Smart Designs Smart Decisions

You have to look no further than the cash register to understand the attraction of going retail.

Where commercial sales jimmy down every margin, need you to deliver the parts, and then make you wait three months for your money, the consumer is often motivated by impulse, and pays you right away.

The proof of the impact that this can have on top-line revenues is clear in industry statistics.

According to the Motor Equipment Manufacturers Association’s Financial Services Group (MFSG) wholesale/retail report, those auto parts distribution networks partially or wholly ensconced in the retail world enjoyed higher margins than their counterparts who focused more or less exclusively on wholesale trade.

For example, Genuine Parts Co., the largest NAPA member in the U.S. and parent of NAPA Canada, reported a 33.3% gross margin at the end of 2004. In contrast, AutoZone reported a gross margin of 48.4%. Further to the positive side, Genuine Parts and AutoZone reported vastly different payables to inventory numbers of 39% and 80% respectively. (For the record, both Canadian Tire and Uni-Select were included in the report, but neither reported gross margin or operating expenses, though Canadian Tire did report an admirable payables ratio of 100%.)

While these top-line gross margin numbers are obviously an attraction at one level, looking at reported operating expense percentages provides a slightly more sober analysis. While the more traditional NAPA network paid out an average of 26.6% in operating revenues, the much more consumer-focused AutoZone was at 32.7%.

In both cases, millions of dollars are at stake, and even for individual businesses there are some hard realities to face for the traditional auto parts wholesaler. It may be lucrative to be in the retail market, but it is not without risks.

“It’s another industry and they don’t know it,” says John Williams, a senior consultant at J.C. Williams, a leading retail consulting firm with offices in Toronto and Chicago. “Robert Campeau said, ‘I know about retailing, I shop.’ Then he ended up with the biggest bankruptcy in North America.”

Campeau, a Canadian real estate magnate, borrowed $11 billion U.S. from Wall Street in the late 1990s to acquire Allied Stores and Federated Department Stores, both successful and relatively debt-free retail conglomerates in the U.S. Two years later, Allied, Federated, and Campeau Corporation were plunged into Chapter 11 receivership.

That is obviously not the kind of outcome that anyone is looking for when they decide to move to a more retail focus, but it does serve as a lesson that going retail isn’t a shoo-in.

“It is a very complex business, and it is not consistently profitable. You have to manage it very well for it to be profitable,” says Williams.

He understands the lure of the retail dollar, but says that there are some key differences in how to approach the market. For one, he says, you have to understand that your market is no longer the customary 20 key garage customers and 200 others. You have to realize that you’ll be working to communicate with thousands of customers.

“In retail you have to have a whole different communication strategy,” says Williams. But it’s not all bad news.

“One of the neat things is that you probably don’t need a whole new inventory. You are going to have to add additional lines,” depending on brands, “and it is probably at a higher margin, but you have to get these other things right, too.”

For many jobbers, it requires that they walk a fine line between pursuing the retail customer and retaining the loyalty of their trade customers.

Some jobbers have been staying totally clear of retail as a result; others have chosen to pursue it, albeit carefully.

“I look back at 1957, when our company started as a single jobber and 95% of our business was to the installer,” reported David O’Reilly, CEO of O’Reilly Auto Parts, at the recent Global Automotive Aftermarket Symposium in Chicago. O’Reilly, which went public in 1993, operates 1,200 stores in 18 states, and had revenues in 2004 of $1.7 billion U.S. This model is close to what many in the aftermarket are going for. In 2004 it registered a 43.5% gross margin, operating expenses at 32.6%, and a payables to inventory number of 38.5%.

“Over the years we gradually increased our retail percentage.” Currently, it puts about 50% of its business in the retail category.

“In the early ’80s,” said O’Reilly, “we recognized that we were really dealing with two different businesses. There was one location and one inventory, but the commonality stops there.”

Having the right brands on the shelf is not a given, of course. The number-one choice of your professional technicians may not, in fact, be the number-one retail draw. The Fram brand, for example, regularly comes up as the number-one recognizable brand in consumer impressions research, but it does not have such a dominant share within the trade.

However, Bob McPherson, automotive analyst with the NPD Group, which compiles statistics on retailing, says that one can get caught up with too much focus on brand.

“The importance of brand is really declining and is being replaced by the importance of the outlet,” he says.

“Traditional DIY products, appearance, motor oil”–where TV budgets seem to determine market share–“are still brand-driven, but hard parts differ.”

For those products that aren’t subject to such fervent consumer demand, such as spark plugs and ride control, it becomes about the outlet, the brand of the store as opposed to the brand of the products, if you will. “And it’s about the store’s ability to deal with the customer. If you can’t build loyalty with your customers, you will lose them. I’m not going to say that brand is insignificant, but there is no one factor that drives the purchase.”

“It is the quality of customer service and the shopping experience,” says McPherson.

Making the most of that requires that the right decisions be made.

Dennis Staples, sales manager at Raytheon’s, a leading supplier of store design and fixture services, says it is important at the outset to recognize what a business is getting into.

“I see it as being two completely separate entities. You have your traditional jobber, who usually has 10 lbs. of potatoes in a five-pound sack.

“And then there is the automotive aftermarket customer who sells only a fraction of his auto parts to the trade. The aftermarket guys tend to be younger, and because they are, they are used to modern trends in retailing. Some of the older businesses are happy with what they are doing; they don’t like change. They don’t see the need to spend money to renovate their store.”

Staples says that it can be tough to convince a traditional jobber to spend approximately $10 a square foot to build a showroom that works.

“There are reasons. It disrupts business and it is a considerable expenditure that they don’t think they are going to recoup. And most think that it will cost more than it does.”

Yet the upside can be considerable. Staples says that most stores see a sales increase of 25% to 40% following a renovation.

“And the consumer is looking for stuff that may not be what the traditional guy is used to selling. He may want sunshades, and beds for a pickup. In today’s vehicles there is not the same turnover in traditional parts as there used to be. So, to fill the void in margins and turns in inventory, a lot of guys are selling the aftermarket [accessory] products.”

These can be anything from pickup truck accessories to sport compact modifications.

Making the environment adhere to current trends does require a rethink, though.

“What comes to mind immediately is changing the counter. People are bringing the counter into the middle of the store. They’re not fetching parts like they used to, so they don’t need to have access to the stock room.

“And lots of colours,” says Staples. “A lot of the automotive guys are stuck on the red and white and checkerboard floors and oranges.

“We’re doing stuff with silvers and lime greens and bright blues, things that you would see in Best Buy. We’re adding lots of track lighting, trusses coming down from the ceiling.”

Checkerboard tiles have given way to etched concrete, almond gondolas to steel racks.

In fact the whole racing theme has faded.

“There are lots of NASCAR people, but black and white checks get old quickly. They don’t really have excitement.

“You can only show people the same thing for so long. People are used to a different level of retailing. You go into a Disney store or a big box, you don’t see checkerboard. You know how many people buy their automotive supplies at Wal-Mart? It is staggering.

“The people who used to work on their cars were a select group. The checkerboard was synonymous with racing and working on your car. That division doesn’t exist anymore.”

There are other reasons for changing design ideas, not the least of which is the fact that you want the products, not the design of the floor, to be a showroom’s boldest statement.

“You want something that’s neutral. Then you can put more energy into your lighting and your fixtures.

“Most people who do a black and white floor do it for themselves.”

Even once you have settled on a showroom and an inventory, the work must continue to communicate to the market. As mentioned, this is a different assignment than generally faces the trade marketing approach, where you can literally sell your services face to face and where product knowledge is king.

“To really work, it probably requires a different type of location in the heart of your market and in a very visible location,” says Williams. “Auto parts dealers can be out of the way. That’s number one. Number two is you have a different type of sales associate. They have to be very customer-friendly. It also requires entirely different hours. You should probably be open seven days a week and evenings.

“The guy is coming off a shift at 4:30 and he expects you to be open at 9 p.m. and on Sunday when he is tinkering with his car.”

How much will it cost? “It depends how deep your pockets are, and if you can afford to take time. It depends how aggressive you want to be. It takes at least a year and probably two– a year to learn what you are doing and a year to get it right.”

Furthermore, says Williams, don’t make the mistake of assuming that the wholesale business has taught you much about retailing.

“It is a serious enterprise. Spend the money. Get the advice you need. Get the right IT systems. Get all that in place and spend the money. Take at least a year’s normal promotion and marketing budget and spend it on the opening and spend another year’s on the normal promotion.”

The idea is to leave as little to chance as possible. You don’t want to find yourself with doubts down the road.

“Did it fail because it was a bad idea,” Williams wonders aloud, “or did it fail because I didn’t market it?”