Wednesday, March 4, 2009

The Future of OEM-Dealer Business Model for Wholesaling Mechanical Parts to Independent

Over the last several weeks we have focused on ways OEMs and their dealers can improve their service business, service retention, as well as customer satisfaction and loyalty – even in the face of a weakening economy and declining consumer confidence. Let’s talk about the “dark side” – the driving factors behind why OEMs and dealers will struggle to sell significantly more parts until they have figured out how to penetrate the largest untapped growth market in the aftersales parts industry: the market for wholesale mechanical and maintenance parts. The answer is quite simple and one I think we already know: OEMs need a game-changing approach for wholesaling parts to independent repair facilities.

Let’s start with some facts. Based on the latest AIAA data, the market for mechanical and maintenance parts outside the dealer service shop is estimated to be over $60 billion (at wholesale prices), which is HUGE. OEMs and dealers maintain only a fractional share of this market – maybe 10%, but probably much less. This means if dealers could grow their already miniscule wholesale mechanical part sales by 25% (2.5 points of share) this would be worth an incremental $1.5 billion in part sales.

The problem, however, is that many dealers are simply neither equipped nor engaged in a way to support the requirements of independent repair facility business owners – but more on this later.

Why do we sit idle while the IAM continues to grow stronger (and the numbers don’t lie)? Part sales for many OEMs are in steady decline, or have been stagnant at best, while the Big 3 auto parts companies (O-Reilly, AutoZone, and Advance Auto) have racked up their greatest revenue and earnings performance years. The stock prices for 2 of these 3 companies hit 52 week highs recently, even as stocks in general (and auto stocks in particular) were tanking. Wall Street rewarded these companies because their businesses provide a countercyclical sales safety net and for their strategies of improving distribution, increasing store count in key areas and closing poor performing locations, providing higher levels of customer service, improving inventory levels, and others. Their stock price increases have been staggering, exceeding 50% since the November 2008 market low. These increases have pushed the market caps for some of these companies beyond those of some of the OEMs that build the vehicles that consume their parts. The fact is that their business models really aren’t that complex. These aftermarket companies are simply experiencing part sales growth based on the huge number of vehicles sold over the last 5-7 years, as these vehicles enter their prime parts consumption years.

The Big 3 auto parts companies have capitalized on this growth opportunity by consistently providing their repair shop customers with three basic fundamental services: 1) have the part when the repair shop needs it, 2) get the part to the shop within 1 hour, and 3) help the shop’s technicians when they have problems repairing vehicles. These three simple things increase shop productivity and profits, while generating high customer satisfaction – something any customer who buys tens of thousands of dollars in parts from you every year would expect.

The fundamental dilemma for OEMs is how to meet the installer needs using their existing dealer channel. Although there are dealers who have been successful at wholesaling parts, an average dealer lacks the capabilities and mindset to support the independent repair shops and grow the business. This creates a classic Catch-22. These dealers don’t sell much to IRFs because the IRFs simply cannot rely on the dealer to support their business. The reason these dealers cannot support the IRFs business is because, on average, they sell only $25k-$30k of mechanical parts each month to IRFs, which doesn’t generate enough revenue or profit necessary to support the levels of service required by IRFs – support being trucks, drivers, full-time support staff, sales people, etc. But the reason dealers don’t have the profits is that they don’t provide the service levels – you get the point.

A typical installer encounter with the dealer goes something like this, “Hello this is Joe over at ABC auto and I need to order some parts”, “ah, ok can you hold….. (5 minutes later), you want to order some parts?” “Yes I would” Joe replies calmly because he’s gone through this same routine over and over again with dealers. As Joe rattles off his list of parts the dealer tells him what he can and can’t fill (dealers can typically fill only a portion of what Joe wants “today” because the dealer doesn’t stock the right parts for older vehicles). Then the dealer tells Joe he can get Joe the other parts to him “sometime today.” And for this level of service the IRF gets to pay a premium price? The sad thing is that these are the high quality parts with which Joe wants to service his customers’ vehicles. So, do we honestly wonder why we can’t capture more part sales? God forbid Joe calls back and needs technical advice! No successful businessman would rely on a partner who places the success of his business in jeopardy.

In an effort to help dealers overcome their weaknesses and increase wholesale part sales many successful OEMs are implementing targeted programs which motivate dealers with financial support and non-financial support. Financial support includes such things as incentives on parts sales growth. Non-financial support includes expert training and advice on how to operate a mechanical parts business in their dealership, as well as targeted marketing. For select OEMs, these programs have been instrumental in changing dealer behavior and growing the business.

But the efficacy of these programs is really dependent on sustained dealer engagement in the wholesale channel. To be successful, dealers have to think and behave like parts retailers, providing high service levels and developing relationship with installers. At the same time, OEMs and dealers need field sales support to continuously monitor and promote dealer engagement in wholesale. All this requires investment in labor, capital, and, most importantly, focus and commitment.

By the way, programs that solely focus on giving wholesale comp, with no strings attached, operate on the wrong criteria. The issue that IRFs have – despite what your dealers have been telling you – is not with the price, but with the service levels! Wholesale comp does nothing to address that, unless dealers are required to invest in providing higher levels of service to grow their business. So, most wholesale comp-only systems do not address the antiquated dealers’ low-service business model that has eroded installer satisfaction and trust in doing business with them.

The fact is that many OEM dealers are not engaged in going after the wholesale mechanical business because it requires commitment and investment. Only the committed dealers can survive this. Some OEMs have taken the right approach and successfully focused their efforts on helping these engaged dealers. But to really catapult and grow the business beyond current levels (i.e. change the game), OEMs need to address dealer capability gaps as a broader group.

Interestingly enough, all OEMs and dealers face very similar challenges in the wholesale channel. As such, can OEMs leverage their economies of scale and collectively fill these capability gaps? We think they can and more so in today’s economic environment.

The Time Is Right to Capitalize on the Mechanical Wholesale Opportunity; but OEMs Must Collaborate to Compete. It boils down to these four things:

  1. Realize that fragmentation is costly and inefficient and that fragmented industries must often consolidate to compete. Is there any reason why we should have different brand dealers maintaining redundant asset (e.g., trucks, drivers, support staff, sales people, accounting staff, etc.) servicing the same IRF customers?

  2. When in Rome…you simply need to copy the core strategies of successful aftermarket companies. AutoZone, Advance Auto, NAPA, O-Reilly, and others rely on having local warehouses (part stores) that stock the fastest moving 30k or so part numbers to provide high order fill and deliver these parts to IRFs within an hour. They use IT systems to integrate their respective companies with IRFs to make locating and ordering parts easy.

  3. Share “experts” to support customer service and provide repair advice. OEMs need to act like aftermarket companies and realize that customer relationships and real-time service builds loyalty. They need to provide IRFs the expert advice of the most veteran parts counter person. Give IRF technicians instantaneous access to a centralized part and vehicle repair information portal that would answer their questions in a proficient and professional manner – a common OEM support center.

  4. Build relationships one at a time through one-on-one sales support with IRFs. OEMs need to have field sales representation, just like the aftermarket. This sales force builds relationships by calling on installers, on behalf of every OEM dealer, and assisting them with improving their businesses.

With these basic elements of collaboration (warehousing, logistics, support staff, tech support, IT integration, and sales support) OEMs and dealers can greatly enhance their ability to penetrate their biggest potential market for growth. Collaboration will allow OEMs and their dealers to provide substantially higher levels of service – the basic element of every effective mechanical wholesale business model – at lower costs. This is the future of OEM wholesale mechanical parts programs.

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