Cover Story: Inside the White Box

Another cycle of white box parts promotion and discussion has hit the industry again, only this time there are many more concerns than there were 10 years ago.

Many jobbers say that there is a place for white box parts in the market. The example most often referred to is the 15 year old Chev that needs repair, and obviously the price of the repair on this vehicle is the issue.

Jobbers are also saying that certain white box parts are made better today than they were 10 years ago, considering the North American companies that have been investing millions of dollars into offshore companies.

The jobber feels that there is now a good marriage of reasonable quality with reasonable price in the white box package.

Although these are the common examples given to explain the product, there are many areas where that explanation doesn’t quite pass the smell test.

CONSIDER THE FOLLOWING REALITIES.

There are jobbers out there promoting white box first through flyers to their customer base, emphasizing price of the product. These jobbers promote price first since most of their customers run their business based on price first. The problem with most of these jobbers’ customers is that they expect the hard goods and parts profit to carry their shop’s bottom line.

These promotions are emphasized to shops of, to be polite, lesser professionalism in terms of the shop’s appearance, and to service providers who have no professional business structure or future business plan and vision. These shops live for today and frequently go to market with lower labor rates.

Many of the white-box-first jobbers also go to market with the attitude that they don’t care what they sell as long as they are making money. What is the real message that these jobbers are saying about our industry? That they really don’t give a damn about this industry?

Consider also that many used car lot owners instruct the garage owner to install white box parts on the used car, or the end of lease vehicle being repaired and readied for the next sale, and that there are people who own a $40,000 light truck or a $50,000 motor home who insist on paying no more than $20 for pads.

Then consider that it was really the jobber who made the decision that white box was okay to stock and sell to the marketplace.

It is very possible that the jobber, or the service provider, hasn’t considered the entire ramifications of their decisions.

It is perhaps time to step back and reassess what has to be considered here in order to ensure a secure financial future for the jobber and the service provider. Before any change can be effected, there are three groups of people who have to be reeducated, because it seems all three have not given thought to the long-term consequences of their decisions.

The first and most important person to be reeducated and informed is the consumer.

The image of our overall industry in much of the public’s eye seems to be that of an industry repairing cars by unprofessional, not so trustworthy people. As we know, in the better shops, nothing could be further from the truth. The average consumer has not been properly educated, and does not currently understand the technology and durability of today’s cars.

Even a 1994 Chev is substantially different than a 1984 Chev, yet the purchase process or mindset is the same as it was in 1984: get the cheapest priced part for this vehicle because a part is a part is a part. The perception seems to be that the consumer believes price is all you need to worry about when repairing or maintaining the vehicle. The consumer does not understand the importance of seeking out the right quality part for their maintenance, or repair. We lack good, up-to-date, educational material to be handed out to the consumer explaining the facts and realities today between quality parts and white-box parts, and what it means for the consumer.

By Bob Greenwood and Andrew Ross

The reasons for this extreme shortage of educational literature and material are starting to surface with explanations at every level. The manufacturers have been beaten up so much with pricing by the WDs that there are no extra resources left. The WDs have been beaten up on price by their jobbers, leaving them bone dry with no extra resources to allocate to address the education topic. And the jobber is constantly bombarded about the necessity of low pricing from the majority of his service provider customers, leaving him with little or no financial resources to pump into his local marketplace.

These all sound like very reasonable explanations, but the scary reality is the perception that each level doesn’t want to spend their own money educating the competition’s customers. As this is perhaps the real reason, where does the industry start? An additional contributor is the fact that everyone at every level is in this race to the bottom in pricing, and seems determined that we operate as a poor cousin.

Consider that it may be a good time for an attitude adjustment, and to start running profit oriented businesses, instead of just sales driven businesses, at every level of our industry. Every level of the industry must take responsibility to ensure the consumer is educated if the aftermarket is to grow and sustain itself.

The second person to be reeducated is the average service provider, who suffers from a lack of business know-how and professional business savvy.

The service provider must start to take some responsibility here. The blunt questions that everyone in our industry must raise and discuss with the service providers are:

1. What is the service provider doing today to truly educate the consumer about today’s vehicle realities and their need for quality parts?

2. Is the service provider giving the consumer all the factual comparisons required, other than price, of a white box part compared to a brand name part so the consumer can make an informed decision?

3. Is the service provider buying white box and then turning around and selling them at OE prices?

4. Is the service provider selling white box so he can show a discount on the labor to look good in front of the customer?

5. When there is a warranty claim on the white box part, is the service provider hiding the replaced part cost in other work being performed at the same time?

These are real-world examples and they raise ethical questions; they play an important role in forming society’s opinions and perceptions of our industry. In today’s knowledge-based businesses, this just is not a realistic way to conduct day-to-day affairs, and it is definitely not the equation to ensure the service provider’s shop’s future financial success.

Marketing a low labor rate with a white box part as the common practice of running a shop, and perceiving that the part profit is all that one has to worry about in the success of the shop, proves that the installer is totally uneducated to required business practices that will ensure a shop’s profitability, growth, and prosperity.

A service provider must learn to become focused on labor productivity rather than just parts profitability to drive his bottom line. A simple example can be made by measuring the average labor hours produced per work order at the right labor rate.

If a shop averages 1.3 labor hours per work-order (current Ontario average) and is charging a low $40 per hour labor, then there has been $52 worth of labor produced ($40 X 1.3). This independent service provider would currently be averaging a 0.80 to 1 ratio of labor to parts. Therefore, it is safe to say that $62.40 worth of parts were sold also on that work-order. If the parts were white-box parts and even at a 60% gross profit on the parts, (a $24.96 cost) then $37.44 gross profit would be produced from the parts. The total labor and parts gross profit on the work-order would be $89.44. ($52 + $37.44 = $89.44)

If the shop moved to the necessary $72 labor rate (the minimum required today in Ontario), and still produced 1.3 labor hours on the work order, but installed a higher quality part for the customer, then the numbe
rs would line up like this: $72 X 1.3 hours = $93.60. The quality parts coming in at even a 50% higher cost price than white-box ($24.96 X 1.50 = $37.44), and being sold for the same price would produce only a 28% return, which we all know is low, or $14.56 gross profit ($52 – $37.44 = $14.56). Now the total gross profit on the work-order is $93.60 + $14.56 = $108.16.

The difference in gross profit made between the two work orders is a very minimum of $108.16 – $89.44 = $18.72. If the shop was producing an average of 290 work orders per month, then the additional gross profit made would be $5,428 per month, or $65,136 per year.

The higher labor rate would certainly contribute towards hiring better technicians, and maintaining high quality training. It allows the owner to keep his/her best technicians by paying them properly. It allows for the right equipment to be installed in the shop. It allows for management to earn more for themselves, to enjoy a career instead of buying themselves a job. As long as the sales do not go on the receivable list, the shop can pay its bills in full each month. Those are excellent benefits.

The better quality part gives the client a better return on their vehicle investment because quality parts perform better and last longer than white-box parts. With substantially fewer comebacks with quality parts, shop efficiency increases, the service provider and client relationship is enhanced, providing the atmosphere to create a trust relationship. Trust leads to more sustainable business. These are excellent benefits. A shop that runs on white box mentality doesn’t enjoy these perks.

Buying white box and selling it at OE pricing may be perceived as creating a short-term financial benefit, but in reality it has a long-term negative impact. Quite frankly, these shops are ripping people off. Credibility is lost with the consumer, relationships are not built with a quality client base, and the shop ends up with a price shopper customer base. With a price shopper customer base that includes used car lots, the owner just works hard turning dollar over for dollar (creating shop activity only: “We’re so busy”), cannot pay his bills in full each month, has a low-end, dirty, poorly equipped facility, and fails to enjoy the finer things in life. He has bought a job. Hard goods in the service provider’s business do not build a professional bottom line; the knowledge and labor side of the business does.

The third person in the equation is the jobber.

Consider that by offering quality parts with business value added to your products, you send the correct, and appropriate, message for today’s business climate, a message that builds profitability and not just activity for the jobber business.

Here is a simple example. If a jobber with annual sales of $1,000,000 operating at a 30% margin, increased his margin by 5% across the board, and allowed for a 10% drop ($100,000) in sales by saying good-bye to the cherry picker customers, what would the simple outcome be?

Old Sales: $1,000,000 times 30% = $300,000 in gross profit.

New Sales: $900,000 times 35% = $315,000 in gross profit.

(This does not even include any savings from reduced white box inventory investment.)

If the jobber re-invested half of the increase ($7,500) back into business value for selected customers, do you not think that the enhanced relationship would increase the volume from those customers to the jobber business? Do you not think by taking the time to work with those selected customers, the volume would not come back up to $1,000,000, or higher, and at the higher margin? Selling more to fewer customers, with value, increases jobber business efficiency and profitability. Math doesn’t lie. Selling quality parts with business value added in helps everyone win.

Is it really worth it for the jobber to take the white box route as a policy for the business in terms of sustaining the jobber’s business value on the open market? When one sells a jobber business today, you are not only selling your inventory and sales volume, you are now also selling your customer base that buys that volume. Well, looking at your customer base today and based on the way they run their business, how do they approach today’s industry challenges, concerns and realities? will your customers be here in five years’ time? If 50% of them are a “No” or in a gray zone area, what have you got to sell?

Opinion versus Fact

Every person within our industry has an opinion on white box parts. Ultimately, each of us, at every level of this industry, answers to only one person, and that one person is the final retail consumer paying for the maintenance or repair of their vehicle.

To build trust, the end consumer must be properly informed, and served with the highest quality possible at all times. It does not pay to cut corners that take away quality, no matter what you’re doing. Those companies that wish to take the lower road on the quality issue as a policy of their business in this industry will pay a price reflecting no ROI (just activity), a lower shareholder value, or the ultimate: bankruptcy. Yes, the choice is theirs, but in the end, all of us pay the price for their decisions and actions.

For the individual business, it can affect the dollar profit they bring home and the niche within their market that they fill–high or low end. For the aftermarket as a whole, the growing reliance on entry level product, whatever the customer is charged, can lead to less customer satisfaction with the independent repair facility and lower their confidence in their vehicle, which could lead them to opt to buy a new one.

If that happens, the aftermarket loses a customer for many years, maybe forever.