With acquisitions as active in the fastener industry as anywhere else, this distributor powerhouse bucks convention with a different growth tack, opening small branch sites across the continent by the handful.

Today, most business owners and managers in the distribution industry probably consider hearing or reading phrases such as "economies of scale," strategic alliance" and "terms of the acquisition" just part of a normal business day. Merging and acquiring has become the '90s approach to fast corporate growth, and it seems that anybody who can swing a deal is doing it.

Enter distributor-powerhouse Fastenal Co., Winona, Minn. It has given a thumbs-down to the acquisition approach, preferring instead to grow the company the old-fashioned way-through internal growth, opening one small branch location after another. Slow and steady nurturing have grown this big boy into a company that competes with the likes of Home Depot and Lowes.

Founded in 1967 by Robert Kierlin, the company began as a small operation with a 2,000 ft storefront. Fastenal now operates 788 stores in 48 states, Puerto Rico and Canada, and 12 distribution centers that are scattered across the U.S. In 1998, the company produced its first full-line catalog.

Fastenal's quiet, methodical approach, one that garners no headlines in industry publications, has resulted in a phenomenal growth rate that has exceeded 20% per year for the past 18 years. Major financial publications such as Forbes, Financial World, Inc. magazine, Worth and Business Week have all taken note of the company's phenomenal growth. Fastenal is one of a handful of companies named on the Forbes "Best Small Companies in America" list every year it's been eligible (1987-1996).

Entrepreneurs everywhere. Fastenal didn't achieve its success using a strict, corporate operating policy. Securities analysts have credited much of Fastenal's rapid growth to the company's decentralized corporate structure that allows its branch managers to act as store owners rather than employees. The company considers itself a product specialist that builds "growth through customer service," and most of that customer service happens down at the branch level.

Local store managers know their customer base better than anyone else, so Kierlin, Fastenal's president, chief executive officer and board chairman, gives his branch managers great latitude in making decisions on what inventory to carry for their particular customer bases and are allowed to deal directly with approved vendors. They have authority to change product pricing for their particular location, and Kierlin gives them free rein when it comes to locating and acquiring new customers. It's a policy that's working well for Fastenal, as well as for the store managers. If the branch stores are successful, those managers are rewarded with commissions and profit sharing. Kierlin says managers with five or more years' experience with the company can earn a six-figure income.

Another way Kierlin pushes service out to customers is by providing lots of local coverage in an area. Most national distributors use regional hubs that service a large geographic area; Kierlin turned this concept on its ear a bit. In addition to opening full-sized branch locations around hubs, he opened tiny stores of 3,000 sq ft in very small towns, spreading many stores around hubs that effectively service myriad locations within about a 500-mile radius. During the first nine months of 1999, 23 new sites were opened. The total sites at the end of the third quarter were 788, which consisted of 729 Fastenal stores and 59 satellite stores. When Fastenal began opening these small "satellite" stores, they were often in communities of as few as 5,000 people. Surprisingly, these tiny stores became profitable within two to three months, in contrast to the larger sites that generally take from six months to a year to turn a profit.

Spreading the wealth. Fastenal bills itself as a product specialist and as a distributor that will go the extra mile, or 250 miles if that's what it takes, to satisfy the customer. The company doesn't compete with the likes of Home Depot; it operates on high margins (currently Fastenal boasts a 10.66% profit margin; W.W. Grainger, one of Fastenal's biggest competitors, hovers at around 5%), but provides a lot of convenience to customers in sparsely-populated areas where there are generally few competitors.

To keep up with all this widespread distribution, and to keep its shipping costs down, the company operates its own fleet of semi-trucks and trailers, as well as standard pick-up trucks. Kierlin has truly mastered the art of cost cutting, but not at the expense of his customers. He finds innovative ways to trim costs, such as, after making deliveries to branch locations, having delivery trucks pick up product from vendors before returning to the warehouse. Instead of wasting time and money on an empty return run, the company racks up credit from its vendors.

And have you ever seen a distributor with a used car lot? In yet another move toward frugality, Fastenal began selling the company's used vehicles outright instead of just trading them in on newer vehicles. If you're in the market for a used truck, you might want to visit the company's Web site at www.fastenal.com. to check out which vehicles are currently for sale.

Taking stock. The cost-saving culture that permeates Fastenal begins at the top. Robert Kierlin is not the highest paid employee in the company. His annual salary, still about $120,000, has not changed in more than ten years. (For more on Kierlin's legendary penny-pinching, see Inc. magazine's Oct. 1, 1997 issue, "The Cheapest CEO in America.") His fortunes are tied to the company's stock performance. Kierlin currently owns 4,217,736 shares of common stock, which, at press time, were trading at more than $39 per share-a valuation of more than $164,491,704. If the company does well, he does well. If it does poorly, well . . .

So it goes with the rest of the employees. Fastenal has no 401K plan, but it does have a profit-sharing program that is based in part on cost savings, so employees have additional incentive to keep the distributorship running as lean as possible. They'll soon have another incentive, too. In November, the company announced the creation of an employee stock option plan (ESOP). This is the first such plan for Fastenal.

The plan will consist of options granted directly from Kierlin to a broad group of employees. The options will be awarded under the plan in January 2000 and will be backed by Kierlin's existing shares of stock. No new shares will be issued to fulfill the option needs. As a result, the options will produce no dilution of the stock.

If the future continues as the past, the ESOP should generate some wealth for the Fastenal employees. The cost-cutting culture at Fastenal has meant operating efficiencies that have resulted in a phenomenal stock performance over the company's 32-year history. In the last five years, the company has had two 2:1 stock splits; some long-term Fastenal stockholders have seen the value of their stock increase by more than 6,500%.

No resting on its laurels. All that cost-cutting and bottom-line watching doesn't mean Kierlin is so cheap that he won't spend money where it's needed to keep the company competitive and ready for the future.

Since its inception in 1967, the company based its business almost exclusively on threaded fastener products. Hedging its bets on what the future may hold, the company has begun some diversification. In 1993 the company added tools under the name FastTool to its fastener product lines; a cutting-tool and services line (SharpCut), hydraulic and pneumatic products (PowerFlow), material handling and storage products, industrial paper products and janitorial supplies (CleanChoice) were added in 1996; an electrical-supplies line (PowerPhase) and a welding supplies line (FastArc) were added in 1997; and safety supplies were introduced this year.

In 1998, having taken note of the e-commerce implications, it began migrating from a UNIX environment to a Windows NT point-of-sale environment. In the third quarter of 1998, Fastenal joined an alliance with Datastream Systems, Inc., Greenville, S.C., Applied Industrial Technologies, Cleveland, Ohio, and WESCO International, Inc., Pittsburgh, Pa. Datastream is a provider of computerized industrial maintenance-management and procurement software (which includes the MaintainIt and MP2 families). Applied Technologies distributes ball, roller, thrust, and linear bearings; mechanical- and electrical-drive system products, and specialty maintenance and repair products. WESCO, of course, needs no introduction.

The initiative, called e-MRO, connects Datastream customers with MRO suppliers directly through the Internet for streamlined purchasing and inventory control; e-MRO also hosts catalog content and delivers purchase orders to Fastenal. Through the agreement, Fastenal gained access to several billion dollars worth of middle-market procurement managed by Datastream applications.

In July of this year, Fastenal opened a Web store at its Web site with an online catalog. In September, the company's product lines became available online through ProcureNet, Inc.'s OneSource PurchasePlace buying portal (www.procurenet.com).

Although Fastenal took a half-million-dollar hit from Hurricane Floyd, net company sales for the first nine months of 1999 managed to climb to $453,884,000, a 21.2% increase over net sales for the comparable period in 1998. The company expects a similar increase in sales for the fourth quarter of 1999, which should push its total 1999 sales to more than $550,107,000. Not bad for a company built on nuts and bolts.

1998 Sales: $503.1 million

Sales as of 3rd qtr. 1999: $453.9 million 1-Yr. Sales Growth: 26.4% 1998 Net Inc.: $53.0 million 1-Yr. Net Inc. Growth: 29.9% Employees: 5,256 at company sites and in support positions 1-Yr. Employee Growth: 13.0%

Key People: Chairman, President, and Chief Executive Officer: Robert A. Kierlin Vice President and Chief Operating Officer: Willard D. Oberton Secretary: Stephen M. Slaggie Treasurer, Chief Financial Officer and Chief Accounting Officer: Daniel L. Florness

Divisions: Fasteners Tools Cutting Tools Electrical Supplies Hydraulics and Pneumatics Janitorial Supplies Manufacturing Materials Handling Safety Supplies Tool Repair Services Tool and Cutter-Grinding Services Welding Supplies

The Electrical Supplies Division offers a diverse selection of electrical supplies and accessories. Products range from wire, switches and fuses to fittings, conduit and receptacles. You can go to the company's Web site (www.fastenal.com) and download each division's entire product catalog in PDF format.

In addition to products and services listed above, the company offers CAD Design, packaging, hose crimping, material management and other specialized services. It also provides a Non-Industry Standards Catalog, which lists the company's semi-standard, hard-to-find parts.