only due to the age because the average store is much younger. You don't have to adjust for the product or the business model. We have a similar age. It's actually greater than the company in number.
The second is more of a clarification on what you said earlier, Will. You were talking about the number of sales specialists and vending reps, and I just want to make sure I had these numbers right. You were talking about in 2011, your plan was to add 50. Could you just go over those?
In 2010, that is what we had.
That is what you added. Could you just go over those numbers for us again? You had.
I think the best way to do it is just pull them off the PowerPoint slides. Oh, you're right. They weren't. Let me grab them. I apologize. We had them on the PowerPoint slide for our annual meeting. Right now, we added 50 national accounts people. We have 37 government salespeople. We have a current number, and this is through First Quarter, we have about 72 vending rep specialists. Through the end of the First Quarter, we have 32 cutting tool specialists. Also, I didn't mention earlier, but we have, I believe, 13 or 14 safety product specialists. I know I met the group this week in this room. Those are basically where our main initiatives. Safety was driven by customer demand. Cutting tools are driven by our initiative with cutting tools, national accounts because of the tremendous opportunity, and vending is obvious based on what we've been talking about.
I just had a question. Your hierarchy before used to be very clear. You know, you were a young graduate joining from school. You become a Store Manager, then District Manager, Regional Manager, and so on. How do these other people now fit into your hierarchy, and what are the cultural issues that you see around that? It seems to be becoming a little bit more complicated.
Yeah, I don't think it's a lot more complicated. These are just new opportunities. I met a gentleman last night that actually is working on our Emerson account. We had dinner. He said he's a Store Manager. I met him before, but he's a Store Manager. He said, "My choice was between becoming a District Manager or being an Account Specialist for Emerson." He said, "I thought this was a better opportunity for me. I love the selling." This was someone who just looked at the opportunities because we don't have as many District Manager roles today. It's really about different opportunities. This has been going on for a long, long time. We're creating new jobs like Russ's position. Russ has been all over the company and now he's the VP of Vending.
It's really about creating good opportunities and they're almost universal as far as where you want to be. Do I want to be selling vending products or cutting tools or a District Manager or running a store? Culturally, do you guys see any cultural differences? Yeah, I think it really is opportunity. Tucker, do you have your hand up?
I thought you had for a while.
So.
This goes back to Dan 's comment. He feels really good about 23%. Really, really good. The progress you've made on store level expense leverage and efficiencies, does that make you think any differently about store potential? If you can now maybe have more stores because they're going to be more productive than you maybe expected a couple of years ago?
From my vantage point, I think it's neutral to the opportunity for stores, you know, as far as expanding the number or not. At the end of the day, the Pathway to Profit, driving up the profitability, the basic need there was to better leverage our operating expenses. In the short term, we got some added boost because we leveraged the gross margin as well. To me, it ultimately comes down to long term. This evolves. Will mentioned earlier, at one point we were looking at 500 Fastenal stores at some point selling fasteners in North America. What really changes is as you learn more about different ways of going to market. There's a great big ocean out there of opportunities. What's the best way to go take that market share?
If we see that we can, for the next 5 years to 10 years, aggressively go after that market share with vending, that becomes a more important piece. I think the wildcard ultimately comes to how, you know, in a market, how many potential customers do we eventually expand that to? Because when we went from fasteners to all the other product lines, we not only expanded what we could sell to each and every customer, we did expand the universe of customers that could really buy from us. With what Will talked earlier about some of the government initiatives, we're taking a big expansion of who can buy from us and buy easily from us. That, to me, is what determines it long term. What's the best vehicle for taking market share? I don't think anything we talked about has changed that, you know.
Back to that 23% EBIT margin, what gross margin are you assuming there? My second question, it seems you know the strategy is really not get better as you grow, but graduating freshmen to juniors. Is there any risk there's some freshman stores that can never be juniors?
Over 40+ years, I think we've closed 10, 12, 15 stores. Those were some freshmen that didn't make it to juniors. When I look at that relative to our group of stores, it probably wasn't the market, it probably was a leadership issue because a lot of those markets where we closed in, we subsequently reopened. It might have been initially we closed it because the products we were selling at that point in time, there wasn't enough opportunity. When we expanded products, all of a sudden that market became more attractive. It might have been a piece of that, but a lot of times it's leadership. As far as the 23%, you know we've always said 51% - 53% is kind of our range for gross profit. Five, six years ago, we were down around 49%.
We did a nice job of raising that range up, a combination of freight, additional products, private label, expanding our sourcing capabilities. When I look at the 23%, 51% - 53%, nothing changes in that math. To me, the good part is the leverage points that we talked about are intact.
Just a question around pace of international growth and pace of international investments that's currently growing 2X. Is that sustainable or is that a goal of the companies? A follow-up question just maybe around some of the recent commodity price fluctuations and current thoughts.
Our goal is to maintain a much higher rate of growth outside of the United States. If you go back to early Fastenal, there were two constraints that Bob Kierlin determined. One was generating cash and the other was developing people. If you look at Steve's business outside the United States, he doesn't have either one of those constraints because we'll give him enough cash to develop the people. We believe we can grow outside of the U.S. and Canada. He'll be able to grow his business north of 50% for three to five years, is what your goal is. Canada is going to drag it down a little bit. Combined, it's more in the 35% to 45% growth because Canada is a lion's share. As far as commodity pricing, I've been actually working a lot on this lately because I spent a week in Asia just two weeks ago.
I've never seen a murkier crystal ball than we have right now. Everybody in the U.S. you talk to says steel is going up. I talked to 10 of the largest manufacturers of fasteners in the world over a week's period, and not one of them believes that fastener pricing is going up more than just they do a little bit. They're all good friends of mine, so I can talk about it. They believe, this group of people, and talked to them individually in meetings over five days, a little bit of inflation between now and September because that's their visibility with their steel supplier. The Taiwanese manufacturers believe that the government will protect their currency, not let the dollar drop against it because they sell in U.S. dollars and they're going to get crushed if that happens. There's a presidential election in January in Taiwan.
I don't know if they will protect that. That's their belief. They think we're going to have some stability in pricing in the fastener side of our business. Oil seems to be dropping. It's again, murky crystal ball. If oil continues a downward trend, we don't think we're going to get a lot of commodity pressure there. We push prices out. We push some price increases in May. We're going to wait and see what happens there. From a fastener standpoint, I think it's going to be somewhat stable growth, but not a lot of growth in pricing.
Just a question back on vending. As your vending solutions increase, there's some work involved in packaging a wider and wider array of products for vendable solutions. Are you pushing your suppliers or having any success pushing the packaging question back on your suppliers, or is that something that's going to require more and more labor on the part of the Fastenal employees?
Yeah, we don't. Actually, we're getting great response from our suppliers. A lot of Asian producers, you know, direct relationships, you'll see all the packaging out there. I have some samples. The U.S. suppliers are raising their hand like crazy. You're going to see it when you walk out there today. Many of the booths that you see, and they have signs of vendable product because they're trying to push it. They know if they don't hurry into the fold that they're going to get beat by the other guys. I'm pushing our team to not work as hard even with the domestic suppliers. Let's go work hard with our direct sources, but they'll both have it. I mean, 3M came to us right at the beginning and asked if they could get a machine for a year. They have a whole bunch of product that's all vendable.
Yes, thanks. Could you go over some of your goals for some of these bigger picture initiatives like growing the government business? How big do you think you can get in that? How big do you think you can get into cutting tools and maybe the investment that's required in people to get there? Also, the online business seems like a big opportunity. Where are we today? Could it be 25%, 30% of Fastenal's business going forward like it is for the other big guys?
We aren't publicly stating sales goals for any of those initiatives because they're too new and we want to be realistic about it. Government business is growing much faster than the rest of our business today, and we believe it'll become larger, as I said earlier. Cutting tools, time will determine. If you talk to our product manager, he has very solid goals and sometimes almost chokes when he tells us what. I'm like, "Okay, Mike, you have to support these goals." He's very aggressive with where he believes it can grow. Internet sales, we look at differently. The internet is really just the way we look at it, a vehicle for customers. It's not like they're additional incremental sales. Many of those sales are a customer who used to phone us and fax us is using the internet to do it. It's really hard to determine what is what.
As I showed you or talked about earlier, we had 4,000 customers buy from us online in December, and now we have had about 15,000. Most of those are the same customers. The positive of the customers that are buying from us are spending more money. We can measure that. They're spending about 10% more than they did in an equivalent month last year. That's a very positive opportunity. As far as 25% of our revenue coming through the channel, very likely. I think it's going to take a long time. Dan and I have talked about this, another form of electronic interchange that nobody talks about is called vending, industrial vending. That's coming to our business on the internet. What do you add in there? We've questioned how our competitors look at it. Most of there's EDI, there's internet, there's all kinds of ways of bringing it.
It's just how you sort it out. You know what? We don't care if they Pony Express the order to us. We really just want the order. We'd rather have it electronically. I think it's hard.
Thanks. A question on private label. You shared the goal of 2 points to 3 points of incremental penetration per year. That strikes me as an acceleration versus what you achieved the last couple of years. Can you just kind of compare that to the recent trend? If it is an acceleration, talk about what would be the drivers of the acceleration.
It is an acceleration. The real driver to the acceleration is we have better sales growth. We were growing very nicely in 2007, 2008. In 2009, we pulled back our purchases hard because we want to reduce our inventory and manage our inventory. We lost, there's no question we lost momentum. If you look at our container count and all the things we're doing, we brought it back up in 2010. We just have a much better position. If you look at the brands, we have several new brands, and we've just gotten a lot better at it. That's one. The other one is vending because a lot of the safety product is by far the best fit for vending. That's probably our best private label brand, Bodyguard. It's just really well received by the customers.
We can show the customer 10%, 15% of savings and increase not just our gross margin percent, but our gross margin dollars.
Have you all seen any kind of a competitive response from either of your two largest competitors on the vending machine effort?
I might let you take this, Russ. He knows this better than I.
Russ Rubie with Fastenal Solutions. We've seen some interest with some of our larger competitors with our vending initiatives. From that standpoint, our website's seen more hits of interest on what some of our capabilities are, what type of customers that we're approaching, some of the marketing strategies that we're doing. What we want to do is continue to focus on what Fastenal's capabilities are and create relationships and build.