A new chapter unfolds

Retaining character is crucial

The business model for today's domestic suppliers has required a drastic change, mostly due to the onslaught of outsourcing the channel has tapped into.

"They do get crunched," admits Mike Lambert, president of the Automotive Distribution Network. "On one hand, we are beating them up for more discounts," but then they are forced to cut certain services. For instance, "the sales force is thinning."

"It's gotten to the point where (manufacturers) are having difficulty dealing with it. It's a threatening atmosphere," Creamer claims. And now, channel members who don't want to abandon their normal suppliers have to in some capacity just to keep up.

Ron Levene, former president and CEO of Tier Parts Warehouse, says he "truly hopes that (manufacturers) can find their place in the supply chain and be successful. There is too much at risk if they can't fix this positioning. Without them, the typical traditional WD will suffer greatly since they are not prepared to take on many of the functions which will be and are being lost."

Dick Fairbanks, president of Orleans Auto Supply, Inc., says the interest from private equities does show some financial confidence in the business. "It's nice to have leverage, but if our suppliers are not growing and solvent, we are all in tough shape."

Tom Swoboda, chairman and CEO of Ducker, Findlay, Swoboda & Associates, tells us that manufacturers are going to draw a line in the sand somewhere when it comes to pricing. "They have to exist," he says, emphasizing that there also needs to be more than just one or two market players in each product category in order to have a healthy, competitive environment.

Levene says if suppliers continue to struggle, WDs are going to have to learn very quickly how to properly source directly, something many aren't ready for. "This practice will add layers of complexity to the channel and significantly impact the traditional relationships and roles between the manufacturer and distributor."

Sourcing from overseas is a double-edged sword, says Joe Catalano, president and COO of Strauss Discount Auto. "Some (products) are fine. Others are lower quality," and when industry players warranty products of lower quality, it may cost them more in the long run.

But Ted Wise, co-president and COO of O'Reilly Auto Parts, says it's up to the manufacturer "to continue to look for offshore manufacturers that produce a very high quality part at competitive prices."

Lambert says he thinks there may be a time when sourcing parts from China no longer provides a major financial advantage. Gingell notes that time will be in the next three to five years.

"The concern for quality and customer service and logistics to make operations work effectively will cause people to re-evaluate" and we may experience resurgence in U.S. manufacturing, he states.

Creamer thinks the industry needs to be cautious. "As long as the Chinese continue to keep their yuan tied to the dollar and keep stability there, then we are OK. But if they go into a free enterprise system, that may change the ballgame overnight. If there is any ripple in that economic model, we've got problems."

A new adventure for distributors?

Suppliers aren't the only segment going through change. Since 2005, merger and acquisition activity among wholesalers and retailers has been at an all-time high, and some stalwarts have come and gone.

Jon Wyly, executive vice president of Arrow Speed Warehouse, says, "It is particularly noteworthy when a player the size and tenure of Reliable is taken out of the market." Keystone purchased Reliable Automotive in November 2005, just six months after purchasing Blacksmith Distributing, Inc.

In July 2006, Auto-Wares Inc. bought Lee Auto Parts and Certified Automotive of Chicago. Certified was renamed to Auto-Wares Illinois, while the 21 Lee Auto Parts stores have continued to operate under that name. Lee Auto Parts' Phill Porpora is now president of Auto-Wares Illinois. He tells us that when Lee Auto Parts/Certified decided to sell, they wanted a company that could take them to the next level in the Illinois area, and Auto-Wares afforded them that opportunity. "We were able to cash out on our years of hard work, plus I get to stay on working with my loyal employees and hopefully continue to build our business using the new tools from Auto-Wares. I would say that's a win for all of us."

Uni-Select also expanded through M&A activity. In June 2006, it purchased Red Rooster Auto Stores, a six-store group in Minnesota. Last November, it made another major acquisition with the purchase of Tier Parts Warehouse, an operator of one warehouse and 16 stores run by Levene. "Our company had been in business for 85 years and it was a huge decision to exit, but we believe it was the correct one for our company, our employees and our future," says Levene.

Lambert believes that we will continue to see more industry players exit. "A lot of guys tell me, 'I'm not in the parts business. I'm in the real estate business.'" He is worried about who will take over as these executives make their departures.

The reasons Levene decided to sell were macroeconomic. "I had to measure if I was better off making an investment in the business or choosing to exit at this time." When asked what's next, Levene says he is looking forward to a new adventure, be it in aftermarket consulting or down another path.

A turning point?

Last year, some momentum gathered around the proposed Right to Repair Act. In May, the House Commerce, Trade and Consumer Protection Subcommittee voted in favor of the legislation in an open mark-up session on Capitol Hill, but the year passed without a legislative agreement. Proponents, who plan to reintroduce the bill this year, will need to provide hard stats on repair accessibility issues in an effort to garner the support the bill needs in Congress.

Porpora, among others, is adamant about getting the Right to Repair Bill passed because techs need the information necessary to fix today's vehicles. "The ASA deal will not work!" he purports.

Diagnostics are at the core of the industry's future repair market and a great growth opportunity, says Catalano, but only if the appropriate repair data is provided.

Wise fully believes that until there is a legislative agreement, we'll continue to see loss at the technician level. Today's sophisticated shops are managing on their own, but the average independent doesn't always have the ability to access the "data or right tool to make that repair," says Wise. "It hurts them in that it limits the amount of work they get."

Continually sending vehicles to the dealer for certain repairs will break down the relationship that many independent shops have built with their customers, which is problematic because many motorists already have the perception that the dealer is the better choice.

Andy Fiffick, owner and CEO of Rad Air Service Centers Inc., says today's independent techs are the more savvy of the two, partially because they are working on all makes and models and have to be extremely creative sometimes at securing pertinent repair data. Dealers "never become great diagnostic techs" because they can use the shop as a training ground. Plus, if they can't figure out how to fix something, they can call the factory, Fiffick suggests. Dealers have so many resources that today's independents don't.

Now, add extended warranties and better constructed vehicles on top of Right to Repair issues, and it "doesn't bode too well for the aftermarket," says Swoboda.

"Longer factory warranties are no doubt going to play into my end of the business," Fiffick adds. "They are going to keep the vehicles in the dealership that much longer, and it gives me fewer chances of getting my hands on the car."

Fiffick believes the only sector offering growth for shops is preventive maintenance. "Repairs are going by the wayside."

Ken Walker, president and CEO of Meineke Car Care Centers, agrees, adding that many of today's consumers are receptive to listening to what should be done to their vehicles. But it may be difficult to perform certain routines if shops can't access the proper data.

As part of a Meineke training program, Walker had his brakes fixed after the sensor light came on. When he picked up his vehicle, the repair was perfect but the light was still on. The techs couldn't turn off the sensor. "They called every available source. They called the dealer, and they said they weren't allowed to share that information." Walker had to call a friend who worked at a dealership to find out how to turn it off. "If they won't share that level of information, then we have a problem. How much confidence does a consumer have that pays $600 for a repair on brakes and the sensor light is on?"

Walker says many of his franchisees admit to buying parts from dealers on occasion just to have an ongoing relationship. That way, they can call and obtain repair information when they need it.

Developing new plotlines

Having solid repair data and pushing preventive maintenance certainly will enable the aftermarket to steadily grow, but traditional parts distributors are always looking for new revenue streams, and tapping into the specialty parts market might be an answer.

"The specialty parts segment is strong and growing, and as a specialty WD, I continue to hear about a lot of interest on the traditional side," says Wyly at Arrow Speed Warehouse.

He explains that the specialty parts market really has been divided into two key sectors — truck and performance, with the tuner category "melding" into the performance category.

Wise says it makes sense for traditional distributors to get involved in the specialty parts market because they overlap nicely. "I think that most traditional WDs will continue to look at partnerships with specialty warehouses," because they don't have to buy and stock inventory themselves.

But Levene wonders if it will get more "difficult to keep competitive bidding in this area of supply" due to Keystone's growth and stature. Additionally, he says, there will be competition from "mega e-commerce platforms," because consumers can take the time to shop online and they don't need their parts the same day.

Wyly points out the specialty market is growing at twice the annual rate compared to the traditional side, and "the DIY guy that's walking into a parts store today to buy starters, batteries and oil is also a great candidate to accessorize or performance-enhance his vehicle."

It's true that traditional distributors need to be educated on the specialty side, but it no longer requires as much know-how. "Advancements being made in electronic catalog data and the top quality print catalogs available today" have made it easier to enter the market, Wyly explains.

Wise thinks there is another category that needs the industry's attention. "It seems like there is a hole" in import parts coverage and distribution. In the past, the industry somehow got by, but now "a lot of that business is going back to the true import specialist."

Gingell agrees. He says the industry really needs to step back and look at the vehicle mix. "We are seeing more import names and there is also a rebalancing of the SUV market." The aftermarket has to be prepared to service these vehicles.

Blurring the story lines

With intense consolidation and competition, the landscape of the aftermarket is ultimately changing. More jobbers are increasing their coverage and becoming two-steppers. More WDs have their own stores and are selling directly to repair shops. And manufacturers are looking at ways to get products in the market without going through traditional channels. So, is the three-step model a thing of the past?

Creamer says he believes the industry has seen gradual erosion starting at the technician level. "Big installers buy like a jobber did five years ago. We've taken one layer out of the distribution system to satisfy the demands on margin."

Catalano says the two-stepper is getting more powerful in the jobber market than "the traditional WD to jobber and jobber to installer" channels. "They can offer a better price and, in many cases, have a better in-depth assortment."

But Wise believes it depends on one's geographic location. He explains that rural markets still have three-step distribution, but "in metro markets, where you've got national retailers or company-owned warehouse stores, it's really a two-step market. If a jobber does well, it's because they've carved a niche out or service the heck out of their installers and live on thin margins."

Porpora advises jobbers to latch on to a larger distributor who's willing to promote their business and provide them with marketing support. If they don't, they may die. Many, he points out, already have.

Swoboda says the line between WD and jobber will continue to blur because of the profit squeeze. "The individual owner needs to go where he has to (in order to) make a living and could care less about crossing lines that were traditionally not crossed in the past."

Fairbanks believes there is little delineation between a WD and a jobber. "Both terms are obsolete. We buy parts for the lowest possible total costs and sell them at the highest possible price." And most channel partners will buy and sell to whomever they can to make that happen.