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 with operations primarily in North America, Japan and Europe. 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’s strategy is to relentlessly expand its leadership position (i.e., supply chain infrastructure, broad in-stock product offering and deep customer relationships) by being the go-to partner for customers who build and run safe, sustainable, and productive operations. To execute this strategy, the Company competes with two business models: high-touch solutions and endless assortment. Grainger’s high-touch solutions businesses serve customers with complex needs primarily in North America and Europe. The endless assortment businesses are focused on customers with less-complex needs and includes Zoro Tools, Inc. (Zoro) in the United States (U.S.) and MonotaRO Co., Ltd. (MonotaRO) in Japan. Competing with these two models allows Grainger to leverage its scale and advantaged supply chain to meet the changing needs of its customers. The following provides a high-level view of each model:

MRO Industry

The estimated market where Grainger has operations is large with an estimated size of more than $290 billion and is concentrated in North America, Japan and Europe. These large core markets have high gross domestic product per capita, advanced infrastructures and competition is highly fragmented. Grainger estimates to have 4% share within these markets with opportunity and a track record for growth.

Grainger’s two reportable segments are the U.S. and Canada, and are further described below. Other businesses include the endless assortment businesses, Zoro and MonotaRO, and smaller international businesses primarily in Europe 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 14 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, 2019:

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

2 Customers served in the U.S. may include overlap with Zoro within the endless assortment businesses.

Customers and Products

Approximately 5,000 suppliers provide Grainger businesses with about 1.6 million products stocked in DCs and branches. Additionally, Grainger’s endless assortment businesses offer millions more products through its expanding drop-ship assortment. No single supplier comprised more than 5% of total purchases and no significant barriers exist with respect to sources of supply.

Grainger’s MRO product offering is grouped under several broad categories, 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 removed from Grainger's product lines on the basis of customer demand, market research, suppliers' recommendations, sales volumes and other factors. No single product category comprises more than 17% of global sales.

United States

The U.S. business offers a broad selection of MRO products and services through its eCommerce platforms, 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.

Sales in 2019 were made to approximately 1 million customers and no single end customer accounted for more than 2% of total sales. U.S. business customers range from mid-sized businesses to large corporations, government entities and other institutions within many industries. Macro trends and technology drive the way U.S. business customers behave. Customers desire highly tailored solutions with real-time access to information and efficient delivery of products and services. These trends are reflected in how customers do business as demonstrated in the following tables for the 2019 line mix:

Customers have access to more than 4 million products through Grainger.com and other branded websites. 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 majority of products sold by the U.S. business are third-party owned products. In addition, approximately 21% of 2019 U.S. business 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.

Sales and service representatives in the U.S. business drive relationships with customers by helping select the right products for their needs and reducing costs by utilizing Grainger as a consistent source of supply. Additionally, inventory management through KeepStock® allows the U.S. business to help customers be more productive. KeepStock® is a comprehensive program that includes vendor-managed inventory, customer-managed inventory and onsite vending machines.

DCs are the primary order fulfillment channel with approximately 70% of direct shipments. Automation in the DCs allows the majority of orders to ship complete with next-day delivery and replenish branches that provide same-day availability to customers. The U.S. business DC network is also a primary component of Grainger’s North American distribution network and it supplies inventory, product management, supply chain and related support services to all Grainger subsidiaries in the North American region, including the Canada business, Mexico business and Zoro, which are part of other businesses. Approximately 18%, 62%, and 99% of inventory purchases in 2019 for the Canadian business, Mexican business and Zoro, respectively, were sourced from the U.S. business.

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

The U.S. business houses the North American Customer Service Centers which support the needs of customers in the U.S. and Canada. The centers handle more than 73,000 daily customer interactions for the region via phone, email, eCommerce portals and online chat.

Canada

The Canada business provides a combination of product breadth, local availability, speed of delivery, detailed product information and competitively priced products and services. The Canada business primarily serves Canadian customers through its integrated DC and branch network as well as sales and service representatives.

Other businesses

Other businesses is comprised of the endless assortment businesses, Zoro and MonotaRO, and smaller international high-touch solutions businesses primarily in Europe and Mexico.

Zoro

Zoro is an online MRO distributor, primarily serving U.S. customers through its website, Zoro.com. With sales of more than $625 million in 2019, Zoro offers a broad selection of more than 3.5 million products to its customers. Zoro has no branches or sales representatives, and customer orders are fulfilled through the U.S. business supply chain and third parties.

MonotaRO

Grainger operates in Japan primarily through its majority interest in MonotaRO. MonotaRO had more than $1 billion in revenue in 2019 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. MonotaRO also operates small operations in other Asian countries, which represent less than 5% of their sales.

Seasonality

Grainger sells products that may have seasonal fluctuations during the winter or summer seasons or during periods of natural disasters. However, historical seasonality impacts have not been material to Grainger’s operating results.

Competition

In the large and fragmented MRO industry, Grainger faces competition from a variety of competitors, including manufacturers (including some of its own suppliers) that sell directly to certain segments of the market, wholesale distributors, retailers and internet-based businesses. Also, competitors vary by size, from large broad-line distributors to small local and regional competitors. Grainger differentiates itself by providing local product availability, a broad product line, sales and service representatives, catalogs (which include product descriptions and, in certain cases, extensive technical and application data) and advanced electronic and eCommerce technology. Grainger also offers other services, such as inventory management and technical support.

Employees

As of December 31, 2019, Grainger had approximately 25,300 employees, of whom approximately 23,800 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.invest.grainger.com, 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.

Information about our Executive Officers

Following is information about the executive officers of Grainger including age as of January 31, 2020. Executive officers of Grainger generally serve until the next annual appointment of officers, or until earlier resignation or removal.