Item 1. Business

The Company

W.W. Grainger, Inc., incorporated in the State of Illinois in 1928, is a broad line, business-to-business distributor of maintenance, repair and operating (MRO) products and services. W.W. Grainger, Inc.'s operations are primarily in North America, Europe and Japan. In this report, the words “Grainger” or “Company” mean W.W. Grainger, Inc. and its subsidiaries, except where the context makes it clear that the reference is only to W.W. Grainger, Inc. itself and not its subsidiaries.

Strategy

In the large and fragmented MRO industry, Grainger holds an advantaged position with its supply chain infrastructure, broad in-stock product offering and deep customer relationships. Grainger's purpose is to help businesses keep their operations running and their people safe.

The Company competes with two models: the high-touch, high-service model and the endless assortment (single-channel) model. Competing with these two models allows Grainger to leverage its scale and advantaged supply chain to meet the changing needs of its customers. Grainger’s high-touch, high-service model serves customers with complex needs in North America and Europe. The endless assortment model is focused on customers with less-complex needs and includes the Zoro Tools, Inc. (Zoro) brand in the U.S. and MonotaRO Co., Ltd. (MonotaRO) in Japan.

MRO Industry

The global MRO market is approximately $608 billion, and the estimated market size where Grainger has operations is $284 billion. The most attractive geographies for Grainger are those with high GDP per capita and a developed infrastructure. Grainger’s strategy is concentrated in North America, Europe and Japan. Each of these core markets is large and the competition is highly fragmented. In total, Grainger has about 4 percent share within its addressable market with ample opportunity for growth.

Grainger’s two reportable segments are the U.S. and Canada, and they are described further below. Other businesses include the endless assortment businesses, Zoro in the U.S. and MonotaRO in Japan, and smaller businesses in Europe, Asia and Mexico. For further segment and financial information, see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 17 to the Consolidated Financial Statements (Financial Statements).

The table below shows Grainger's estimated share of the MRO market and the summary of its operations by reporting segments and other businesses as of December 31, 2018:

1 Estimated MRO market size where Grainger has operations.

2 See Item 2, "Properties" for more information.

3 Includes businesses in Europe, Asia and Mexico.

4 Customers served in the United States may include overlap with Zoro in Endless assortment business.

Customers and Products

Grainger serves more than 3.5 million customers worldwide through its DCs, eCommerce platform, contact centers, branches and sales and service representatives. These customers represent a broad collection of industries including government, manufacturing, transportation, commercial and contractors (see Note 2 to the Financial Statements).

Grainger offers a broad selection of products to its customers including material-handling equipment, safety and security supplies, lighting and electrical products, power and hand tools, pumps and plumbing supplies, cleaning and maintenance supplies and metalworking tools. Products are regularly added and deleted from Grainger's product lines on the basis of customer demand, market research, suppliers' recommendations, sales volumes and other factors. No one product category comprises more than 18% of global sales.

United States

The U.S. business offers a broad selection of MRO products and services through its eCommerce platform, catalogs, branches and sales and service representatives. A combination of product breadth, local availability, speed of delivery, detailed product information and competitively priced products and services is provided by this business.

The U.S. business purchases products for sale from approximately 3,000 suppliers, most of which are manufacturers. No single supplier comprised more than 5% of total purchases and no significant barriers thus far exist with respect to sources of supply. The majority of products sold by the U.S. business are nationally branded products. In addition, approximately 21% of 2018 sales were private label MRO items bearing Grainger’s registered trademarks, including DAYTON®, SPEEDAIRE®, AIR HANDLER®, TOUGH GUY®, WESTWARD®, CONDOR® and LUMAPRO®. 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 operates and fulfills orders nationally through a network of DCs, branches and contact centers. Customers range from small and mid-sized businesses to large corporations, government entities and other institutions within many industries (see Note 2 to the Financial Statements). Sales in 2018 were made to more than 1 million customers and no single end customer accounted for more than 1% of total sales. The U.S. business also exports to various countries.

Macro trends and technology drive the way Grainger's U.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 are reflected in how customers do business in the U.S. as demonstrated in the following tables for the 2018 line mix:

U.S. customers continue to migrate to web and electronic platforms such as EDI, eProcurement and KeepStock®. Through Grainger.com and other branded websites, customers have access to more than 2.9 million products. Grainger.com provides real-time price and product availability, detailed product information and 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.

The U.S. business has an outside and inside sales force to help customers select the right products for their needs and reduce costs by utilizing Grainger as a consistent source of supply.

Inventory management is another area where the U.S. business helps customers be more productive. KeepStock® is a comprehensive program that includes vendor-managed inventory, customer-managed inventory and onsite vending machines.

DCs in the U.S. business range in size from approximately 45,000 square feet to 1.3 million square feet, the largest of which can accommodate more than 500,000 in-stock products. Automation in the DCs allows Grainger to ship most orders complete with next-day delivery and replenish branches that provide same-day availability.

Branches in the U.S. business serve the immediate needs of customers in their local markets by allowing them to directly pick up items. Branches also support local KeepStock® operations and allow customers to leverage branch staff for their technical product expertise and search-and-select support.

Grainger's contact center network in the U.S. business on average handles about 73,000 customer interactions per day including approximately 20,000 orders via phone, e-mail and chat.

Canada

Acklands – Grainger Inc. and its subsidiaries (the Canada business) provide a combination of product breadth, local availability, speed of delivery, detailed product information and competitively priced products and services. The Canada business serves customers through branches, DCs and sales and service representatives. Customers have access to more than 194,000 stocked products through a comprehensive catalog and website.

Other businesses

Other businesses is comprised of the endless assortment businesses, Zoro in the U.S. and MonotaRO in Japan, and smaller high-touch, high-service businesses in Europe, Asia and Mexico.

Zoro

Zoro is an online MRO distributor, primarily serving U.S. customers through its website, Zoro.com. Zoro, with sales of more than $500 million in 2018, offers a broad selection of more than 2 million products to its customers. Zoro has no branches or sales force, and customer orders are fulfilled through the U.S. business supply chain and third parties.

MonotaRO

Grainger operates in Japan and other Asian countries primarily through its majority interest in MonotaRO. MonotaRO had nearly $1 billion in revenue in 2018 and provides customers with access to approximately 20 million MRO products primarily through its websites and catalogs. A majority of orders are conducted through MonotaRO.com and fulfilled from its DCs and third parties.

Seasonality

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

Competition

Grainger faces competition in each market from manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, to wholesale distributors, catalog houses, retail enterprises and internet-based businesses. Grainger differentiates itself by providing local product availability, a broad product line, sales and service representatives, competitive pricing, catalogs (which include product descriptions and, in certain cases, extensive technical and application data) and electronic and eCommerce technology. Grainger also offers other services, such as inventory management. Grainger has several large competitors and continues to be highly competitive against the predominant number of small local and regional competitors.

Employees

As of December 31, 2018, Grainger had approximately 24,600 employees, of whom approximately 23,100 were full-time and 1,500 were part-time or temporary. Grainger has never had a major work stoppage and considers employee relations to be good.

Website Access to Company Reports

Grainger makes available free of charge, through its website, www.grainger.com/investor, 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 if any, as soon as reasonably practicable after these materials are electronically filed with, or furnished to, the U.S. Securities and Exchange Commission (SEC).

The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC and the address of that site is http://www.sec.gov.