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Grainger defends move

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After winning praise as one of the first old-economy companies to embrace the Internet, W.W. Grain-ger Inc. has discovered it can't outrun the dot-coms.

The Lake Forest, Ill.-based distributor of industrial products last month agreed to trade its most promising online business, along with $21 million, to Works.com for a 40% stake in the Austin-based e-commerce start-up.

When Grainger launched OrderZone.com with great flourish a year ago, executives said the Web site would help the company use the Internet to grow sales by expanding its customer base.

But they soon learned a hard lesson about electronic commerce. The Grainger name, a fixture of American industry for 80 years, counted for less in a crowded Web marketplace where comparison-shopping is a breeze and price is what grabs attention.

Window shoppers

While OrderZone drew plenty of visitors, too many turned out to be browsers. Grainger acknowledges that sales fell short of expectations. Soon, investors were demanding to know when Grainger's heavy Internet spending would start generating profits.

Grainger executives maintain that the new partnership is the best way to grow the Internet business. But the Works.com deal amounts to an admission that the old economy stalwart got lost on the Internet. Grainger is giving up control of OrderZone in the hopes of getting a piece of a Web operation that will be large enough to prosper in the margin-crushing competition of e-commerce.

Under the terms of the deal, the OrderZone name will disappear and Grainger's products will be sold alongside the paper clips, staplers and other office supplies sold by Works.com.

"After throwing a lot of money at these things, it appears they're throwing in the towel on some of these things," said analyst John T. Dempsey at Barrington Research Associates Inc. in Chicago.

Grainger has spent upward of $80 million--and plans to spend another $100 million this year--developing digital businesses. The Web initiatives include Grainger.com, where large industrial customers can

buy more than 220,000 products ranging from work gloves to power generators; Grainger Auction, an auction site; and FindMRO, a site for hard-to-find items.

Of all Grainger's Internet offerings, OrderZone was considered the star. The marketplace for maintenance, repair and operations items is estimated at $250 billion-plus, and Grainger seemed well-positioned to gain marketshare as more and more small businesses began to make routine MRO purchases online.

With visions of creating a one-stop shopping portal for potentially millions of customers, Grainger debuted OrderZone June 1999. Grainger named one of the company's brightest young executives, Daniel Hamburger, 36, as OrderZone's president.

Investors became impatient

Riding the wave of investor enthusiasm for anything Internet-related, Grainger's stock hit a 52-week high of $58 in the week following the launch.

Last month, almost exactly a year later, the stock was trading around $34, having sunk sharply days before a weak quarterly earnings announcement and the announcement that OrderZone would be merged into Works.com.

Investors grew tired of waiting for the online strategy to pay off. Sales at OrderZone amounted to a tiny fraction of the company's $4.3 billion in 1999 revenues. In the first quarter of this year, Grainger reported a $10.9 million loss on its "digital businesses"--OrderZone, FindMRO and Grainger Auction, but not Grainger.com--on $6.2 million in sales.

Most of the company's Internet sales come through Grainger.com, which gives existing corporate customers the convenience of online ordering but doesn't attract much new business.

OrderZone, the company's play for new accounts, has about 3,500 customers, Grainger said. That's about 500 fewer than Works.com has, and puts OrderZone somewhere in the middle of a large pack of online industrial equipment purveyors.

Hamburger, who will become co-president of Works.com, said the deal is an opportunity to grow the business faster. With the addition of Works.com's office supplies, the combined entity will be a formidable force in the world of online purchasing, he said.

"This expands our offerings and allows us to target more customers," he said.

Such partnerships are common on the Internet, said Timothy M. Klein, a senior research analyst at U.S. Bancorp Piper Jaffray in San Francisco. But they don't necessarily boost sales. "Anyone can aggregate the supply. Aggregating the demand is much more difficult," Klein said.

Hamburger's boss, Grainger Group President Donald Bielinski, said that Grainger realized some time ago that OrderZone wouldn't be able to make it alone. More customers registered at the site than Grainger predicted, Bielinski said, but "revenues were less than we anticipated."

Meanwhile, Wall Street wonders whether the Internet ever will produce meaningful gains for Grainger. The Works.com deal isn't inspiring much confidence.

Said Barrington's Dempsey, "Somewhere down the line, this move may raise earnings, but it lowers expectations."

Kevin Knapp is an associate editor at Crain's Chicago Business.

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