Introduction
The following deep dive includes the following sections:
History
Industry Analysis
What do they sell?
How do they sell it?
To whom do they sell it?
Where do they sell it?
The analysis of Fastenal’s economics, its future growth plan and final valuation will be included in the second part of this deep dive, which will be published next week. FAST 0.00%↑
Note: I acknowledge this might be a long read but I believe it is also a worthwhile one, helping you (and me) to fully understand everything about Fastenal’s business model.
Fastenal’s mission
“Becoming the world’s largest, most respected supply chain partner.”
History
Bob Kierlin’s father opened an auto parts store in 1946. While working there as a child, Kierlin thought about the idea of dispensing nuts and bolts via custom vending machines.
The idea stuck with Kierlin throughout school (where he studied engineering and later went to business school), and it finally came into fruition in 1967 when he pooled together $31,000 with four friends and opened the first Fastenal store, a 1,000 sq. ft. shop in his hometown Winona, Minnesota.
Kierlin’s initial idea was to have 2,000 vending machines around the country which would be supplied by semi-trucks with the name of the company in their back trailer.
The name he initially thought of for the company was “Lighting Bolts”, but his friends (and investors) told him “If you name the company “Lighting Bolts” our money is out the table. That’s bad.”
After a round of brainstorming, one of his friends thought: “We’re going to sell nuts and bolts, that’s holding things together, that’s fastening. If you’re going to Fasten all kinds of things, so maybe Fasten-all?”. They then decided to remove the hyphen and the extra L, and Fastenal was born.
Unfortunately, the vending machine model turned out to be unviable at the time and they decided to adopt a normal over-the-counter model instead. In their first store, they had no furnishings whatsoever, all of their inventory was sitting on boxes on the floor and they would then weigh and sell the fasteners inside them.
After six years of operations, Fastenal became a successful business on the basis of reliability of quick service, and Kierlin decided to leave his job at IBM as a Financial Analyst in 1973 to run Fastenal full-time. He focused aggressively on customer service and used his financial background to keep tight control of the company's finances.
After having $15 million in sales in 1986, Fastenal went public in 1987. The stock jumped from $9 to $15 by year-end, making the Fastenal IPO the most successful of the 627 conducted during the year. Fastenal had 58 stores at the time and their strategy was to grow their store base by 30% every year.
Fastenal’s sales experienced rapid growth even despite the economic recessions in the early 1990s, and the reason for Fastenal's success was readily apparent: customers were willing to pay a premium for a dependable service that could save them a lot of money.
As an example, a contractor paying employees $30 per hour in wages and benefits could not afford to have a project held up by the lack of a special fastener for a piece of equipment—and he knew he could find it at Fastenal.
In one instance, a Ford plant's assembly line was shut down by a breakdown that required a few dozen special bolts. Ford's regular supplier told the company it would have to wait until Monday—three days later. "Meanwhile, it's costing them something like $50,000 an hour to have this line not operating," Slaggie (Fastenal cofounder) said on March 11, 1992. "They called us and the part is an oddball, something we don't have in stock. We had them fax us the blueprint for the machine and we determined we could make it. … We had them finished Sunday afternoon."
In summary:
Industry
In this section, I will focus on Fastenal’s current two biggest product segments: Fasteners and Personal Protective Equipment (PPE).
Fasteners
Fasteners are needed in a lot of important industries, like making cars, building, making machinery, making electronics, building ships, and making railroads. All of these industries are expected to grow over the coming decade.
In 2022, the automotive segment accounted for the largest share of the industrial market, closely followed by industrial machinery and aerospace.
Tailwinds
The rapid growth of heavy machine-driven industries, including textiles, food & beverage, and chemicals, is expected to propel the demand for industrial machinery, thus driving the demand for industrial fasteners over the coming years.
The ongoing construction of railway infrastructure in developing economies such as India including bullet trains and metro rails is expected to drive the demand for construction material. These trends are projected to drive the demand for Bolts as they are widely used in the construction of rail and roadways infrastructure. Whether Fastenal will be able to benefit from this growth will depend on how successful it is in expanding its operations globally.
Headwinds
Increasing metal prices and the decelerating growth of these fasteners owing to their replacement by plastic fasteners, automotive tapes, and adhesives (majorly in the automotive industry) are expected to be key barriers for metal fastener growth.
The automotive fasteners market is mainly hindered by the emergence of alternatives such as welding and auto parts’ clinching. But even with these headwinds, the metal fastener segment shall still dominate the market (it held 91% industrial market share in 2022) due to better resistance and mechanical strength.
The expanding use of plastic fasteners in various applications is mainly due to their lower weight and their ability to serve these applications at a much lower cost.
It is important to note, however, that while plastic fasteners can offer many advantages, they are usually not suitable for applications that require high strength, extreme temperatures, or heavy loads. In such cases, metallic fasteners will always be the best alternative.
Regional Analysis
The North American market accounted for 24.2% of the global revenue share in 2022. In North America, the U.S. has been dominating the industrial fasteners industry in terms of consumption owing to the presence of a wide manufacturing base of automotive, electronics, and aerospace companies.
Asia Pacific is the fastest-growing region in the world, accounting for 43.6% of the market share in 2022
PPE
Personal protective equipment or PPE is referred to as equipment that is worn to minimize exposure to hazards causing workplace injuries and illnesses. These injuries or illnesses could arise from contact with varied chemical, electrical, mechanical, and radiological hazards, to name a few. PPE is greatly summarized in the graph below.
The hand protection segment accounts for the major share of the market, with approximately 36.7% of the revenue share in 2021.
Tailwinds
The industry is expected to experience great growth over the coming years due to various trends:
First, the growing consideration of workers’ safety in oil & gas, mining, construction, and manufacturing industries will drive PPE industry trends.
Also, strict mandates by regulatory bodies such as the American National Standards Institute (ANSI), have made it compulsory for workers to ensure safe equipment usage in accident-prone areas, which, in turn, is expected to boost the PPE market size.
As can be seen in the chart above, the Manufacturing and Construction industries represent some of the biggest consumers of PPE equipment, which are also the biggest end markets for Fastenal’s fastener product lines.
In the short-term, PPE sales numbers may be a bit “dirty” due to the unusual rise the industry experienced during the 2020 pandemic, a period where the global market exhibited a growth rate of 16.6% in 2020 as compared to 2019.
Wearing face masks became usual and ubiquitous, not only in hospitals but in all public places due to COVID-19, which led to the overconsumption of surgical and N95 masks by the general public.
What do they sell?
Products
As I mentioned in the history section, Fastenal began as a distributor of fasteners and related industrial and construction supplies. This includes threaded fasteners, bolts, nuts, screws, studs, and related washers, as well as miscellaneous supplies and hardware, but they have over time expanded their product lines.
Most of Fastenal’s business model consists of reselling products from other suppliers (mostly coming from Asia). In 2022, approximately 96% of sales were attributable to products manufactured by other companies.
The remaining 4% is related to products manufactured, modified, or repaired by their manufacturing businesses or their support services. These in-house manufactured products consist primarily of non-standard sizes of threaded fasteners and hardware made to customers' specifications,
The final years of the 20th century saw Fastenal rapidly expand its product lines. Product introductions during 1996 included a line of metal cutting tools, fluid transfer parts and accessories for hydraulic and pneumatic power, material handling and storage products, and janitorial and paper products.
Two more product lines were added the following year: a line of electrical supplies and one of welding supplies. Finally, in 1999, they added their safety product line.
Although they have a wide range of products, their most relevant product lines today are fasteners and safety supplies, as shown below:
Fasteners represented 34% of sales in FY22, and “non-fasteners” represented 66% of sales. Non-fastener products tend to move through the same distribution channel, get used by the same customers, and utilize the same logistical capabilities as the original fastener product line.
Although both product lines have many similarities, over time, the supply chain for non-fasteners has evolved in ways independent of the fastener line. For instance, non-fastener product lines benefit disproportionately from the development of industrial vending as we’ll see in the “How do they sell it?” section.
The safety category represented 20.8% of sales and has grown dramatically over the past 10 years, which is due to Fastenal’s success in cross-selling safety supplies to customers that previously only bought fasteners from them, as well as their ability to market, deploy, and service industrial vending over that period.
Fastenal also plans to add other product lines in the future.
Services
Besides their usual products, Fastenal offers their customers a wide variety of services, some of which are:
Tool and hoist repair.
Chain sling and hose fabrication.
Band saw blade welding.
Other light manufacturing and fabrication.
Fastenal’s eight North American-based tool repair service centers provide authorized warranty repairs for 35 major tool brands (and are able to work on more than 750 brands of tools in all). This resource, combined with their local service and transportation network, allows customers to meet their tool repair needs through a single efficient source, and to do so through a process that largely overlaps Fastenal’s existing service activities and truck routes.
For example, rather than having to transport products to multiple service providers, the customer places any broken tools in a Fastenal tote or FMI Technology compartment. The customer's local Fastenal representative collects the tools during a regular service visit and ships them to their nearest service center via a regular Fastenal truck route.
In 2021, Fastenal repaired over 51,000 tools for customers through this process.
In Fastenal’s tool & cutter grinding service, the process is similar to their tool repair program, but in this case the customer’s worn (cutting) tools are transported to a Fastenal manufacturing facility, where their machinists sharpen them to like-new condition for a fraction of the cost of buying new tools. In 2021, they extended the service life of 345,804 cutting tools through this program.
The manufacturing team also makes and modifies custom tooling for customer-specific applications.
Fastenal may add additional services in the future and expect these services to continue in the range of 4% to 6% of sales in the future.
How do they sell it?
As I mentioned in one of my tweets, the most relevant aspect of Fastenal’s business is not what they sell, but how they sell it.
In Fastenal beginnings, their main focus was on growing their traditional branch base, but over time their model has changed with the introduction of onsites in 1992 (which began gaining considerable traction in 2014) and vending in 2008. Together, branches and onsites are called “in-market locations”, and today Fastenal engages with its customers primarily through these two initiatives. This structure has evolved as a result of one of Fastenal's guiding principles since its inception:
“We can improve our service by getting closer to the customer.”
Branches and Onsites exist very close to their customers, usually within miles in the case of the former and most often within or immediately proximate to customers' physical locations in the case of the latter.
All of these locations’ inventory needs are fulfilled through Fastenal’s distribution centers, which are located so as to permit deliveries of two to five times per week using their trucks and overnight delivery by surface common carrier.
Nearly 90% of the product tonnage transported in North America to meet customers’ needs travels via their internal fleet. This North American fleet includes more than 740 commercial motor vehicles (CMVs) as well as 8,200-plus RAM pickup trucks used to provide final-mile delivery service.
Below I’ll expand a bit further into their different type of selling locations and how they function:
Two Versions of Branch Locations
Traditional Branch
A 'traditional branch' typically services a wide variety of customers, including their larger national and regional accounts as well as retail customers. Locations are selected primarily based on their proximity to their distribution network, population statistics, and employment data for manufacturing and non-residential construction companies.
They stock all branches with inventory drawn from all of their product lines, and over time, where appropriate, their district and branch personnel may tailor the inventory offering to the needs of the local customer base.
Traditional branches are also differentiated by their operating styles, they either operate as a Customer Service Branch (CSB) or a Customer Fulfillment Center (CFC), models which are described in the image below:
The choice of operating style is made by local leadership and is based on local market considerations. At the end of 2022, 20% of their traditional branches operated as a CSB and 80% operated as a CFC.
The change to operate most branches as a CFC was highly accentuated during the pandemic, a period where Fastenal decided to close the front doors of most of their branches as the CEO mentions below:
“[During the pandemic] because of our vending footprint, because of all the bin stocks we do .. we were getting into customer’s facilities. One of the reasons we closed the front door of all of our branches is we didn’t want to be the weak link. If this customer is shutting down access to their building but they are letting us in, well, our building becomes an extension of theirs and we shut down access to that, too.”
Although the pandemic accelerated the process, this trend had begun before. In 2019, Fastenal began testing the Market-Based Inventory (MBI) program to make their United States branch network more space-efficient and customer-focused. This included removing slow-moving standardized inventory, minimizing (or in many cases removing) walk-in “retail” space, and using that square footage to install high-density vertical shelving to support key customers’ inventory needs.
Due to the success and operational improvements Fastenal saw in their branches, they accelerated the program to include more than 250 MBI transformation projects by the end of 2021. As a result, these branches gained significant cubic footage (room to grow the business) without expanding their brick-and-mortar footprint.
In many markets, this initiative has created opportunities for local branches to consolidate and operate in one building instead of multiple buildings, setting the stage for additional efficiencies.
An example of this strategy is their branch in Chanhassen, Minnesota. In Q3 2021, they invested in this location and consolidated three buildings (20,000 square feet combined) into one building with 14,500 square feet.
International Branch
This is the branch format they usually deploy outside the US and Canada.
Their go-to-market strategy in other countries focuses primarily on servicing large, national account customers concentrated in manufacturing. From a product perspective, these customers are more heavily oriented toward planned fastener spend, though non-fastener manufacturing, repair, and operations (MRO) spend is becoming more common in these markets.
Onsite Locations
Value proposition: Fastenal assumes the inventory and crib duties for its customers, freeing up personnel and working capital for them.
The Onsite concept is not new, in that they entered into the first such arrangement in 1992. However, it was largely a local option that grew slowly before they identified it as a growth driver in 2014. They then proceeded to make substantial investments toward accelerating its traction in the marketplace since 2015.
In this model, they provide dedicated sales and service to a single customer from a location that is physically within the customers' facility (or, in some cases, at a strategically placed off-site location), with inventory that is specific to the customers' needs.
When a customer adopts the onsite model, Fastenal transitions from simply being their supplier (branch) to becoming their business partner.
The model has gained a lot of traction in the manufacturing industry and is best suited for larger companies, though they believe they can provide a higher degree of service at a lower level of revenue than most of their competitors as mentioned in the following quote from the CEO:
“Our motto is Growth Through Customer Service. I don’t believe there is a higher service model in our industry than Onsite; however, you need a certain level of site-specific business activity to make the model economical. Fortunately for us, our break-even point is lower than our competitors.
One of the reasons Fastenal has been successful with its onsite initiative is due to its frugal culture. This allows them to succeed in an onsite doing $100,000-$150,000 a month, while most competitors struggle with the onsite model once they get below $250,000-$300,000 a month.
The Onsite model differs financially from their branch model in the following ways:
It carries a lower gross profit margin profile. Fortunately, it also has a lower operating expense profile.
The operating margins are a bit lower than they see in their branch network. Fortunately, the operating margins are still industry-leading.
From an individual site perspective, Onsites are ultimately limited by the activities of the individual customer location.
On the plus side, Onsite changes the competitive dynamics: “It allows us to displace a wider range of suppliers, and we believe it builds a more defensible and wider moat.”
Customers are usually very motivated to add wallet share to Fastenal because of what onsites represent to them:
“It represents Fastenal putting personnel and inventory into their business to support their business, which frees up their need to add personnel, frees up their need to add working capital. So it's a great program for our customers and it's a way for them to have resources.”
—Daniel Florness
Other Selling Locations
Fastenal also utilizes additional types of selling locations within its network, but these tend to be more specialized and relatively few in number, comprising less than five percent of its total selling locations.
Business Tools
Over time, Fastenal has invested in and developed various technologies that allow them to put physical products closer to the point of use in a customer location, increase the visibility of a customer's supply chain (to the customer as well as their personnel), and/or improve the ability to monitor or control usage.
These technologies are utilized by their branch and Onsite channels to enhance service to customers.
Fastenal Managed Inventory (FMI)
Value Proposition: Allowing customers to focus on their main operations (manufacturing for example) and let Fastenal take care of inventory management.
Industrial supplies are traditionally a “blind spot” for manufacturers and other businesses. Limited visibility to basic information – what product is stocked in the facility, where it’s located, how it’s being used – leads to various forms of waste, from obsolete inventory and over-consumption to stock outages and inefficient rush deliveries.
Fastenal has allowed customers to fix this through its FMI solutions. Its fully integrated distribution network allows them to manage the supply chain for all sizes of customers. FMI programs tend to generate a higher frequency of business transactions and coupled with their fully integrated distribution network, foster a strong relationship with customers.
Their FMI offerings are comprised of bins and vending machines. Bins are big in OEM, while Vending is big in MRO.
Industrial Vending
Value Proposition: Fastenal invests working capital (inventory), fixed capital (machines) and labor (restocking, maintenance, etc.) into its customers’ facilities, while bringing valuable data of product usage in the customer’s plant.
As mentioned above, this system was introduced in 2008 to provide customers with improved product monitoring and control (After more than 50 years, Kierlin’s initial vending idea finally came to fruition to some extent).
Today, Fastenal is the largest service provider of industrial vending machines in the world, currently servicing and owning over 100,000 vending machines.
Their 3 main models function through the use of card readers given to the customer’s employees and are used as follows:
Coil: These allow for very controlled transactions and are especially effective at managing small items like safety gloves, glasses or adhesives. The customer can designate limits to the quantity of products that any of their employees can have access to at any given time or even if they have access to the product at all depending on the area they work on.
Locker: These have 3 core functionalities: (1) To vend larger items than coil machines. (2) To automate the check-out/return process for assets (tools, scanners, tablets, etc.), and (3) to retrieve spot-buy deliveries from Fastenal through their Locker Pickup Program. These can have from 2 up to 36 doors.
Sensor: While coil machines are more centered around control, these focus on making quicker transactions. The user makes a selection to unlock a cabinet, locker, or drawer, and sensors (mostly scales or pusher modules) automatically detect and report the number of items taken by that individual.
Their coil machine is their most popular offering as of today.
These vending machines (which Fastenal provides free of charge to their customers) are mostly used for the sale of non-fastener products and usually lend themselves to large rather than small customers.
These tools offers various benefits to Fastenal’s customers, for example:
Fastenal leverages a customer’s employee database in order to restrict certain products for specific employees. For example, if an employee is not part of the welding area he doesn’t have access to welding-related products.
The machines have 24/7 access, bringing the assurance of “perpetual inventory”.
Each dispensed item can be traced to a person, place, time and cost center. This fosters a culture of accountability and helps reduce unnecessary consumption.
Lockers allow managers to track tools, scanners, and other returnable assets to the most recent user, helping to prevent loss and theft.
Their industrial vending portfolio currently consists of 20 different vending devices, with 16 of these being in either a helix or locker format. Their most utilized models include the helix-based FAST 5000 and their 12- and 18-door lockers; combined, these comprise approximately 67% of their installed base of devices.
These are either configurable or are available in multiple configurations to accommodate the various sizes and forms of products that will be dispensed to match the unique needs of customers.
In 2022, Fastenal bought certain assets (primarily intangible) from their long-time vending partner, Apex, that should improve their cost profile and enhance the development of the vending platform.
“The Apex transaction was very much about bringing the technology closer to us so that the technology development of the platform is more aligned with where we want to take it. Because our partner, great partner for the last 12 years, is as much interested about expanding outside of industrial distribution as they are within industrial distribution. And sometimes that means what's prioritized from a technology development doesn't always harmonize with what we're thinking. And so it provided us the ability to do that … And so very much see it as making the technology part of our umbrella and having access to the supply chain ultimately will lower the cost for us over time of the platform.”
Below is a testimonial from one of Fastenal’s vending customers:
“It took our consumption way down because of the applied accountability factor and gave us more controls and more audible tools to see what we’re using and where we can adjust. When you take all those burdens away – a 40% straight drop in consumption, plus the personnel it took us to manage that product before – it added a tremendous value to our company.”
—Darren Hill, director of supply chain for Triumph Fabrications.
Bin Stock (FASTStock and FASTBin)
This program, where the product is held in bins in a customer facility, is similar to their vending business in that it involves moving products closer to the point of customer use within their facilities.
Such programs have existed in the industrial supply industry for a considerable time, with open bins being clustered in a racking system, each of which holds OEM fasteners, MRO fasteners, and/or non-fastener products that are consumed in the customers' operations. Historically, these bins were simply plastic and metal containers that held products and were visually inspected by their customers or Fastenal personnel to determine replenishment needs.
These bins in some cases are organized and labeled into customer digital plan-o-grams, which they call FASTStock and allow for the scanning of product when product is at a minimum desired level.
However, in 2019 they introduced their FASTBin technology. FASTBin is the evolution of FASTStock into a set of electronic inventory management solutions that automate process controls by providing 24/7 continuous inventory monitoring, real-time inventory visibility, and more efficient replenishment of bin stock parts.
These technologies come in three forms:
(1) Scale sensors.
(2) Infrared sensors.
(3) Radio Frequency Identification (RFID)
“What we do today is where we've implemented the Bin technology. When that Bin is empty, the person that emptied it puts the Bin up above the shelf, and there's an RFID chip in it, and there's an RFID reader that's saying, hey, Bin #242 is empty, it's hungry, it needs to be fed. And that transmits right through our point-of-sale system to our distribution center.”
Digital Solutions
Fastenal also invests in digital solutions that aim to deliver strategic value for customers, leverage local inventory for same-day solutions, and provide efficient service.
Transactional
Their eCommerce platforms (web verticals or integrated catalogs) provide a means for customers to effectively and efficiently procure MRO and unplanned spend. One of their eCommerce solutions, Fastenal EXPRESS, guides customers to products which are locally stocked, capitalizing on existing location footprint, in order to provide same-day or early next-day service for online orders.
This positions them to outperform what is most typically a 24-to-48-hour fulfillment expectation.
Digital Footprint
Digital products and services are comprised of sales through FMI plus eCommerce (collectively, their Digital Footprint).
A large Digital Footprint provides incredible amounts of usage information – what is being used, where it’s being used, when it’s being used, and who’s using it. As Fastenal’s CEO wrote in one of his letters:
“This knowledge also allows us to help make every customer’s supply chain more resilient and effective and allows us to grow faster and serve more customers. Everyone wins in this scenario (well, everyone but our competitors).”
Digital Footprint represented 49.3% of sales in 2022, and Fastenal’s long-term goal is for its digital footprint to represent 85% of total sales.
“Our Digital Footprint. We have talked about that. It’s really about widening the moat, illuminating the supply chain for our customer and making the supply chain more efficient for both ourselves and our customer.”
—Daniel Florness
To whom do they sell it?
The large majority of Fastenal’s transactions are business-to-business, with most of their customers buying from them through multiple channels.
End Markets
Most of their customers are in the manufacturing and non-residential construction markets.
Fastenal’s manufacturing business consists of two subsets:
The industrial production business (this is business where they supply products that become part of the finished goods produced by their customers and is sometimes referred to as OEM - original equipment manufacturing).
The maintenance portion (this is business where they supply products that maintain the facility or the equipment of their customers engaged in manufacturing and is sometimes referred to as MRO - maintenance, repair, and operations).
The manufacturing market includes both OEM and MRO customers and represents approximately 70% of their business, with a significant part of it coming from the heavy equipment market.
The non-residential construction market includes general, electrical, plumbing, sheet metal, and road contractors and represents approximately 10% of their business.
Other users of their products include farmers, truckers, railroads, oil exploration companies, oil production and refinement companies, mining companies, federal, state, and local governmental entities, schools, and certain retail trades.
Customer Size
Traditionally, their in-market locations prioritized acquiring additional active accounts, which Fastenal defines as any customer account with purchase activity of at least $100 per month.
Over time, however, it became clear that the pursuit of smaller accounts consumed significant organizational energy and the large majority of new active accounts did not meaningfully increase in size. Therefore, since 2020, their in-market locations have prioritized ‘key accounts’ (accounts with purchase activity of at least $2,000 per month).
In 2022, approximately 90.8% of sales in in-market locations were derived from their key accounts.
Key account customers have typically been able to utilize a wider range of Fastenal’s products and services, and as a result have exhibited greater potential to increase in size while being more efficient to pursue and support. Fastenal also believes they can provide better and more efficient service to these customers.
During 2022, no single customer represented 5% or more of Fastenal’s consolidated sales.
Where do they sell it?
Fastenal’s most relevant part of their operations are currently in North America but they have slowly begun to develop operations both in the rest of the continent and overseas.
Fastenal entered the Canadian market in 1994, where the company now has branch locations in every province and two Canadian distribution centers.
In 1999, Fastenal entered the market in Mexico, where they have branches in 14 of Mexico's states as well as a distribution center.
The Canadian operations of Fastenal are very similar to their US business model. Their Mexican operations, however, are quite different. In Mexico, Fastenal focuses on large key account customers and getting as close as possible to them. Furthermore, in this region they focus most of their efforts on onsite locations, which can be noted by the fact that their onsite locations outnumber branches in the region.
Because of the success of this model in Mexico, they have replicated it in their other international markets. The main difference (and disadvantage) in these other regions is that they cannot leverage their US strong supply chain capabilities as they can with their Mexican operations
The geographic distribution of Fastenal’s sales has developed as shown below in the past 5 years:
The CAGR over the past 5 years per region was as follows:
8.2% for the US.
13.6% for Canada & Mexico.
11.4% for All Other Countries.
Below is an image that depicts Fastenal’s international expansion timeline. It is important to note that this expansion was made organically, not through acquisitions.
Cyclicality/Seasonality
“We operate in a cyclical industry, but we build for the future every day.”
-Daniel Florness
Based on their customer profile being oriented toward manufacturing and non-residential construction, their business has historically been cyclical.
However, they believe their model has certain features that moderate the volatility of their results around cyclical changes:
First, they have a large number of customers that serve a wide range of segments within the broader manufacturing and non-residential construction market.
Second, they have a significant portion of revenue that is derived from products used to maintain facilities. This source of revenue tends to be less influenced by dramatic cyclical changes.
The non-fastener business is not immune to the impact of industrial cycles. However, Fastenal would typically expect it to outperform its fastener business over the course of a cycle. This reflects three things:
The non-fastener market is larger than the fastener market.
Fastenal is under-penetrated in the non-fastener market relative to the fastener market.
Industrial vending lends itself to sales of non-fastener products.
Closing
And that’s all for the first part of this deep dive! Hopefully you find this helpful in order to understand everything about Fastenal’s business model.
In the second part of this deep dive, which will be published next week, I’ll be digging into the numbers (margins, returns, expense management, valuation). Make sure to subscribe below if you don’t want to miss it👇🏻
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