[SHW] Sherwin-Williams

In some industries you will find one player that uniquely and above all peers excels at something that is foundational to excess returns, whether that be customer service, cost discipline, scale economies or product innovation.  At times, you may find yourself thinking “I get it, X is a much better company than Y.  But Y trades at a 30% discount and if its turnaround initiatives pan out, then at X’s margins and multiple…”  This rarely works.  Disparities in returns on capital and valuation multiples between the best and the rest stubbornly endure, as often: 1/ the competitive advantages driving excess returns tie back to culture and culture is hard to change, and 2/ greatness begets greatness – the best companies attract the best talent and win the most customer trust, which feeds back into more of the same. There are exceptions of course, but as a rule of thumb and assuming a long enough time horizon, it makes sense to go with the company that clearly and consistently stands out from its peers on dimensions that matter in a particular industry, even if that means paying up¹.

In the paint and coatings industry, that means choosing Sherwin-Williams over PPG, AkzoNobel and other inferior peers (not an investment recommendation!).  Sherwin reminds me a lot of Fastenal, which obsesses over its customers and serves them through a fully integrated supply chain.  Fastenal operates through 3k+ locations and transports 90% of tonnage on its own trucks, which allows them to supply customers on short notice.  Likewise, Sherwin manages a footprint of 4.4k+ stores, which account for 1/3 of specialty paint stores in North America, and moves 95% of its volumes through its dedicated in-house fleet.  Sherwin has always seen stores as critical to its service advantage and expands its footprint every year, even in hard times, confident that doing so as peers retrench positions it to take share during the eventual recoveries.  This proved true from ’07 to ’09.  Sherwin opened new stores against negative comps and realized market-leading 9%-10% growth in the 3-4 years coming out of the crisis.  The same pattern is playing out again, more than a decade later, with Sherwin opening new stores in the US last year during the pandemic to reap the rewards of share gains in years to come².  By contrast, PPG, the second largest player in North American architectural paints, has been shrinking its 1,000 store base in recent years.    

Owning the end-to-end process – conceiving of and manufacturing paint products in its own plants, transporting them on its own trucks and distributing to end customers through its own stores – enables rapid turnaround times, close relationships with local contractors, and faster pivots in response to market conditions.  In the early days of COVID Sherwin rolled out curbside pickup across its 4k+ US stores over a single weekend, a feat made possible only through Sherwin’s controlled network.  And because it distributes predominantly through its own stores, Sherwin can immediately push raw material inflation through to end customers whereas manufacturers like PPG and AkzoNobel, who distribute more heavily through independent dealers, may be unable to do so for several months. 

Contractors and handymen staffed on home projects – kitchen remodels, bathroom restorations – might just purchase a few gallons of paint at Home Depot as they pick up lumber and drywall, but professional painters will turn to Sherwin for rapid procurement, technical advice, excellent service and just-in-time on-site delivery, which are especially critical for large commercial jobs, where paint crews may need immediate possession of dozens of gallons of a precise hue in short notice.  They will regularly swing by a Sherwin-Williams store early in the morning to pick up their dozens of paint gallons and plan inventory needs on future projects with the store manager before taking off for the day.  Contractors can call in to specify volumes and color combinations before driving 20 minutes to the nearest store, where their paint cans will be waiting for them.  Or one of the Sherwin’s 3k delivery vehicles will deliver their supplies to the job site. Sherwin’s local sales reps will visit job sites to ensure customers have everything they need. 

Moreover, the company has dozens of wholesale account executives dedicated to educating designers and architects about the nuances of paint application and color combos³, and national account reps managing their exclusive vendor relationships with 18 of the top 20 national homebuilders and multi-family developers.  Of course, if everyone is equally assiduous about attending to customers, a strong service culture isn’t a competitive advantage, it’s table stakes.  But as is true of Old Dominion Freight Lines in less-than-truckload logistics and Fastenal in inventory management, Sherwin’s heavy emphasis on doing right by customers is unique in the paint and coatings industry.

With 30%-40% of their compensation tied to growing accounts and wallet share, store managers and local sales reps are motivated to do right by customers.  Economic incentives aside, the service ethos is sustained by organizational continuity.  Like Fastenal, Sherwin maintains an internal management training program from which 70% of Sherwin’s field leaders and sales reps have graduated.  Its voluntary employee turnover is just 7%-8% (more like 5%-6% for store managers and sales reps), which is incredible for a retailer.  30% of the company’s full-time employees have been with the company for more than 10 years, 15% for more than 20.  In its 150+ year history, the company has had just 9 or 10 CEOs.