Business Breakdowns
· 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 Rollcab 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.
· Matt Reustle, Matt Fleming
[00:00:00] S0: One of the other things I wanted to tap into was the idea of advice, and this is something that I'm always surprised by, but I need to adjust my thinking around it. How these reps can really instruct and help out the actual people performing the jobs, would you say that that is a big piece of what they're doing? How would you measure the value in just the knowledge and the ability to suggest a different tool that's going to make whatever operation a little bit easier on a BMW? [00:00:00] S1: Candidly, the van operators are not necessarily automotive technicians themselves. They're probably not going to suggest a new way of auto repair. Where I think their value added though is, really understanding from the company what the new product line is and again really refreshing that 4,500 new tools a year. The company itself does a great job of really going to visit customers, watching technicians take cars apart, take notes and say, "Wow, we could come up with this new product." So again, I think that the new tools are really being designed in partnership with the customer, but it's the van operator who is just really distributing or promoting. That is probably a better way to think about it.
· Matt Fleming, Matt Reustle
[00:00:00] S1: Candidly, the van operators are not necessarily automotive technicians themselves. They're probably not going to suggest a new way of auto repair. Where I think their value added though is, really understanding from the company what the new product line is and again really refreshing that 4,500 new tools a year. The company itself does a great job of really going to visit customers, watching technicians take cars apart, take notes and say, "Wow, we could come up with this new product." So again, I think that the new tools are really being designed in partnership with the customer, but it's the van operator who is just really distributing or promoting. That is probably a better way to think about it. [00:00:00] S0: That makes sense. On the idea of the advantage that they have built over time. It's a historic business, there's been a ton of tools businesses around. Maybe this gets into what you were mentioning with KCI, but what can you point to that has allowed them to differentiate from competitors but also just maintain that advantage over time? If you were to isolate or think about different variables, what really stands out there?