Insights

“Being careful about your expenditures, whether large or small, requires a total commitment. Either you do a good job of cost control in all aspects of your business, or you start losing it… Frugality is an attitude you develop. Once you have it, it sticks with you in everything in life. You don’t have to think about it.” – Bob A. Kierlin, Fastenal’s founder

Fastenal is a business that is a part of our investment universe of moats, companies that, in our opinion, possess a durable competitive advantage. It supplies threaded fasteners and other industrial supplies like nuts, bolts, screws, etc., to industrial and construction customers. These aren’t highly differentiated products. What matters to the customer is the price and the ready availability of the desired product.

Having the products readily available is crucial as they are critical in keeping the customer’s production lines and equipment running. Delays in these supplies can be extremely costly to the customer as they may result in shutdowns, shipment delays, quality issues, etc. In this hyper-competitive business, Fastenal’s vision of ‘Growth through Customer Service’ is achieved by delivering essential products both reliably and cost-effectively.

So how does Fastenal ensure on-time availability of its supplies? Starting from a network of stores and onsite locations, the company has increasingly pivoted towards smart solutions like industrial vending and smart bins. Located within the customer’s facility, these offerings are adequately stocked and dispense the necessary inventory/requested parts as and when needed.

There are now over 90,000 vending machines that have been installed at its customer’s premises with about 1,500 onsite locations. Together, these solutions account for around 60% of the company’s revenues. They also lower the cost to the customer with savings in inventory procurement and management. With its focus on improving the access and availability of the products that its customers need, Fastenal has gained significant market share over the past two decades, growing faster than its peers in the industry.

Source: Company data and MAEG

The statement above by the company’s founder reflects its culture of cost-consciousness that is deeply embedded within the organization. Fastenal maintains an utmost focus on avoiding expenses that it considers unnecessary to effectively service its customers, including spending on its store shelves or offices, maintaining an almost exclusive focus on promoting from within its internal ranks, and fostering an entrepreneurial culture that rewards performance over organizational hierarchy. All this is also reflected at the very top of the ladder, with its senior management taking home much lower overall pay than its competition and similar-sized corporations.

To illustrate, in the table below, we have presented the CEO and CFO compensations for Fastenal and its peer WW Grainger for the latest year. As is seen, Fastenal’s executives have lower overall compensation levels. Additionally, while WW Grainger has doled out significant ESOPs as a part of its compensation policy, Fastenal has reasonable/limited stock option plans.

Fastenal’s cost-conscious culture is also reflected in its superior operating profitability, with the company’s operating profit margins being significantly higher than its competitors.

 Source: Company data & MAEG