Business Breakdowns
· 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.
· Matt Reustle, Matt Fleming
[00:00:00] S0: Certainly makes a lot of sense, the enforcement of that credit. I want to tap into that evolution from van into franchise and the franchise model. There's obvious benefits when it comes to capital intensity and what you can do. But can you tap a little bit more into that? Was it unique when they did it? And what would you say are the major benefits of operating this way versus the traditional in-house sales force? [00:00:00] S1: First of all, I think you can control your margins, and so they will sell at a certain price to the franchisee. They have probably what I call MSRP, or list pricing, that they set out. But ultimately it's up to you as a franchisee to price appropriately. Therefore there's very little discounting that they're doing. As opposed to say, Stanley Black & Decker who has to partner with a big box retailer with a lot of pricing power, they're going to share in that margin. The vans do a pretty good job and they typically earn about a 30 to 35% gross margin. But they are bearing the risk. They are also absorbing the capital cost as well. And then just frankly the operating costs as well. So they're driving a van around pretty regularly. The risk to that, of course, is Snap-on's got to really make sure that their customers are getting serviced and make sure the brand is intact. It was sort of a natural evolution of once they had that geography and footprint in place to really kind of outsource the model to a more capital-light approach.
· Matt Fleming, Matt Reustle
[00:00:00] S1: First of all, I think you can control your margins, and so they will sell at a certain price to the franchisee. They have probably what I call MSRP, or list pricing, that they set out. But ultimately it's up to you as a franchisee to price appropriately. Therefore there's very little discounting that they're doing. As opposed to say, Stanley Black & Decker who has to partner with a big box retailer with a lot of pricing power, they're going to share in that margin. The vans do a pretty good job and they typically earn about a 30 to 35% gross margin. But they are bearing the risk. They are also absorbing the capital cost as well. And then just frankly the operating costs as well. So they're driving a van around pretty regularly. The risk to that, of course, is Snap-on's got to really make sure that their customers are getting serviced and make sure the brand is intact. It was sort of a natural evolution of once they had that geography and footprint in place to really kind of outsource the model to a more capital-light approach. [00:00:00] S0: Do you see pockets of pressure on that system? Because as you mentioned, you're putting a lot of the business decisions in their hands. It removes some of the risk from you, but ultimately you're dependent on them to remain in business and thoughtfully efficient. How much volatility have you seen with that over time?
· Matt Reustle, Matt Fleming
[00:00:00] S0: Do you see pockets of pressure on that system? Because as you mentioned, you're putting a lot of the business decisions in their hands. It removes some of the risk from you, but ultimately you're dependent on them to remain in business and thoughtfully efficient. How much volatility have you seen with that over time? [00:00:00] S1: I don't have a great number in terms of a turnover, but it's pretty low. I wouldn't go so far as to say that the Snap-on franchise is like a Budweiser dealer or Caterpillar dealer, anything like that. It's a pretty loyal group. They bring all these franchisees out to this main conference every year, and it's a 10-day event and people really love it and they look forward to it. The initial capital costs are not insignificant. So I think what you get is folks that are pretty committed to being in the business and then figure out pretty quickly that they like it. One thing I didn't mention is the company also has a number of other trucks that they use as well, and they will supplement the vans. And so these are pretty funny. They've got the Rock 'N Roll Cab and the Techknow which is T-E-C-H-K-N-O-W. These are specialized vans that they will bring around and really help the franchisees sell the product, market it. But for example, they don't have to carry 100 units of $10,000 tool cribs. I think Snap-on has done a very good job partnering with the franchisees and making sure they know that they're supported.