Traditionally recession-proof, U.S. industrial distributors such as WW Grainger Inc and Fastenal Co are looking to make deals and expand their product range to take advantage of the market slowdown.

These firms use sales representatives, marketing materials and catalogs to help customers source and purchase maintenance, repair and operating (MRO) supplies and other products and services.

Ratings agency Standard & Poor's has highlighted Grainger as one of the top six non-financial businesses maintaining strong AA+ credit ratings.

Unlike capital intensive manufacturers, who have a big chunk of their funds locked up in fixed assets, industrial distributors have the flexibility to access resources quickly when the squeeze comes.

That doesn't always mean industrial distributors cut jobs to survive a difficult market.

Grainger, the largest U.S. industrial distributor, axed 600 positions in 2009 to counter falling sales, but invested cash in expanding its product offering to remain competitive.

The recession put more focus on MRO because businesses were looking for areas of their operations where they could get cost out and improve productivity, Grainger CEO Jim Ryan wrote in response to an e-mail from Reuters for this article.

As customers seek cheaper or more efficient products to get them through a downturn, industrial distributors take advantage by investing in people and products.

Through the recession, Grainger added sales reps and expanded its product lines to provide customers a differentiated offer at a time when they needed easy access to a broad array of MRO products, Ryan said.

Illinois-based Grainger, whose catalog stretches to close to 1,400 pages and lists more than 900,000 products, sells everything from abrasives and pumps to padlocks and wrenches.

Grainger shares rose 11 percent, and Fastenal gained 3 percent during the turbulence of 2008-09, when the broader Dow Jones Industrial Average <.DJI> dropped by more than a fifth.

If we go into double-dip recession, I'd expect the sales growth rate to be negative for nearly all distributors, but not much as they will take market share, said Ryan Merkel at William Blair & Co. They have a buffer, a mitigating factor.

M&A WAVE?

Applied Industrial Technologies , Wesco International Inc and MSC Industrial Direct Co also compete in the highly fragmented $250 billion U.S. MRO supply market.

Competition in this North American market is not price-driven, but more about the ability to source and deliver products through multiple sales channels. This makes acquisitions significant.

The market is dominated by small, local mom-and-pop shops, with no company having more than 6 percent market share. Grainger had sales last year of over $7 billion, while Fastenal and AIT are in the $2 billion revenue bracket.

When the economy weakens, the smaller shops find it tough to survive due to the liquidity crunch -- presenting an opportunity for established players to push them out and gain market share.

The smaller guys start to pull in service levels and inventory that can serve cash. Larger distributors can take advantage of that service disruption to grow market share. We saw this in 2008-09, said William Blair's Merkel.

This is also a chance for the established distributors to drive consolidation.

I'm a believer that over a long-term, you're going to settle into a small number of very large distributors and a very large number of very small, specialized distributors, BB&T Capital Markets analyst Holden Lewis said.

Grainger's Ryan said the company will look for distributors in North America to enter parts of the market or service businesses that complement its MRO product offering.

Grainger followed a similar strategy two years ago, buying Imperial Supplies from American Capital Ltd and lighting retro-fit company Alliance Energy Solutions.

MSC Industrial has said it plans to expand its end-market verticals to enter new sectors and grow market share.

Companies are also aggressively looking overseas.

Grainger last month bought Netherlands-based Fabory Group for about $344 million, its biggest buy in at least a decade.

Going forward, you can expect us to focus more on emerging markets in Asia and Latin America, Ryan told Reuters.

BB&T's Lewis said the deal indicates M&A will become more of a feature in distributors' growth strategies.

The larger distributors spin off a large amount of cash every year. I don't see any limit on how much acquisition activity they do at this point.

(Reporting by Bijoy Anandoth Koyitty and Megha Mandavia, with additional reporting by Soham Chatterjee in Bangalore; Editing by Ian Geoghegan)