Winning the Consumer Retaining the Trade

Retailing has always been a difficult topic for the distribution segment of the automotive aftermarket. So much so, it is often avoided entirely. But the downward pressure on profitability that the wholesale trade has suffered makes it critical to seriously consider it.

A quick glance at the most recent Motor Equipment Manufacturers Association’s financial report tells a compelling story.

The association’s Wholesale/Retail Report illustrates the impact that a retail approach can have on an organization’s bottom line. The data, based on U.S. responses, states that Genuine Parts, operating NAPA stores, reported gross margin of 32.7% in 2003. Compared to retail chain AutoZone’s reported average of 48.7%, the contrast between wholesale margins and retail margins becomes clear. Of course there are higher operating costs to running retail, about 8% in favour of primarily wholesale operations, and AutoZone has the benefit of a corporate store structure, but the picture is clear: retail boosts margin. Even with a more balanced mix, at an organization such as the 1,000-store O’Reilly chain — which sells both wholesale and retail — gross margins reported are in the 42% range.

Certainly this is U.S. data, but retailing is not the sole preserve of traditional aftermarket players south of the border. Lordco Auto Parts, currently operating some 75 stores in British Columbia, has become an example for many in the Canadian aftermarket of an organization that successfully balances the wholesale and retail approaches.

They are, however, not the only one to have made the foray.

Murray Mackey is CEO of the Auto Part Counter business currently being expanded in Wal-Mart stores. As the longtime owner of Albion Auto Parts in Mississauga, Ont. — recently sold — he says that he believes every jobber should consider the benefits of retail in concert with their wholesale operations.

“As a matter of fact it worked so well, they complemented each other,” says Mackey, referring to the way that the separate Albion Auto Parts Uni-Select affiliated store and the Parts Counter operations fed off each other.

“Our customers call there after 5:30 and on Saturdays,” continues Mackey. Because the retail operation is open the longer hours, it provided an opportunity for existing trade customers to get some parts outside of the wholesale operation’s hours. While such customers did receive additional discounts over the customary retail business, the location does not offer business on account. And Mackey says that, on the flip side, he was even able to put a list of service providers together for retail customers, service providers who were willing to install parts purchased at the retail location.

“We never had any problems with the balancing act. Some shops don’t want to get involved with parts from outside; for other ones a dollar is a dollar.”

Such forays into retailing are often done using gut feel and experience combined with agile decision-making. It is an approach that is anathema to the big retailers. They all look for a way to plan for success.

That desire to be surer of successful retail approaches has bred a desire to share data, and a way to use it. This has come to be known by the familiar term “category management,” where the retailer nominates inside personnel or an individual vendor to manage a given category — such as motor oil — to maximum profit across all brands being offered. Born in the packaged food industry, this approach has become gradually more widespread in automotive categories at large retailers such as Wal-Mart, less so in the traditional aftermarket where a subset of category management, enhanced line review, is currently under development.

Robert Morris, manager of supply chain technology at the Automotive Aftermarket Industry Association where the process is being developed, characterizes the strategy as one built on cooperation.

“What it is about is simply collaboration. Two trading partners sit down and agree to terminology, and establish the playing field. Traditionally what is done is the supplier comes in and says ‘Here are our specials.’ Category management says that they should come in with more information and understand what the customer’s needs are.”

Currently the data to do this across the board is largely lacking. Point of sale data is currently available for retail lines, but is lacking for the much broader selection of hard parts that make up the bulk of the traditional aftermarket’s business.

“We’re just starting this. There are myriad issues that we still have to confront. Suppression is a big issue. There are some enigmas you have to work through on the retail programs. On the hard parts, we aren’t making a whole lot of progress. They won’t provide line item detail. This process that we are going through is one step at a time.”

He says that people need to understand how confidentially this information is treated. “What we’re trying to do is what the consumer packaged goods, the grocery industry, went through years ago.”

Having little or no data is something that the Canadian automotive retailing world has become used to. While category managers in the U.S. have the benefit of point-of-sale data collected by the NPD Group, such data is not available from Canadian retailers.

This however, does not mean that NPD lacks initiative, or data, on the market.

“The big difference between data in Canada and data in the U.S. is that we don’t have point-of-sale data,” says Bob McPherson, vice-president of NPD Group Canada and a veteran of the automotive aftermarket. “In Canada we only deal with consumer recall and retailer perception in the industry.” Still, says McPherson, the data does show some interesting trends.

“What you’re seeing is a constant shrinking in the DIY segment, but I think that it is starting to level off. So from the DIY perspective it has shrunk and you are seeing people other than Canadian Tire dominating the Do It For Me business.”

The battle for the remaining DIY business is being fought strenuously between Canadian Tire and Wal-Mart, he says.

“Even if you look at the shrinking market there is still a huge DIY market. So there is a piece of pie for others to get into it and be very successful.”

Even as major retailers promote DIY offerings to pull consumers in, those same consumers can become frustrated with the generally low level of expertise found at those locations. Many don’t know of an alternative.

“If you look at the retail marketplace today, nobody knows who Uni-Select is and a few know who NAPA is,” says McPherson. There is, he says, some serious brand building required.

“If they develop a retail presence, consumers seem to be a little more educated, willing to ask more questions.

“One of the things that I was surprised at is the patience that a lot of retail customers have. There is not that sense of urgency. The retail customer seems to be a lot more willing to wait for parts.”

He does say that the parts and brands that attract the consumer may not be the same as those favoured by the trade. You can’t just take the products you have on your back shelf and put them in the showroom and expect they will draw in customers. In some cases the least popular trade brands are the most popular at retail. It is something that both retailers and traditional wholesalers are finding out.

The AAIA’s Morris says it is an interesting point that, while the traditional jobber network is looking for increased retail, the auto parts retailers are looking to build their wholesale business.

“Who wouldn’t want to be more retail? The traditional jobber has an inventory problem and an accounts receivable problem. But what I see in traditional jobber stores, the front of the counter, is they don’t have planograms or organization. They aren’t thinking that way. It is a question of making it fit, or making it overcrowded, as it usually is.

“It seems like there is an element that you have to add into the retail side that is missing from the wholesale side. Category management helps bridge that gap.”

Mackey recently sold his traditional busin
ess to focus on his Auto Parts Counter venture and still have time left over to enjoy three- and four-day weekends — he has been at it for more than a quarter-century and is looking to scale back. He doesn’t understand why so many jobbers resist the retail approach.

“The big thing is there are no more collections. A sale is a sale. We don’t spend three days a month on collections. That’s a number one concern for jobbers.

“There are some wholesalers that won’t even sell retail. In retail, you get the bigger gross margin and the money’s in the till. Why wouldn’t you want to sell retail?”

I think they’re going to have to look at their business plan. I think they’re going to have to address it. Some of these guys better wake up pretty soon.”