Meeting of the markets

And many are redefining this paradigm by working in both markets simultaneously and reporting success. The specialty marketplace — which includes appearance and body accessories, racing and performance products and wheels, tires and suspension — is now a $34 billion industry, according to the Specialty Equipment Market Association (SEMA).

"In general, the specialty parts market grows at about twice the rate of the traditional market," says Jon Wyly, executive vice president of Arrow Speed Warehouse, a distributor in the specialty parts and accessories market and an Aftermarket Business Editorial Advisory Board member. While the traditional marketplace typically sees 4- to 5-percent annual growth, increases in the specialty market are about twice that, Wyly adds.

"You must train your employees; that's a non-negotiable impact," says Dan Maslic, owner of Masport Speed Shop in Boca Raton, Fla. He adds that all it takes to sink this business plan is one call from a concerned customer that can't be addressed properly by a staff member.

To have what potentially may be 1 percent of your sales tarnished by the perception of unknowledgeable employees can ruin a distributor's overall business image in the customer's eyes, he says.

"If a customer has a problem, he's going to call the counterman," says Maslic. "If the customer isn't happy, that particular instance will reflect on the store's entire reputation."

But all in all, Maslic adds, "the same (customers) buying wiper blades and brake pads are the same ones buying cold air intakes, too." He advises that it would behoove traditional distributors to consider carrying specialty parts lines.

It's also recommended that you look at geography before making the leap to the specialty parts market to ensure there's a regional niche to fulfill.

He says he finds more traditional stores are carrying performance items to supplement sales in order to maintain or increase profitability.

"New cars have such a good warranty on them and the parts last longer and longer, so the traditional parts stores are looking to supplement their revenues by bringing in additional product lines," he says. "You can only sell so many belts, hoses and oil filters."

Wyly advises interested repair and replacement parts distributors to dispel a fear of the unknown.

"The most important piece of advice I would give the traditional distributor or jobber would be don't be intimidated. I think the traditional side has a tendency to look at the specialty category and think: 'That customer takes too much time to wait on,' or, 'I don't have someone in house who can speak that language,'" he says. "But the real pain is less than the perceived pain."

Carving out unique trails

Just as the parts themselves tend to break from the "traditional" mold, so do those companies that sell and install specialty parts.

Some distributors and installation shops buy directly from the manufacturers, while other jobbers have bays on-site.

Those in the specialty parts arena even tend to have more harmonious working relationships with OEMs in light of the accessorizing that now takes place at the dealership level. And these niche distributors and shops tend to originate from a mixture of necessity and chance.

Take Monty Holt. The owner of Bits & Pieces in Long Beach, Calif., received a phone call from a friend who needed material for a Le Mans. Now his all-encompassing operation sells to everyone from manufacturers themselves to wholesalers, parts stores and specialty repair shops. His company even dabbles in parts development, he adds.

"I know of nobody else who does what I do," says Holt.

Non-traditional characteristics aside, specialty parts and accessories are making their way through traditional channels.

Todd Balaban, president of Speed Tech Performance, which makes muscle car suspension parts, says about 25 percent of his company's parts go through traditional jobber stores.

Arrow Speed is unique in the large amount of business it conducts with traditional parts stores, such as O'Reilly Auto Parts and CARQUEST, says Wyly. "We also do a fair amount of business fulfilling orders for e-commerce companies. We don't do direct to consumer online sales, but we fill orders."

As some traditional distributors may see dollar signs in the specialty parts and accessories marketplace, Wyly conversely sees selling to the traditional side of the business as a strong opportunity.

Joe Winterberg, merchandise product manager at O'Reilly Auto Parts, explains that O'Reilly has sold specialty parts pretty much the entire time it has been in business. It sells to both retailers — who might want more truck accessory products like bug shields — as well as to wholesale customers, who lean more toward carburetors and manifolds.

What about repair shops?

According to our annual State of the Industry report, eight out of 10 repair shops report installing specialty parts and accessories, mostly as a result of customer requests. (View the complete study beginning on page 11.)

"Traditional shops certainly do (install these parts)," says Winterberg, who adds that O'Reilly distributes to both traditional and specialty shops.

Some distributors and manufacturers, however, are noticing a prevalent DIY contingent for specialty parts.

"Our main customer is 18 to 24 years old, and it's usually their first car," says John Modica, president of Modacar Auto Accessories and Forcedfed Engineered Perfection. "They're very excited about modifying it, but they have very little knowledge of what they need to do to make power."

And based on the tech calls received, a number of these young enthusiasts are doing the work themselves. But those who are taking the parts into a shop are going to traditional repair shops and not speed shops, he surmises.

Modacar sells sport compact parts, while Forcedfed engineers its own lines of higher end products for BMW, Lotus Elise and Ferrari, among others.

SEMA stats point out that 9 percent of specialty equipment parts and accessory purchases were made from independent parts stores and repair shops last year, but to follow the traditional and specialty paths at once is not an easy task.

"Most aftermarket performance speed shops, these guys have to stay in touch with high performance to integrate them with the stock vehicle," says Maslic from Masport Speed Shop. "Because of the sheer amount of information you're looking at, it's very difficult to follow both paths at the same time." What it really boils down to is, "how many people can the shop put into training sessions?"

Distributors and manufacturers we spoke with are not actively soliciting dealers' business, although dealerships do represent another component of the specialty parts market.

"If a dealership calls us, we give them between 5 and 10 percent off, (but) we don't solicit the business anymore," says Modica.

The reality is more new vehicles, especially trucks, are being accessorized at the dealer level, so a relationship with the OEMs is inevitable when working with specialty parts.

According to SEMA, vehicle dealerships last year represented 2.7 percent of specialty equipment parts and accessory purchases, down from 4.6 percent in 2005.

Specialty market still has hills to climb

Although a number of its players and issues resemble the traditional aftermarket, there exist some inherent challenges in the specialty marketplace.

For example, e-commerce has been a significant obstacle, as a number of enthusiasts are purchasing performance parts and accessories directly from manufacturers.

The online landscape and its attendant presence of competition is expected to include more traditional players in coming years, so it's a concern that even those who remain in traditional parts sales should note.

"The speed business has really dropped off with the Internet," admits Montambault, who adds his company still sells a good portion of items like camshafts, air intakes and carburetors. "Most of the time, the real gearhead who is building his racecar is buying from (Internet retailers). They're selling Mallory parts at 30 (percent) off jobber over the Internet."

Montambault combats this increased rivalry, as well as what he refers to as a "more diluted market," by convincing his customers that customer service tends to be deficient with some online retailers. "We try to give 110-percent customer service and try to keep our customer base with the service we've always given and try to keep the price competitive."

Distributors like Motor State Distributing are joining the e-commerce masses by conducting a lot of business electronically. The company provides live access to product pricing and availability through their Web site and also by way of Motor State's Price Guide Pro® software program. They offer easy access to nearly 700,000 part numbers from 470 performance parts manufacturers.

Modica's companies offer a full array of customer service but still face competition from online hubs such as eBay, which he says takes away about $1 million in annual sales from his business.

Although he can't always compete on price with those non-brick-and-mortar companies, his employees offer valuable tech assistance. But, the workers will offer assistance only with parts purchased from his companies.

"If you can't produce an invoice number, we can't help you," Modica explains. "I'm not paying a guy $18 an hour to help someone who buys from eBay."

Montambault says he charges a higher labor rate to install parts that are purchased outside of his company, a policy that's fairly widespread in this segment due to the large number of online purchases made.

From the manufacturer's point of view, e-commerce can only make profits grow. But Balaban, from Speed Tech Performance, ensures the playing field is level for his parts dealers. "If they have a mutually advertised price, they can sell for less, but they can't advertise for less."

Nonetheless, his online traffic has tripled over the last three months, so he clearly is reaping the benefits of online sales.

According to SEMA, Internet retail sales of specialty equipment parts and accessories grew from 21 percent in 2005 to nearly 27 percent in 2006. Other growth channels include direct from the manufacturer and catalog and magazine mail order.

Another challenge the specialty parts market faces that perhaps mirrors the traditional repair and replacement parts market is more accountability for returned parts, says Montambault. An element of trust has eroded, and what was once just sending a part back now involves sending to the manufacturer insurance information to make sure the vehicle in question is still on the road, and for other components, it involves sending back filters and other auxiliary parts.

"The accountability for defects is definitely increasing, but that was meant to come because people have been abusing (returns) for years," he adds.

Two steps to success

A number of the aftermarket's manufacturers offer parts through both traditional and specialty channels, and some see more two-step distribution in the specialty parts market.

Delphi sells a number of its mobile electronics products through what's commonly referred to as the "12-volt channel," in which a number of retailers do the installation themselves.

Though these 12-volt shops face similar concerns (like returns, warranties, etc.) as those faced by traditional parts installers, this channel is more two-step than three-step, says Frank Ordoñez president of Delphi Product & Service Solutions and vice president of Delphi Corporation.

Montambault buys from between six and 10 WDs, and now that most of these warehouses offer their own delivery fleets, he's seen less of a need to stock the inventory that was once required. "I know I have trimmed my inventory back to a level that's what I need on a daily basis."

These same WDs also likely have been faced with the question of how far can they go with a discount structure and still maintain a profit, he adds.

O'Reilly sources most of its parts from manufacturers, "but we do use a couple of WDs on the performance and truck side for the non-common items that we don't stock," reports Winterberg. "Some of these lines are very deep in stocking SKUs. In the truck side, for example, grille guards can have applications for many different vehicles and are a big, bulky item — to try to stock that in a warehouse would take up a lot of space."

More savvy tuners in the landscape

Exhaust and ignition products are big among specialty parts purveyors, according to some jobbers we interviewed. So are air intakes, shocks, struts and brakes, not to mention the vast array of electronics taking to the distribution channels.

When fuel injection enhancements gained prominence, their dubious compatibility with engine systems gave the category a perception of a mysterious dark art, says Maslic from Masport Speed Shop.

Now, sophistication and electronics have spawned a generation of electronic tuners, tweaking fuel and spark timing with programmable handheld tuners. And Generation Y, which is ultimately comfortable behind a mouse and keyboard, is embracing electronic tuning with open arms.

Another significant trend expected to take root is diesel-related performance enhancements, both with sport compact vehicles and trucks. With its unlimited boost pressure and more power and torque than its gasoline counterparts, performance diesel should not be ignored.

Maslic says companies such as Gale Banks Engineering have been involved in performance diesel for some time. "When (vehicles) leave the show floor, they're fairly powerful to begin with, but nowhere near their maximum potential."

In addition to diesel, Scott Cannon, merchandise product manager at O'Reilly Auto, asserts chrome accessories and trim is a growing trend in the truck category. The parts store is also seeing rapid growth in high-performance filters, which enhance performance and offer gas savings.

Whatever the hot new item of the moment, it's bound to change quickly, so being successful in this market involves keeping your finger on the pulse and your eye on the dollar signs that will result.