Business Breakdowns
· Matt Reustle
[00:00:00] S0: This is Matt Reustle, and today we explore the world of tools to break down Snap-on. My guest is Matt Fleming, Portfolio Manager at William Blair. For all of the publicity that the other Snap gets, Snap-on has been around for over 100 years. Today it operates with over a $17 billion market cap and it has continuously evolved the straightforward model of selling tools to specialists like mechanics, into this durable business model where it has carved out a leadership position in the professional tools market. Matt gets into what makes Snap-on different, the early days of tool innovation, the relationship-focused sales team built around a franchise model, and a financing program that dates back to the very early days of Snap-on. If you've only lived in the world of DEWALT tools, you'll have some fun learning about the professional world through Snap-on. So please enjoy this breakdown of Snap-on. All right Matt, I am excited to break down Snap-on today. This has been a fun one for me to research myself, get into some of the history here of this business, one that I was not particularly familiar with. I thought the best place to start is with the simplest overview. They operate in an interesting niche in an interesting segment of the economy. So maybe you could just kick us off there?
· Matt Fleming, Matt Reustle
[00:00:00] S1: Of course. Well Matt, I think they do probably the best job of describing their business. And so they self-describe as a designer and manufacturer of innovative and high-quality tools that quote, "make work easier for serious professionals performing critical tasks where the cost and penalties of failure are high." They are a tool company, but it's very different from the tools that maybe you have in your garage or I use in my basement from time to time. These are professional grade tools, very, very high quality. They've got to be durable. The socket wrenches can't snap, the screwdrivers can't bend. Their technicians and users, which I'll get into, are using these all day, every day, for their livelihood. Things like comfort and ergonomics really matter. And then again, dependability. One of the great things about Snap-on is that they're constantly innovating and creating tools for their customers to do the job quicker and more efficiently. So very high uptime and productivity improvement. [00:00:00] S0: You mentioned it there. It's a little more targeted at the professional rather than me with my set of DEWALT tools, or pick your consumer brand. Do they have a particular market that they go after in terms of the tool usage? Is there concentration in certain portions of that?
· Matt Reustle, Matt Fleming
[00:00:00] S0: You mentioned it there. It's a little more targeted at the professional rather than me with my set of DEWALT tools, or pick your consumer brand. Do they have a particular market that they go after in terms of the tool usage? Is there concentration in certain portions of that? [00:00:00] S1: Yes, there certainly are. So again, these are professional technicians and 77% of their customers are vehicle services professionals. So think about automotive technicians, mechanics that are working at dealerships, but also for the most part, smaller collision repair or auto repair shops. The other 23% of their customer base, again are professionals, but in usually what they describe as critical industries. So think aviation, aerospace, military, government, natural resources and trade schools. So it is a pretty well defined professional segment that they're targeting. [00:00:00] S0: How do you think about the market that they operate in? Because we could just look at it as the broader tool market. You could separate it between consumer and professional. How do you frame it? And then do you have any sense on the size of that market just in terms of what it represents?
· Matt Fleming
[00:00:00] S1: So take these numbers with a grain of salt because they're a little bit squishy. But what I've come up with is probably the total tool market in the United States. I'll kind of reference United States, because that's about 75% of Snap-on tools in North America and predominantly in the United States. So that market is about 6 billion. But again, that's going to include Stanley Black & Decker, DeWalt. The stuff that I may use, Big Box. I estimate about half of that. So about 3 billion is probably the total addressable market for their customer base. So the way to think about that though, is there are 800,000 auto repair technicians in the United States. So that's their primary customer base. There's about 8% turnover annually in that industry. So about 68,000 professionals are coming into that business every year. So it's pretty fluid. Specifically, the way they measure market share is, and I'm sure we'll talk more about this, but they have a specialized distribution network that they call mobile tool distribution, probably more commonly known as the van market. And they have about 60% share within the van market of mobile tools. Within their two other segments, which are adjacent, so think non-auto technician, which would be auto repair equipment, and critical industries. Market shares are a little bit harder to frame out for those two segments. Auto repair equipment's very decentralized and Snap-on has by far the leading share, but it's hard to put a number on that. And then the same within critical industries. A little more concentrated, but again, they have the majority of that share.
· Matt Reustle
[00:00:00] S0: It's an interesting business model in terms of how they've evolved with the mobile van dynamics and a bit more that we'll get into there. But let's just go all the way back to the start. It has a rich history. Can you bring us to the origin story and some type of timeline to where we are today? It's a long time. So any major points that you think are worth highlighting?
· Matt Fleming
[00:00:00] S1: I think it's really fun because when you look at the business today, you can look back and really see the evolution of this company. There were no major pivots. There were just what I'd say are evolutions and enhancements. So in 1920, there was an automotive engineer named Joseph Johnson who was recognizing the burgeoning automotive industry in the United States. Model T Ford, all the other car companies that were coming out. And he recognized that you could increase productivity through tools. He essentially invented what we consider to be the modern day socket wrench. So he came up with a system with five different handles and 10 different sockets that you could interchange and interconnect. And his mantra was that five does the work of 50. He created this multipurpose tool back in the day when you had single-use tools. So really a much more effective model. Fast forward to 1930. The company which he founded, which was then known as the Snap-on Wrench Company, merged with another high-quality tool company called Blue-Point. So those two companies merged and renamed the company Snap-on Tools. In the 1930s, you had some interesting evolution because we were unfortunately, obviously in the depression, and so not a lot of tools were being bought. But what Snap-on did was they came up with what they called the "dream orders." And that's when they would go to their customers and say, "Hey, I know you're not in a position to buy any tools right now, but what would be the magic wish list? If you were to get any tool you want, what would it look like?" And so they would really listen to their customers describe what they needed in the tools. And so that became the precursor to what we now talk about as the voice of the customer. The other thing that they pioneered during the 1930s was Extended Payments, they called them "time payment." Well, fast forward to the model today where technicians are able to buy tools off the van and finance those, and make regular payments. So that really originated in the 1930s. 1940s, post-World War II, we saw the development of the direct distribution, which was the precursor to today's mobile tool distribution or van model. In 1990, they converted that business to a franchise model, which it is today and is a very important part of the story.