Fastenal's Industrial Vending Competitive Advantage | In Practise

Fastenal's Industrial Vending Competitive Advantage

In Practise Weekly Analysis

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Fastenal continues to get closer and closer to the customer through our branch locations, and even more importantly, through our Onsite and vending programs. We're actually injecting ourselves farther and farther into the customer base where we see a lot of our competition retracting. And it's our ability to continue with that increase in contact time by being closer to customers that more and more solutions come into play. - Jeff Hicks, VP, FAST Solutions at Fastenal

When Bob Kierlin founded Fastenal (FAST) in 1967, the original idea was to dispense fasteners from franchised vending machines lining the walls of retail stores and manufacturing facilities. However, it quickly became apparent that the machine design couldn’t effectively serve the size and volume of inventory customers demanded. Kierlin was forced to pivot to a branch-based model which forms the core distribution infrastructure of the company today.

This pivot 50 years ago has proved critical for the success of industrial vending today. When Fastenal revisited vending in 2008, the company could leverage over 2,000 stores nationwide, a last-mile distribution system, and deep inventory management experience.

Over the last 10 years, the number of FAST vending machines installed has grown from 9,000 to 90,000. In Q3 2021, total FMI device revenue, of which vending is the majority, accounts for over 50% of branch revenue and ~33% of total revenue for Fastenal. The company currently has ~91,000 machine-equivalent vending devices installed and management believe there is a potential market for 1.7m devices globally.

We interviewed a former District Manager at Fastenal to discuss how industrial vending works and why it could be difficult for competitors to replicate Fastenal’s strategy.

Fastenal introduced vending to provide customers with inventory monitoring and control to improve productivity and reduce inventory cost. The company offers over 24 different machines which are installed at the customer’s location to provide 24/7 product availability for safety equipment and other consumables. Each machine is configured to provide employees with user ID’s to vend equipment which is programmatically tracked so customers can optimise consumption. After installing a FAST vending machine, the customer’s inventory spend decreases by 40-50%:

“If you’ve had their business for a long time and you sell them gloves, drill bits and anything they’d want to get out of a vending machine, if you are going to move it over into a vending machine, there is a good likelihood you are going to see your sales of those particular products go down 50%. That is how efficient vending machines become for customers; that’s why they love them so much...I had a customer that went from $2,000 a month in drill bits to $500 or $700 a month, because they were now coming out of the vending machine, in packs of two”- Former District Manager at Fastenal

The FAST 5000 Vending Machine, which accounts for ~40% of all machines installed, targets ~$24,000 revenue per device per year. If Fastenal installs two FAST 5000’s at a customer’s location, it would earn $48,000 in revenue which would’ve been closer to $100,000 if the customer purchased the inventory in the branch channel. When employees have to scan their personal ID to grab a pair of safety gloves, they will only buy the specific pair they need for the job rather than the 4 or 6-pack they may purchase in the branch.

On the surface, this seems like a counterintuitive proposition; why would Fastenal install devices that make customers spend significantly less with them?

Great companies often give up short-term revenue opportunities to deeply align themselves with customers in the long term. Whether this is Amazon continually cutting prices and improving delivering times or Fastenal helping companies reduce equipment spend, the best companies take the lead doing the hard and innovative things first to serve customers. By putting customer interests at the heart of what they do, Fastenal has built trusted relationships with customers. This is often rewarded in higher customer lifetime value in the long run: as customers realise the cost savings from vending, they approach Fastenal to add more products to more machines:

For a lot of customers, we didn’t even have to ask them what else we could put in the vending machine; they started coming to us. They go and grab something out of a box and they’re out of it, even though they go down to Home Depot and buy cases of duct tape. They come to us and they don’t even care that it is going to be more expensive; they just want it in the machine. They don’t have time to manage that anymore.” - Former District Manager at Fastenal

The machines reduce wastage and provide customers with such insight into their inventory management that customers request new products to vend even when they could be more expensive than Home Depot or Grainger:

“I know you are buying XYZ over here from Grainger or somebody else, and their price just happens to be better than mine; I just can’t get to that price. But couldn’t you save a lot of money if we put it into the Fastenal vending machine? I could sell you duct tape for $9 a roll and I know you can go to Home Depot or Lowe’s and get it for $6.50 a roll, but if you’re using half the amount of duct tape in a month because it’s coming out of my vending machine, could I sell that to you. They realize they are going to save $500 even though it is going to cost them a couple more dollars per roll.” - Former District Manager at Fastenal

The FAST Vend experience fundamentally changes the customer relationship with Fastenal relative to competitors. This is a comment by VP of FAST Solutions from the recent investor day:

"When we put a vending customer onsite, let's say we drop a couple of machines into a location and it generates $50,000 of new revenue for us. It's not just $50,000 of new revenue that we gain with that customer. We typically see about 2x, 2.5x growth throughout the overall account because they appreciated what we do for them. We'll see that customer that we had $50,000 in revenue, 12 months later that same customer actually grew not by $50,000, but by $100,000 to $125,000 in revenue because one solution led to the next one, which led to the next one, which led to the next one over the course of that year. So it reinforces that aspect of the strategic solution." - Jeff Hicks, VP of FAST Solutions at Fastenal

Vending reinforces Fastenal's position as a strategic partner rather than just an industrial distributor. The company is now experimenting with electronic Bin and Stock offerings that can also track and monitor inventory programmatically like the vending machines. Management believes they can grow the total installed base over 17x to 1.7m devices. This seems like a huge opportunity which doesn't seem farfetched given the different ways customers are utilising these solutions today:

"I had a customer who loved the trackability of vending. You could see when tools or anything else was checked out. He wanted to do a checkout for his scissor lift, his chop saw and all these huge tools. I went over one day, helped him for three hours, as a Fastenal outside sales rep, to help him build these huge wooden lockers that you just slid the saw into. They put padlocks and wire around the tool and just locked everything up. Employee XYZ walks up and they can track when they took it. $1,500, $2,000, $10,000 tools are no longer disappearing. Will I pay you $500 a month to have that locker so my stuff doesn’t disappear? Heck, yes, I will. The possibilities are endless when you think about it." - Former District Manager at Fastenal

The flexibility of FAST Solutions is impressive; Walmart was using the lockers to keep track of all their scanners and even Amazon installed FAST machines in every US distribution centre to dispense safety products. Customers as small as 11 employees can also use smaller FAST 2000 CT machines. The flexibility of Fastenal's solutions expands the total addressable market to most manufacturing facilities globally.

There is little doubt that installing vending machines at a customer’s location improves the customer experience by reducing inventory spend and improving productivity. So why can’t competitors such as Grainger or MSC replicate FAST’s vending strategy?

This was the answer of a Former District Manager of Fastenal:

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