Item 1. Business

The Company

W.W. Grainger, Inc., incorporated in the State of Illinois in 1928, is a broad line distributor of maintenance, repair and operating (MRO) supplies and other related products and services used by businesses and institutions primarily in the United States (U.S.) and Canada, with a presence also in Europe, Asia and Latin America. In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries.

Grainger uses a combination of multichannel and single channel online business models to provide customers with a range of options for finding and purchasing MRO products, utilizing sales representatives, contact centers, direct marketing materials, catalogs and eCommerce technology. Grainger serves approximately 3 million customers worldwide through a network of highly integrated distribution centers, websites and branches.

Products are regularly added to and deleted from Grainger's product lines on the basis of customer demand, market research, recommendations of suppliers, sales volumes and other factors.

Grainger's centralized business support functions provide coordination and guidance in the areas of accounting and finance, strategy and business development, communications and investor relations, compensation and benefits, information systems, health and safety, global supply chain functions, human resources, risk management, internal audit, legal, real estate, security, tax and treasury. These services are provided in varying degrees to all business units.

Grainger’s two reportable segments are the U.S. and Canada, and they are described further below. Other businesses include Zoro Tools, Inc. (Zoro), the single channel online business in the U.S., MonotaRO Co. (MonotaRO) in Japan and operations in Europe, Asia and Latin America. These businesses generate revenue through the distribution of MRO supplies and products and provide related services. For segment and geographical information and consolidated net sales and operating earnings, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 16 to the Consolidated Financial Statements.

United States

The U.S. business offers a broad selection of MRO supplies and other related products and services through sales representatives, catalogs, eCommerce and local branches. A combination of product breadth, local availability, speed of delivery, detailed product information and competitively priced products and services is provided by this business. Products offered include material handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies, building and home inspection supplies, vehicle and fleet components and many other items primarily focused on the facilities maintenance market. Services offered primarily relate to inventory management solutions. In 2016, service fee revenue represented less than 1% of sales.

The majority of products sold by the U.S. business are nationally branded products. In addition, 22% of 2016 sales were private label items bearing Grainger’s registered trademarks, such as DAYTON® motors, power transmission, HVAC and material handling equipment, SPEEDAIRE® air compressors, AIR HANDLER® air filtration equipment, TOUGH GUY® cleaning products, WESTWARD® tools, CONDOR® safety products and LUMAPRO® lighting products. Grainger has taken steps to protect these trademarks against infringement and believes that they will remain available for future use in its business. The U.S. business purchases products for sale from more than 2,600 suppliers, most of which are manufacturers. Through a global sourcing operation, the business procures competitively priced, high-quality products produced outside the U.S. from approximately 400 suppliers. Grainger sells these items primarily under the private label brands listed above. No single supplier comprised more than 5% of total purchases and no significant difficulty has been encountered with respect to sources of supply.

The U.S. business operates and fulfills orders in all 50 states through a network of distribution centers (DCs), branches and contact centers. Customers range from small and medium-sized businesses to large corporations, government entities and other institutions. They are primarily represented by purchasing managers or workers in facilities maintenance departments and service shops across a wide range of industries such as manufacturing, hospitality, transportation, government, retail, healthcare and education. Sales in 2016 were made to approximately 1.1 million customers averaging 111,000 daily transactions. Approximately 79% of sales are concentrated with large customers and no single customer accounted for more than 3% of total sales.

Macro trends are changing the way Grainger's customers behave. Customers want highly tailored solutions with real-time access to information and just-in-time delivery of products and services. Demands for transparency are also increasing as access to information expands. These changes in behaviors are reflected in how customers do business with Grainger as demonstrated in the following chart:

Customers continue to migrate to online and electronic purchasing platforms such as EDI and eProcurement. Through Grainger.com and other branded websites, which serve as prominent channels in the U.S. business, customers have access to approximately 1.9 million products. Grainger.com provides real-time price and product availability and detailed product information and offers advanced features such as product search and compare capabilities. For customers with sophisticated electronic purchasing platforms, the U.S. business utilizes technology that allows these systems to communicate directly with Grainger.com. eCommerce revenues in the U.S. were $3.7 billion in 2016, an increase of 12% versus 2015, and represented 46% of total revenues.

Inventory management services is another area where the U.S. business helps customers be more productive. KeepStock® inventory solutions is a comprehensive program that includes vendor-managed inventory, customer-managed inventory and on-site vending machines. Grainger's KeepStock program currently provides services to almost 23,000 customers and completed approximately 11,000 installations in 2016. As of December 31, 2016, there were approximately 59,500 total installations. If the Company included KeepStock®, the electronic inventory management offering, total eCommerce and KeepStock® revenue for the U.S. business would represent 57% of total sales.

Due to the customer migration to online and electronic purchasing, Grainger initiated a restructuring that resulted in the closing of 49 branches in 2015 and 55 branches in 2016. As of December 31, 2016, the U.S. business had 284 branches (254 stand alone, 28 on-site and 2 will-call express locations), 18 DCs, 3 national contact centers and 39 regional contact centers, which are located within branches.

DCs range in size from 45,000 square feet to 1.3 million square feet, the largest of which can stock up to 500,000 products. Automated equipment and processes allow larger DCs to handle the majority of the customer shipping for next-day product availability and replenish the branches that provide same-day availability. The DC network increasingly fulfills a larger portion of customer orders, especially as customers migrate to online and electronic purchasing. Grainger completed the construction of a new 1.3 million square-foot DC in New Jersey and began operations in 2016.

Branches serve the immediate needs of customers in their local markets by allowing them to pick up items directly. In addition, branches support local KeepStock® operations. The branch network has approximately 1,800 employees who primarily fulfill counter and will-call product purchases and provide customer service. Grainger's contact center network consists of approximately 2,000 employees who handle about 74,000 orders per day via phone, e-mail and fax. The contact centers will be consolidating to 3 national contact centers with expanded work-from-home arrangements over the next 18 months, which will enable improved customer service, better team member engagement and efficiencies.

The U.S. business has a sales force of approximately 3,600 professionals who help businesses and institutions select the right products to find immediate solutions to maintenance problems and reduce operating expenses by utilizing Grainger as a consistent source of supply across multiple locations. In 2016, Grainger continued to focus its outside sales force on facilitating growth with large customers who typically have more complex purchasing requirements than small and medium-sized customers. To meet the needs of the medium-sized customers, Grainger added approximately 260 inside sellers during 2016 with a plan to add 115 in the second half of 2017.

The Grainger catalog, most recently issued in February 2017, offers approximately 383,000 MRO products and is used by customers to assist in product selection. The 2017 catalog includes almost 21,000 new items and approximately 1.1 million copies of the catalog were produced.

Grainger estimates the U.S. market for MRO products to be approximately $125 billion in 2016, of which Grainger’s share is approximately 6%.

Canada

Acklands – Grainger Inc. (Acklands – Grainger) is Canada’s leading broad line distributor of industrial and safety supplies. This business provides a combination of product breadth, local availability, speed of delivery, detailed product information and competitively priced products and services.

The Canadian business serves customers through branches, sales and service representatives and DCs across Canada. The business initiated a restructuring in 2015 in response to the decline in oil prices and the resultant weak economy and low MRO market growth. The restructuring resulted in the closure of 16 branches in 2015 and an additional 14 branches in 2016. As of December 31, 2016, Acklands – Grainger had 151 branches and 5 DCs. Approximately 12,000 sales transactions are completed daily. Customers have access to more than 152,000 stocked products through a comprehensive catalog. The most recent catalog, printed in both English and French, was issued in February 2017. In addition, customers can purchase products through Acklandsgrainger.com, a fully bilingual website. Grainger estimates the 2016 Canadian market for MRO products to be approximately $11 billion, of which Acklands – Grainger’s share is approximately 7%.

Other Businesses

Included in Other Businesses is Zoro in the U.S., MonotaRO in Japan and other operations in Europe, Asia and Latin America. The more significant businesses in this group, those with revenues of more than $100 million in 2016, are described below.

Zoro

Zoro is an online distributor of MRO products serving U.S. businesses and consumers through its website, Zoro.com. Zoro serves Canadian customers through ZoroCanada.com via export from the U.S. Zoro offers a broad selection of more than one million products at single, competitive prices. Zoro has no branches or sales force, and customer orders are fulfilled through the U.S. business supply chain.

MonotaRO

Grainger operates in Japan and other Asian countries primarily through its 51% interest in MonotaRO Co (MonotaRO). MonotaRO provides small and mid-sized Japanese businesses with products that help them operate and maintain their facilities. MonotaRO is a catalog and web-based direct marketer with approximately 91% of orders being conducted through Monotaro.com, through which customers have access to approximately 10 million products. MonotaRO predominantly fulfills all orders from three DCs, the largest of which is a 425,000 square-foot DC in the Osaka area. MonotaRO is currently building a 590,000 square-foot DC in the Tokyo area, which it plans to put into operation in April

2017. Grainger estimates the 2016 Japanese market for MRO products to be approximately $41 billion, of which MonotaRO’s share is approximately 2%.

Cromwell

Cromwell is a broad line industrial distributor of MRO products in the United Kingdom (U.K.) serving approximately 70,000 industrial and manufacturing customers. Headquartered in Leicester, England, Cromwell has 52 U.K. branches and 10 international branches. Customers have access to almost 80,000 MRO products through a catalog and through cromwell.co.uk. Grainger estimates the U.K. market for MRO products to be approximately $16 billion, of which Cromwell's share is approximately 2%.

Fabory

The Fabory Group (Fabory) is a European specialty distributor of fasteners, tools and industrial supplies. Fabory is headquartered in Tilburg, the Netherlands. As of December 31, 2016, Fabory has 70 branches in 13 countries. Customers have access to more than 100,000 products through a catalog and Fabory.com. Grainger estimates the 2016 European market (in which Fabory has its primary operations) for MRO products, including fasteners, to be approximately $34 billion, of which Fabory’s share is approximately 1%.

Grainger Mexico

Grainger’s operations in Mexico provide local businesses with MRO supplies and other related products primarily from Mexico and the U.S. The business in Mexico distributes products through a network of branches and two DCs where customers have access to approximately 310,000 products through a Spanish-language catalog and through Grainger.com.mx. Grainger estimates the 2016 Mexican market for MRO products to be approximately $10 billion, of which Grainger Mexico’s share is approximately 1%.

Seasonality

Grainger’s business in general is not seasonal, however, there are some products that typically sell more often during the winter or summer season. In any given month, unusual weather patterns, i.e., unusually hot or cold weather, could impact the sales volumes of these products, either positively or negatively.

Competition

Grainger faces competition in all the markets it serves, from manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, catalog houses, retail enterprises and Internet-based businesses. Grainger provides local product availability, a broad product line, sales representatives, competitive pricing, catalogs (which include product descriptions and, in certain cases, extensive technical and application data) and electronic and eCommerce technology. Other services, such as inventory management, are also offered. Grainger believes that it can effectively compete with manufacturers on small orders, but manufacturers may have an advantage in filling large orders. There are several large competitors, although the majority of the market is served by small local and regional competitors.

Employees

As of December 31, 2016, Grainger had approximately 25,600 employees, of whom approximately 24,400 were full-time and 1,200 were part-time or temporary. Grainger has never had a major work stoppage and considers employee relations to be adequate.

Website Access to Company Reports

Grainger makes available, through its website, free of charge, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports, as soon as reasonably practicable after these materials are electronically filed with or furnished to the Securities and Exchange Commission. This material may be accessed by visiting www.grainger.com/investor.