"There are solid unit trends for the market," notes David Solomon, co-CEO of Lazard Middle Market. "Fleet size is growing, cars are getting older and mileage is going up. Plus there are a number of things affecting manufacturing and distribution, such as more overseas manufacturing, rising costs of raw materials and the demand for OEM parts."
Solomon points to the improved quality of parts, which has led to parts lasting longer and caused shops like Midas Muffler to offer more diverse services.
"It's the efficiencies of scale: more purchasing power, better systems in tracking and distributing, the ability to source private-label parts," he explains.
Tim Odom, president of The AAM Group, notes that purchasing groups keep distributors competitive. "Rather than raising prices and decreasing competition, groups provide services and programs that are necessary to maintain our place in a competitive market," he adds. "I have heard it said several times: 'Without AAM, we would not be able to compete.'"
The role of online ordering
Odom says the Internet is a significant factor in today's competitive market.
"Many Web-based sellers have low-cost/low-service operations. Others have yet to fully understand the costs of selling online and are selling below their delivered cost," he laments. "I recently conducted a study of eBay sales numbers in aftermarket accessories, and saw that many sellers post items with the assumption they will make one sale per listing, when the average item requires six listings per sale. And many manufacturers sell directly to retailers, which fuels low Web pricing.
"Web pricing affects jobbers and retailers," Odom continues. "Consumers today know more about the product, but they also have a perception as to what the price should be. Often this is based on eBay or other Web retailers. When jobbers are faced with this price pressure, they will pressure their WD for lower costs, too."
Solomon points to another online factor in today's market: real-time view to inventory.
"The Web makes established relationships more efficient," he says. "Installers who order parts regularly need them within an hour or two. Finding out which local warehouse has the part will save labor time. And if a particular part is not available, some programs can suggest other parts for the job."
View of the future
Solomon says that with AutoZone, Advance Auto Parts and O'Reilly Automotive overlapping geographically, prices will remain competitive in 2008. This will be felt more in the retail market, where consumers are more price-driven — installers tend to focus on service and will pay a premium to get the part more quickly. Still, consumers are starting to do more price/benefits analysis over brand loyalty, he says, and to value quality over price. This is where private label comes in — higher margins for parts may be the answer to profitability for several distributors in the coming months.
