Thanks for joining us everyone. My name
is Dave Manthe. I'm the Senior Industrial Distribution Analyst with Baird. We're really excited to have Grainger back in the fold here at the industrial conference. I went back a decade. I couldn't find the last time they were here because of their the analyst meeting they used to hold on at this week.
So just thrilled to have D. G. Macpherson here, Chairman and CEO to speak with us about the company. As most of you know, Grainger sells MRO products, repair and operations for various customers, commercial, government, healthcare, manufacturing type customers, 3,500,000 of them that rely on the pieces parts that Grainger sells to keep their businesses running. So, as is usual, we'll have DG kick it off with a few slides and an overview and then afterwards we'll go into the Q and A session.
If you'd like to email a question up to me here, it's session2rwbaird dot com and I'll relay those over to DG. So with that, I'll turn over to DG McPherson. Terrific. Good morning. So it's great to be here.
As Dave says, we've historically had our Analyst Day this week, so have not attended in a long time, but it's great to be back. I will spend just a few minutes on an overview. If you sort of step back and said what do we do, we are in the business of keeping businesses working. So if you think about our customer portfolio, it's extremely broad. We've got manufacturing customers.
We've got hospitals, hotels, military bases. And for all of them, we spend our effort trying to make sure that they have the right products for the right need. We spend a lot of time making sure we manage our inventory effectively. And we try to spend our time making them not have to worry about what is inherently a long tail difficult category. So our job is to make it very easy for them to do the work that is very important to them, whether that's medical care saving patients or producing things, whatever they do.
So that's what we do. We're about $11,000,000,000 in revenue. As Dave said, we have more than 3,000,000 active customers. In terms of e commerce, we have two business models we'll talk about in a minute, but we are the eleventh largest e commerce retailer in North America. Sometimes people ask how is e commerce changing our business.
A lot of it's already happened. 70% of our orders in our traditional Grainger business are already e commerce orders. They're already digitally transmitted. So a lot of that's already happened. And people that go into a branch or call in typically have a real need to do that.
So we've had a big shift over the last ten to fifteen years. We also have the online business model for small businesses, MonotaRO and Zoro, I'll talk about that in a minute, that's becoming a bigger part of our portfolio. And we have a long history of generating cash and investing in the business, but also giving cash back to our shareholders. So I'll spend a minute talking. We have two business models.
The High Touch Solutions model, obviously, the primary business there is Grainger in The U. S, which is our biggest business, our most profitable business. Here, we spend all of our time thinking about how can we provide value added solutions to customers that make it very easy for them to do what they need to do. And so we think about it in three buckets. One is what we call advantaged MRO solutions.
That's leveraging our customer expertise and our product expertise to provide the right solutions. This sounds easy and is a lot harder to do in our space than people realize. Making sure that a customer, if your hospital customer is using the right filter is actually a technical problem. And so we try to embed our technical expertise in all of the solutions we provide, whether that's on the website, in our catalog or in the solutions we bring through our sales force. The secondary focus for us is differentiated sales and services for large businesses.
Most of the action happens at their place of business. It used to be that when I started sort of supporting Grainger, it used to be that those large businesses would, on lunch, take a break, come down to the branch. They don't do that anymore. In most cases, we're managing the inventory for them. We're providing them safety solutions that help them make sure they have the right safety gear and processes.
We are helping them run their business, and we're doing it at their place of business. And so when we think about differentiated sales and services, it's how can we create value at the customer's place of business. And then unparalleled customer service, we're a very transaction heavy business. We do well over 100,000 transactions a day in The U. S.
Alone. The quality of that transaction is really important to our customers. So we work a lot on how do we improve the order to cash process, how do we make sure that we have very high first pass yield. We've made tremendous progress here. We are really best in class at providing a great experience for our customers at all steps in the process, and that will always be a focus for us.
So that's the high touch solutions model. That's the biggest business we have in The U. S. The endless assortment model, which we do through Zoro in The U. S, The U.
K. And MonotaRO in Japan, is really about having an endless assortment for small businesses, so everything a small business needs. That business has been we started in Japan first through MonotaRO. That Japanese business is now well over $1,000,000,000 growing 20% a year, very profitable. We've invested this year heavily in Zoro to give it the capability to become a true endless assortment business.
We expect that business to go from 3,000,000 or $4,000,000 items this year online to $10,000,000 over the next several years. And so we expect that business to be very similar to what we have in Japan in terms of the ability to have everything a small business needs. So that's our second business model and really focused on small businesses. Those two are the vast majority of our portfolio. We've gone through a lot of effort over the last five years to clean up the rest of the portfolio and make sure we're really focused on where we can grow and make very strong returns.
And so that's the portfolio we have today. So with that, I'll turn it over to Dave to ask any questions. All right. Sounds great. So let's first talk about the business environment.
And so as you're thinking about the current environment, the trajectory of business as you're seeing it today. When you look to 2020 and you're thinking about the continuum between recession and growth, I think a lot of people are kind of shaking out near zero. Could you just give us your thoughts on where you think the market is generally as we enter 2020? Yes. I mean, so we talked about this in our third quarter results.
We thought the market in The U. S. Was flat. And if you look at our suppliers, you look at our competitors, you look at our customers that announced earnings, you get a very clear picture that heavy manufacturer owned gas is down and things like hospitals for us are up. Government spending is still strong.
Retail, for us, retail is mostly serving warehouses that ship product to customers. That is still reasonably strong. Our expectations for next year are that we will either be in a slow growth or negative growth market, somewhere in that range. We're building plans to for all those ranges. For us though, I think the important thing is we run the business for the long term.
We're going to continue to invest in The U. S. Our expectation is we will gain share consistently. We have a set of initiatives we're taking to make sure we continuously do that. So we're really looking at the long term.
Our expectation is we can grow share consistently every year and be a significant growth story in The U. S. And then the online model is even a better growth story. So for us, it's making sure we invest wisely in the business, making sure we manage our SG and A wisely, but really not over pivoting on what is likely to be slow growth in the short term, making sure we're doing the right things to continue to grow. So let's touch on the digital business, the endless assortment model first.
Can you outline the advantages that as you see it that a customer would have for having a relationship with Grainger versus any of the other available websites or outlets for direct marketing of the types of products that you sell? Yes. So, if you think about if I go to the business in Japan first because that's the most evolved of that, you would say, first of all, on the customer experience side, that Japanese business has a lot of warehouse capacity. We have 300,000 items in stock. And relative to much of what you get on the web, the customer experience is much better for a small business.
The other thing that I would say is the product knowledge and the customer knowledge is very strong. So there's all kinds of segment solutions. So if you're a small manufacturer in Japan, that business has marketed to you in a way that lets you understand that we really understand you. And so the we've narrowed the product set to products that you should care about. If you're a restaurant, we've actually narrowed the products that restaurants care about.
So it really is a business focused lens on digital as opposed to a consumer focused lens, meaning you have a much higher probability if you're shopping on MonotaRO's website or Zoro's website of getting a solution that makes sense to you and getting service that makes sense to you. And so the businesses are completely focused on how we gain share with that small business effectively. Okay. And I believe it was last quarter you mentioned that you're trying to set up Zoro to be able to sell from any warehouse, from any supplier. Could you talk about the advantages of doing that versus just using the Grainger, the GIS whatever you call it today, the infrastructure of Grainger and the product availability that's resident there?
Right. So if you think about the Grainger business, Grainger business is quite industrial in the sense that our view is we need to be the absolute best at providing the products and services that keep businesses up and running with a real bent towards industrial. So we have the Louisville DCs coming online next year. Ultimately, in The U. S, we'll stock probably 800,000 items in our DCs.
There will not be items that are not as industrial for small businesses. And so when we think about partners and creating the capability for Zoro to have a true endless assortment to serve all businesses, we need partners because Grainger is not going to stock all those items. We just don't won't have the scale to stock those items for Grainger. So the idea is we will have partners that have great service that we can go to that can support the I have everything for small business model that we have and that's really what we're working on. Okay.
Also in the digital businesses thinking about MonotaRO, what are the advantages of owning it? It's obviously been a fantastic investment and it's given you insights into how to run Zoro and so forth. But today and going forward, what are the advantages of owning it versus what some would argue there's maybe the market isn't rewarding you enough for the value of that company? So, first of all, obviously, MonotaRO has been a great investment for us, but very little it's become valuable and so we would recognize that. Right now, we run our online model businesses as a thing in the sense that we get a lot of leverage out of the deep expertise that the Japanese business has had in running Zoro in The U.
S. And running Zoro in The U. K. So for now, we feel like we still get a lot of benefits from having it in the portfolio and it's actually taken a leadership position in helping us think about how to reformulate Zoro U. S.
And how to build Zoro U. K, for example. So that leadership is very engaged. We send we share demand files, we share analytics teams across those businesses and we feel like that is the best way to run the business and it's been a huge value for us having it in the portfolio. I would also say having a business in a mature market that's as successful as MonotaRO in the portfolio has also pushed our U.
S. Business, our Grainger business to think differently at times. And so it's been very nice having it in the portfolio as part of the conversation. Okay. Maybe we could transition to the high touch business.
You've obviously been through tremendous change in that business as well in terms of realigning the footprint and reorganizing sales, number of other factors. First, could you discuss the growth among large and medium sized accounts following the price initiatives you had a while ago here and additional steps you might take in the future to keep that momentum going? Yes, I mean, I would say that for those of you who aren't as familiar, we adjusted pricing. We went from really high list significant discount. We compressed that such that for midsize customers that don't know us, we showed prices that seemed were competitive.
Since that, we've obviously grown very quickly with midsized customers. We've seen nice growth. We've seen share gain. That's been very strong. We continue to see that with midsized customers.
It's important for us to have a balanced portfolio of growth. So we're not doing it at the expense of our large customer growth. But the way you grow with those two customer bases is a little bit different. With midsize customers, the initial sale is almost always digital today. So it's discovering Grainger through digital means and buying and then we have a very disciplined process to figure out who that customer is and to develop a relationship as it makes sense with them.
And we are just really continuing to learn how to do that. So we feel like we've got a long runway ahead in terms of share gain and growth with midsize customers. With large customers, that differentiated sales and services model, we've done a lot to improve our keep stock offer this year to improve capabilities, to build more stickiness with large customers and to create more value through our analytics, our inventory management and our services. And so it's a little bit different in terms of what you bring to large customers, but we haven't slowed down that growth at all. We feel like we continue to gain share with large customers and probably gain share faster with midsized customers over the next three to five years.
And just to go a little deeper on the medium sized customer, The price adjustment seemed like a necessary step just to be relevant to those customers so they could find you and they knew you were there and the price wasn't way out of the range. What are those next steps to developing that relationship and creating that stickiness with that customer in particular? Is it outbound telesales? Is it direct marketing? How are you touching that customer customers to maintain So it really depends on what the customer profile is.
So a lot of the work we're doing is to understand based on the initial orders who that customer is. If that customer has complexity where an inside seller calling will create value, we will do that. We've had very nice success with our inside sales team. In some cases, we're able to make specific offers to get customers that don't need an inside seller onto a pricing program that maybe gives them a little more customization, provides free freight. We're doing that with a number of customers.
We've called that Red Pass historically. So there's a number of steps we go through. The nice thing is we feel like our price point, our competitive price point is in the right range now to acquire new customers and to penetrate existing customers. So we feel like we've got the tools at our disposal and it's just continuing to reengage customers that we've either lost or that have not been greater customers in the past. Okay.
And then on the large customer side, one thing that's been a little hard to pin down historically has been keep stock in terms of how big is it, what are you doing there, is it growing, is it not growing and just hoping you can talk a little bit about your efforts currently and going forward. How do you think about key stock as it relates to that high touch model? How important is it? And what are the key levers you're pulling in that business? Yes.
So we feel as if helping customers manage inventory is absolutely core to what we it's actually been core to what we've always done. But certainly, doing it more at the customer's place of business is a really important offer for us for large customers. That said, had some challenges with KeepStock a few years ago from a profitability perspective. We have worked through those challenges. I'd say we've done three things.
We've improved the profitability. This year, we started building new capabilities. So we've taken more control over our software. We're able to build new capabilities for customers that we didn't have in the past. We've rolled out some of those recently with some success.
And we're now retraining all of our field resources on our expectations around KeepStock. We feel like we're in a very good position to have it be much more of a growth story going forward than it's been the last couple of years. It's certainly a big story the last couple of years, but we feel like we're in a better position now to grow and to grow in ways that are profitable for the business. So we think it's going to become a bigger and bigger story as we go forward. And we'll talk about that as we go forward.
Okay. And you offer a wide array of services from bin stock, vending, person on-site. Any of those that rise to the surface? Or is it just sort of a suite of services that you'll offer to your large customers in a broader way going forward? Yes.
So, a lot of what we've done this year to get prepared is to become more flexible and more agile in how we can deploy solutions. I would say our starting position is always let's understand your business, our customers' business, let's understand the demand profile and come up with a solution that works for you. And that having a suite of options allows us to do things in ways that serve the customer need no matter what type of customer or what demand patterns they have. We have at times frankly been too slow in terms of deploying some of those things and we've gotten much faster this year at deployment. And so while we've added the capabilities, we've also changed the way we've deployed them and we feel like we're in better position to respond to customers' needs and we're going to be really focused on executing in a much better way.
Okay. Maybe we could touch on the expenses at the company. If the forecast we're hearing from a lot of companies flattish is kind of baseline that they're thinking in terms of end markets next year. But if you grow outgrow that flat growth, get low single digit type growth, what are the components of SG and A that you can really drill down on and reduce? Because I think it's natural for distribution companies given that the majority of expenses are people.
You have natural inflation there. You have healthcare. There's a lot of factors that go in. What are the things that you're pulling on to the downside to try to offset the natural inflation and hopefully maintain a little bit of earnings leverage in a flattish market environment? Yes.
So, look at our last five years from an SG and A perspective, you would see significant improvements in SG and A. A lot of that has been a shift in how we think about expenses in general. So our expectation is in areas where we have large cost pools, we have obviously big distribution centers, we have a big sales force, we have call centers, we expect continuous improvement every single year in the cost structure in those areas. So next year will be no different. We would expect to get benefits from continuous improvement throughout the cost structure.
There are some short term levers that are not particularly big that you can pull on. Our focus though is sustained productivity such that when you get through any period or go into any period, you see SG and A leverage and that's really what we're focused on. And most of that is in the big cost areas. Are you continuously getting better? Is your cost per line going down?
Is your revenue per seller going up? The effectiveness of your team in every area has to get better and that's what we're focused on. Okay. I'll ask the standard capital allocation priority question. But it's a little different and the reason I say that is when you look at the share count net at Grainger over the past say twenty years, the share count is down by nearly half.
So you've really done a good job in terms of the share repurchase. Obviously, you have the dividend aristocrat status as well. With those things as a backdrop, can you give us your priorities? And I wouldn't expect there's any reason to expect change there, but could you maybe talk about M and A as the one that could potentially be a wildcard going forward? Yes.
So, I would say that our first goal is organic growth and investing in the business in areas that make sure that we gain share consistently. And for us, the bigger capital expenses have been distribution centers. We're bringing Louisville on, I mentioned that next year. It is 60% bigger than any building we have. It's a bigger footprint and it's taller, which gives us a lot of flexibility.
But those investments continue. They've been fairly consistent. Technology has been the other big investment in terms of building new capabilities. Obviously, being so big in e commerce, that's been a big investment. We will continue to invest in the business.
I would say, we can't contemplate significantly changing the amount of cash we invest in the business as a percentage of what we generate. So we'll probably be similar to the past. After that, we give it back to the shareholders and we've consistently raised our dividend. There's no reason to change that. And the rest of the rest has been buybacks and we're probably in a position where we'll continue to do that.
Any I suppose you review the portfolio periodically. So I would imagine if there was a divestiture that you were thinking about, you would have done it already or you would have it in process. Is there anything that we should know about that particular area? So we I would say we like I said before, in the last five years, a lot of our subscale international business that we've gotten out of, we continue to look at portfolio. We don't when you take The U.
S. And Canada, which is now run very closely knit with The U. S. And we think it's going to be a get more and more successful over time, and you take the online model, there isn't a whole lot left. So our portfolio is fairly clean.
You mentioned M and A. I think we've discovered that in our space, buying small businesses that go to market differently hasn't been all that successful, primarily because the front customer interface is very unique typically on those businesses. And our paradigm sometimes hasn't been all that effective in getting the value out of whatever paradigm we bought. And so we really view ourselves as an organic company. Of course, if something big were to be available, we'd have to look at it.
We'd be irresponsible not to. But right now our focus is significant and consistent organic growth in The U. S. Business, 300 basis points faster than the market and growing and improving profitability in the online business and that's really our entire focus. Sounds good.
I'll give you a quick hit here with one minute to go. Canada, it's clearly becoming a small piece. I'm wondering as you say if it starts to improve, if it's closely integrated with The U. S, is it a reportable segment next year? But more importantly, how confident are you that we're bottoming and turning the corner there?
So, the good news is, I would say over the last several months, we've seen seasonal patterns that look good in the sense that while we may still be not growing year over year, within month you're seeing, okay, it looks more like seasonal patterns we've seen before. So we feel like we're starting to see the bottom on the revenue. The service has been very, very good the last six months. We're having great customer conversations. We feel like we're making progress on the business.
And there's no reason to believe it can't be a growing significant profitability source for us. So we're pretty excited about that. Whether it's a reportable segment, we evaluate that every year and we'll just continue to I'm not so stressed about that either way. So we'll figure that out. Sounds good.
All right. We'll leave it there. Thank you, D. G. For the presentation.
Okay. As usual management will be available. DG will be downstairs in the oak room on the Seventh Floor. The next presentations here will be, let's see, Kratos Defense, Ingredion Incorporated, EnPro Industries, Steelcase, Tellurian and Arca. Thank you.
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