I am sure there are many people who look at Reece, scratching their heads, saying something along the lines of, "What? Plumbing supplies? How can that possibly be a good business?"
Well, the way I think about that is from two angles:
1. the viewpoint of the customer
2. the viewpoint of a Reece competitor.
In terms of point 1, i.e., the viewpoint of the customer, when investing in a business I think it is very important to identify who is really the customer.
Years back, when I first came across Reece, I used to think that the plumber who came to a Reece outlet every morning to pick up his supplies was the customer. But after some time thinking about this, it occurred to me that the plumber is merely the intermediary in the transaction.
The customer is the person who pays for the stuff, i.e., the property owner who is having the repair or the renovation done.
And, the beauty of the Reece model, the stuff that Reece sells for the renovation/repair is usually only a small component of the total cost of the job.
In fact, in the overwhelming majority of cases, the person who is actually footing the bill has no idea what he is paying for the Reece products that form part of the job.
And the guy who actually selects Reece to supply the products, is not the guy who pays for it.
Needless to say, most business executives would dream of the situation where the person who willingly pays for the products of that business is both unaware of, and agnostic to, what they cost.
It stands to reason that scope and latitude to exercise pricing power is very meaningful.
The only thing that needs to happen is for the plumber to choose to go to Reece for his supplies for the job. And why does he do this?
Simple answer:
Because they always have what he needs, and his work is never held up waiting for supplies. And the reason they always have what he needs is because of their inventory management information systems and their accurate management of their supply and distribution networks. [For more on this, refer to the post below [*], which appeared a few years back that attempted to discuss Reece's "moat".]
So, our plumber is never held up waiting for a store-front clerk rummaging through shelves out the back to see if a certain part needed by the plumber is lying around or might have rolled under the racks. Nor does he waste time having to go drive through the morning traffic from one plumbing outlet to the next to pick up the few things that the last place didn't have.
Time is money - literally - for a tradesman, so for him to have to stop at just one regular place in his suburb every morning to pick up all his materials without having to wait long, a place where he knows the people serving him from across the counter very well, and where he can get a complimentary cup of coffee and a few biscuits to kick-start his day... this is immensely valuable to him.
Now, onto Point 2, the viewpoint of a Reece competitor
This is what you need to be able to do in order to just keep Reece at bay (not win back some of the market, but just to stop shedding more share):
Plumbing supplies is an industry with hundreds of SKUs - from bulky, low-value, commodity products such as guttering, PVC and copper piping, to all kinds of finicky little washers, flanges, gaskets, stopcocks (is that a thing? I think it is), fittings, filters, drains, etc. etc. you need to have all of these available at all of your outlets all the time.
Because, like I said, the plumber doesn't want to make two stops in the morning on his way to the job.
And you need to know where each item is in your store, where you can access it quickly, because by the time the plumber has finished his coffee, him and his apprentice want to be straight back on the road on the way to earning money.
They don't want to be kept waiting at the counter with their order only part-filled while old mate Bruce is shouting out to Brian, from one aisle to another somewhere in the back of the store, about if Bruce happened to know what happened to three-quarter inch, non-return and isolating valves that were there just the other day but now no longer are.
Also, while Reece is merrily buying up many of the sites out of which it operates, the competitor down the road or around the block still have to pay rent to a landlord, at a rate that goes up every year. When I think of owning Madamswer's Plumbing Supplies accross the road from a Reece outlet, ever day I would look out the window and think, "Those Reece guys are operating rent-free. And I have to compete with them every day on that uneven playing field. Boy. I'd better not start a pricing fight with them or else my doors will be shut for good before long."
And, related to this, as Reece grows its presence in the market year after year, and as it continues to take market share, its purchasing terms improve, rendering its input costs lower than its smaller competitors.
Making it more price competitive.
Which, combined with the premium service levels described above, results in greater market share.
And better buying terms
Thereby, improved price competitiveness.
Leading to greater market share
And better buying terms
Price competiveness
Market share
Buying terms
Price competitiveness
etc, etc.
And, in support of this virtuous cycle, Reece's management continues to invest in supply chain capability, management information systems and the resources needed to support growth for the next decade or two.
And all that, @Matt48 , is the deep, wide, crocodile, shark and piranha-infested moat that the Castle of Reece has had built around it.
I'd hate to be someone attempting to get across it.
(20min delay)
