Business Breakdowns
· 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.
· Matt Reustle
[00:00:00] S0: I'm sure there's some combination of both, but quality seems like a big piece of this. Is that what they really lean on relative to the competition? What is their brand value, when you think of quality, convenience and even the status that it might signal as a brand?
· Matt Fleming
[00:00:00] S1: Their competitors, specifically Matco, have adopted a van model as well. So I think where Snap-on really differentiates it is just in a tight geography. So the vans are stopping by at least weekly, if not more, to the technicians. Technicians really prefer to buy from the van for a couple reasons. One is it's pretty convenient, they don't have to leave their place of work to get a tool. The second is that the vans are really doing value-added selling. So you might be the van operator and I'm the technician. And I'd say, Matt, I've got this issue that I really need to solve. And you might say, oh well, you should really be using this tool and not that tool. And I happen to have it on stock. So I think it's really differentiation of the value-added sell. It's the SKUs. So Snap-on has 40,000 SKUs just in the tool segment, so 65,000 SKUs company wide. But again just on that automotive technician, 40,000 different SKUs, they're constantly innovating. One number I came up with, it's a little hard to pin down, but CEO Pinchuk referenced their Snap-on franchise conference, which is their big annual event. Last year they showcased 4,500 new tools to the van technicians and operators to really understand that. I would say to your listeners and to you, a real highlight of Snap-on is listening to their quarterly calls when Nick Pinchuk picks a tool to describe and is quite passionate about it. So I picked two. An example they talked about is this new special hex driver with an extra long 5 1/4 shaft that allows the technicians on newer cars to adjust the radar sensors without having to take the bumpers and the grilles off. So historically they'd have to take these parts off. Now they've got this extra long piece that goes in there. Their new handheld is called the Apollo Diagnostic System. It uses their software system called Mitchell1. There's over 3 billion repair records and 500 billion data points in this system. There's just unmatched. And then one of the new things they were talking about, which I think is really cool, is you can actually set your tool crib up such that if you take a tool out and at the end of the day, if you don't put it in and you shut it, it will let you know that you're missing a tool. They're taking that technology and applying it to folks that work on aircraft engines.
· Matt Fleming, Matt Reustle
Just making sure that all the wrenches you brought out came home with you. And they're thinking about adding those types of innovations to things like medical as well. [00:00:00] S0: It's painting a very nice picture. The next time the mechanic tells me it's going to be $2,000 because they have to take apart the steering wheel, I'll make sure that they check with Snap-on first. [00:00:00] S1: I think that's a great idea. [00:00:00] S0: On the van model, for me it's easy to look at this and say, ah, it feels like it might be outdated with everything happening online these days. Can you walk through what that looks like? You have a weekly meeting. You mentioned that they're trying to buy things off the van. I can't imagine they're carrying 40,000 SKUs. So what does that look like in terms of, is there conversations being had about what they might need and then they're bringing them the next week, or a little bit more that gets into the sales process? I know it's going to look differently each time.
· Matt Fleming
[00:00:00] S1: Setting the stage. There are 4,700 vans worldwide. The majority of those, about 3,400 are the United States. Five percent of those are company owned. The rest are this franchise model. When you get into a franchise as a franchisee, there's going to be an initial outlay of capital and then you do have franchise costs. That's probably, I think, around 20 million a year in total for Snap-on that they get from these franchisees. And then there's a capital commitment that the van has to buy somewhere around $140,000 of inventory. So to your point, they really want to make sure that their customers are being supplied with the inventory. They don't want a van to be under inventoried. A franchise van probably has up to $200,000 in inventory. So they're going to carry, obviously not 40,000 SKUs, but they're going to probably carry 80/20. The 80% are the fastest turning. Certainly if there's a product they don't have, they can order it and bring it back. The beauty of the franchise model, as I said, was not only the value-added sell, but it also works very well when they sell on credit, because there's a natural governor that every week you're coming and collecting. If I'm not paying you back and I say, "Well hey Matt, I need a new tool." You might say, "Well, I need to get paid for the first tool before that." So I think there's a natural balance on both sides of that.