Business Breakdowns
· 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.
· Matt Fleming, Matt Reustle
In the 2000s, like a lot of other companies, Snap-on really embraced continuous improvement and developed what they call the RCI, the Rapid Continuous Improvement system. That's based on the Toyota Production System. And certainly there are other very well-known brands, Danaher Business System, 80/20, Kaizen, Lean, et cetera. But Snap-on's is called RCI. And then the last really important milestone I would say is Nick Pinchuk, who is the President, CEO and Chairman today. He became President and CEO in 2007 and it's been really integral to their employment of this business system. And when we talk about the margins and the sales growth, he's really been a key part of that. [00:00:00] S0: Such a rich history and a lot that I want to get into there. I think the idea of the wish list, particularly at a time where the economy was stressed, is something where you could easily just look internally at your business and think about ways that you can improve it. But to go externally is powerful. On your point in terms of the financing model, and giving technicians the ability to do this, which is a unique way of providing credit, almost creating a new business line. It's interesting to me to hear that when I think of tools. Again, I'm coming from the consumer perspective, so I'm thinking of things that might not be super expensive. These items, when you think about the cost, the average sale, are they higher than I'm imagining? What drives that financing need which is not immediately obvious to me?
· Matt Fleming
[00:00:00] S1: I think you've hit the nail on the head. Typically their products are 20 to 30% higher than their competitors, which I think speaks to their brand loyalty, and the quality, and so forth. What's really interesting, and when I first got into Snap-on, this was really the hook for me, is really a couple dynamics I think we should explore. The first is, in the United States, it's a very different model in that the technicians have to supply their own tools. So if I go to work at an auto repair shop, I'm essentially using the bay and whatever car comes in, if it's my turn, I can go work on that car and I can get paid for it. But because there's such a high turnover in the industry, the tools are basically required to be owned by the individual. And so there's not a lot of working capital for the shop. And so therefore what ends up happening is the tools that you have as a technician really enable you to do more work. What's amazing to me, Matt, is not only does, say, a BMW require different tools than a Toyota, but really even within the same brand, different makes, different models, all require tools. So what you end up having is a vast collection of tools that you need as a technician. Some of the work I did suggests that I would say an entry-level technician, just to probably, for you or I to get started in this business, we'd probably need 25 to 50 tools and that might be $11,000 collectively. If you're an experienced technician and you've been doing this maybe 15, 20 years, you might have $40,000 worth of tools that you have. For the most part, the financing does tend to be higher ticket items which are tool storage, for example. That might be a $10,000 really sophisticated rolling toolbox. Increasingly power tools are more expensive. And then diagnostic tools, which are essentially laptops that you can plug into the car and get a whole diagnostic setup, those are pretty high ticket items. For the most part you tend to finance those, but over time there's quite a collection of tools that the technician will finance.