Fastenal growing by getting closer to its customers

Fastenal's strategy of having fewer free-standing industrial supply stores — and instead increasing in-factory sales — has been successful so far.

Branch locations peaked at more than 2,680 locations in 2013. At the time, the Winona-based company had a retail store within a 30-minute drive of 95% of U.S. manufacturers.

Now, the number of locations is down to 1,683 as the company emphasizes industrial vending machines and small stores within large factories.

Fastenal signed 62 new in-factory locations, called Onsites, in the fourth quarter of 2022, and now has 1,623 of them. Soon, the number of Onsite locations will eclipse the number of stores, said CEO Dan Florness on the fourth-quarter earnings call. The goal is to sign 375 to 400 new Onsite locations in 2023.

Since the shift, revenue is up 85%, said Kevin Earley, a portfolio manager at St. Paul-based investment firm Mairs and Power, a longtime Fastenal shareholder.

"We think that the best indicator of the success of the strategy can be seen in the shift of their channel mix," Earley said. "As the physical store footprint kind of began to reach its maximum size, the company ... shifted its strategy to push more of its revenue mix out of the physical store and into their customers' manufacturing facilities."

Fastenal could reach the optimal number of free-standing retail stores in 2024, if not sooner, said Chief Financial Officer Holden Lewis in an interview. That number is 1,450 to 1,500 branches, and one will still be a 30-minute drive from over 90% of manufacturers in the U.S.

New Onsite contracts practically dried up during the thick of the pandemic as companies restricted access to their facilities. However, the number of signings bounced back last year.

Fastenal has identified as many as 15,000 opportunities for Onsite stores in North America, Lewis said.

"In order for an Onsite to work for both parties, there has to be an expansion of volumes that come for us," Lewis said. "Frankly, the requirement is that when we open an Onsite, the volumes that we manage through that Onsite have to be greater than what we were doing just in the branch alone."

For Earley at Mairs and Power, the strategy works because of the "stickiness" of customers when a Fastenal location is embedded in the factory.

"It's a remarkable transformation of doing more with less," Earley added. "We give the company high marks both on strategy and for execution."

By signing large customers to Onsite contracts, the retail stores can then go after more customers as well, Lewis said.

"The truth is you know those branches remain foundational, and the reduction has very little to do with Onsite specifically and a lot more to do with our digital footprint," Lewis said, adding he believes per branch revenue can continue to increase.

That digital footprint includes Fastenal's e-commerce operations, which drove more than $1 billion in annual revenue in 2023. That amount of e-commerce now services some of the walk-in traffic to branches and justifies the branch optimization.

"Our branch network is now more efficient and the branches we have continue to have enormous opportunity for growth," Lewis said. "Truly branches and Onsites run parallel to one another."

The success of each strategy has changed the way the company names its sales channels and reports results. These also include industrial vending machines and other devices classified as Fastenal Managed Inventory, or FMI.

Vending machines allow for 24-hour access and can also be used to control and track who uses each product and how much.

The bin strategy is the latest push to reside within customer locations and create "stickier" relationships. FastBin uses bins of product whose contents are monitored 24/7 through connected scales, infrared and RFID devices. Those systems produce data that can send an alert when stock is running low and needs to be reordered and information used to make the customer supply chain more efficient and cost-effective.

Fastenal's FMI devices now account for about 37% of Fastenal's sales each quarter.

Fastenal doesn't just deliver products, it aims to have solutions to automate, digitize and analyze customer supply chains to reduce the risk of having too much or too little inventory, reduce ordering and restocking costs, and minimize waste.

Relationships that are more partnership-based than vendor-client-based can produce advantages for both sides, the company said. Coming out of the pandemic and the resulting supply-chain challenges in 2021 and 2022, customers are looking to increase the partnership aspects.

"The pandemic really showed them why supply chain isn't really their core competency, and engaging with somebody with whom it is a core competency is what allows them to reduce the overall cost of it," Lewis said.