Tuesday, May 19, 2009

The Curious Case of Slumping Sales

(Sorry for the long blog – it was impossible to talk about what’s happening with cruddy parts sales in 800 words or less. Also, we need your help – please fill out the survey and tell us if these are helpful and what content you’d like to see in the future.)

Service parts sales declines have been a curious phenomena. No generalities seem to explain it all. Here’s what we expect**.
  • We expect that construction sales will decline along with equipment operating hours.
  • Ag sales should be stable due to spring plantings.
  • Auto parts sales should decline due to plummeting accessory sales; yet, we would expect some positive sales offsets as the fleet ages and as customers hold on to vehicles longer and invest more in repair and maintenance.
  • We expect Asians and Europeans to do better than the domestics because “import” service retention is higher than Motown’s.
  • We expect the independent aftermarket to grow off this resurgence in vehicle longevity, and we expect it to steal market share from auto dealers. This should be easy to figure out.

But, not everything we expect is actually happening. And, we should be very careful in making decisions based on erroneous simplifications.

First off, the market for Canadian auto parts is very different than the US market – OE parts sales are down a tad there, but there are a lot of moving parts that we do not think about south of the border. Exchange rates play a translation role there, customers are more “European” in behavior than American, and the aftermarket has a very different character. By European, we mean customers are generally more loyal to their dealer throughout the vehicle ownership cycle. The aftermarket is dominated by Canadian Tire, a retailer with a significant automotive focus not found in the US. We do not see a lot of parallels in market-busting solutions as we move from North to South.

The numbers make HE look like it is already in recovery, but it is too early to celebrate. Here’s what’s behind the U-turn in the numbers: HE has different wholesale sales cycles, different programs, and different sectors (Ag, lawn and grounds care, gentlemen farming, corporate farming, construction, and mining), many of which are in a up-spring cycle. Since the IAM competition in HE is much more limited, with obvious strengths in faster-moving wearable parts, all the players in this segment will move up and down with the blue collar GDP. Fast-moving stealth attacks just don’t happen here.

That leaves the car-guys, and what looks like market chaos. Some players in the “Tough Auto” segment have been nose-diving for the past year. “Middle Auto” consists of the long-timer import brands that have been here for decades – they have been least impacted by the recession. The “Growth Auto” includes the brands that have been gaining market share for the past 2 decades – these companies have seen whole goods and parts sales go down an erosive glide path for the past year. In all cases, the parts sales reductions cannot be accounted for by the recent vehicle sales declines. Most of the Market Watch data is non-warranty sales, so, outside of plummeting accessory sales, the trend lines in “feeder stock” for parts sales looks very different than new car sales.

Our first guess of what was happening was that if OEM sales were down, then retail service lane sales must be the same. So, we looked at Repair Order data for dealers in the Middle and Growth auto segments. What we saw reflected the post-October shock and somewhat of a spring recovery. These franchises for the most part did not experience near-death experiences. Instead, close inspection surfaced a “not-problem” – we did not see any sustained retail evidence of a mass exodus away from dealers to the IAM.

The next look was more forensic in nature and we probed Market Watch data. We indexed deltas in 2009 part sales per 5-year UIO for this year vs. last year (the normalizing constants were the averages for each product line across all OEMs, not the averages across all product lines for each OEM). This is pushing it, but somewhat insightful. What did we see? OEMs who were in positive territory were good at wholesale and had viable wholesale strategies – for M&R and Heavy Repair. Next, the longest bars, both good and bad, were generally in Heavy Repair. This seems to be a make or break product segment. However, it only accounts for about 10%-15% of the sales mix. Third, collision parts sales are down fairly consistently across OEMs. We believe that this is due to the severe drop in young vehicles on the road (which are much more likely to use genuine parts for any collision repairs), as well as lower residual values leading to higher use of salvage parts. A consistent trend across OEMs also suggests weather as a factor. What about M&R? Vehicle market share shifts, improved product quality, and longer warranties over the past decade and a half are working against $/UIO growth here. What helps here? Mechanical wholesale strategies; preferably dealer centric – I will get back to this in a few paragraphs.

So, what doesn’t explain recent auto sales declines?

The first bad guess is the Independent Aftermarket (IAM) is cleaning up. AutoZone sales for the most recent quarter were up 6%, but it is mostly from recession-sparked DIY sales. LKQ focuses on collision and is up around 5%, but it is very difficult to figure out how much of growth is due to the Keystone acquisition and how much growth is organic. O’Reillys merged with CSK, and reported a 10% increase in same store sales … while the premier jobber chain, Genuine Parts/NAPA showed a sales decline of 11% in its most recent quarter due to …. Pep Boys, the underdog, which was up 3%, but this includes parts and service. This all sums up to a virtual dog’s breath of strategic direction. Bottom line is that there is not any hard evidence of a significant, sustainable, competitive shift in market share to the IAM.

Hey it’s a recession. More customers who have the capabilities are doing the easy maintenance stuff themselves – so, there is a shift from DIFM (do it for me) to DIY (do it yourself.) This short term trend is accelerated by the ease and availability of getting parts via internet sources. In some cases, this means cheap parts – and these cheap internet parts are displacing IAM sales in the DIY segment. Since dealers generally are not serious players in DIY, this shift is felt the most by the OEM dealer channel.

Other things are at work in the IAM sales numbers. The double-decade market share shift from the domestics to the Asians has made their car parc more attractive to the IAM. Selling prices are higher in this sub-sector, and volumes have been growing. Our guess is that if you were to look at the IAM sales increases under a microscope you’d find that much of the increase can be explained by these share shifts.

Could it be that the car-guy OEMs are losing dealer sales to the IAM – that the IAM is getting more aggressive in selling to dealers?

Nah. Let’s look at the “Tough Auto” group. Dealers are scared, dead, and/or broke. Dealers we spoke to (the usual suspects) attributed their parts purchase decisions to abject terror and/or cash flow. As a result of this, precipitous parts sales declines are just more first order effects from the Obama Task Force’s shepherding of Chrysler/GM bankruptcies.

“In Richmond, Va., Royal Chevrolet co-owner Del Mugford was slightly relieved when he sifted through FedEx packages Friday morning and hadn't received any bad news from General Motors. But he knew his future could be determined by a phone call or a piece of mail. "This is absolutely nerve wracking. It's like a death sentence. It's the worst feeling in the world," said Mugford …. (The Associated Press, May 16, 2009 – http://www.wtvr.com/Global/story.asp?S=10368954)”

Jay Cremins – a Principal at Carlisle – spoke with some dealers during the week of May 11th. The following are from his notes – he has personalized them to be from a dealer’s perspective.
  • They might fire me; the auto task force is demanding drastic cuts in the number of U.S. dealers … Am I going to get cut? Will the manufacturer survive? While this question is most pressing for GM and Chrysler dealers, it is not a moot question for Ford dealers … or even some imports.
  • I might have to fire them. The franchise has gangrene … I may have to amputate soon to save the rest of my business.
  • Their store is a money sump pump … this was survivable when the other franchises were turning a profit; but it is quickly becoming unsustainable.
  • Credit is tight – feels like a supermodel with an eating disorder. Usually a dealer borrows (floor plans) funds to pay for new vehicle inventory and pays cash for parts and used vehicle inventory. There is currently no cash … I repeat no cash … none … it is gone … the summer selling season better start this month. They are currently unable to borrow funds to pay for parts and used vehicle inventory. I can either invest my little remaining capital to buy parts at the VW store or at the Saturn store. Which would you pick?
  • I (Jay speaking) can’t state strongly enough how fear is paralyzing the domestic-only dealers. Even for multi-franchise mixed domestic/import dealers, they have that pit in the stomach fear that the domestic stores may take down their whole organization. Import-only dealers, with exceptions, are merely gravely concerned.
So, it is safe to assume that much of the car-guys parts sales decline is wholesale-to-dealer-related and reflects dealer fears and lack of cash to add to inventory. Close examination of Market Watch data buttresses this conclusion with an expected spread of good, bad, and ugly results.

Can it get any worse?

Yeah, for the “Tough Auto” group – they might be in for some more of those “second order” effects. Pretty soon there will be approximately 2,000 defrocked dealers stuck with a bunch of cars and roughly $1 billion parts (valued at dealer cost), and without any obligation on the OEM’s part to buy them back. If the OEMs do not buy the parts back, market forces will price these parts at cents on the dollar, and they will be sold to the IAM and other dealers. IAM sales of these parts will displace the OE sales, as well as sales to the surviving dealers. The surviving dealers will use the parts to displace factory purchases, and will be used for parts returns (e.g., buy it for 10 cents and “return” for a dollar). So, the OEMs will buy those parts back one way or another. Hmm. Can the bankruptcy court understand all this and clear the path to buying them back in the first place?

So, what do you do?
  • Problems. Many Tough Auto dealers are dying – the simple reduction in outlets has a negative impact on parts sales. Implicit service territories for the surviving dealers need time to expand to accommodate stranded vehicle owners, stranded body shops, and stranded wholesale accounts; this will take some time. Many of these surviving dealers simply do not have the cash to buy parts and replenish their inventories. When they do invest, they are more likely to invest in parts for their “safest” franchises, at the expense of their weakest franchises. Many are scared and do not want to further invest in the unknown. Others simply can’t imagine a bank giving them credit for buying stuff from a supplier who is in bankruptcy, or close to it. Service customers of troubled franchises have the same sort of fears, but to a much lesser degree; these manifest into a gentle push to non-dealer outlets.
  • Not-problems. There really is no evidence that the pace is rapidly accelerating for the IAM making any significant long term strategic share gains into car dealers. The traditional IAM is a slave to their distribution channels, the centerpiece of which is a jobber store. They sell to independent repair facilities and DIYers. One big threat here to the IAM is cheap parts sold over the internet. There is no reasonable expectation that the incredibly fractured IAM would offer better purchase terms to threatened franchise car dealers (“damaged customers”) – they are experts at understanding bad debt, and they’d smell problems with this group. There’s no evidence that JIT service frequencies from the IAM are eating at the soft underbelly of the OEMs. RIM slows this down, terms slow this down. And, as I said, the IAM would look at some car franchises as being damaged customers.
So, what can you do that makes it through this gauntlet? Check the boxes that apply.

Stop the panic by making sure you do not roll out programs and policies that further disenfranchise dealers. Don’t worry about the usual bad stuff that comes from rolling out creative field programs – stuff like lawsuits, death threats, calls to the CEO, dealer council sit-down strikes. More fear = less sales, and that’s very very dangerous right now.

Stimulate wholesale with attractive (tactical)terms. If the problem is credit and service really is that cash cow, then offer terms that solve the problem. Hyundai will take back the car if you lose your job. Why not offer terms on parts sales that buys back the parts in the event of a dealer bankruptcy? For healthy OEMs why not provide a floor plan guarantee on all parts sold in 2009? Why not provide an instant cash rebate of any return credit for parts sales for the next 3 months? Why not simply provide attractive terms, like buy now and pay later?

Stimulate wholesale by working with your dealers to crack into the mechanical wholesale business (I’m not talking about collision wholesale). Why not provide dealers wholesale growth incentives? Why not fund field and dealer training on implementing delivery routes, IRF account sales calls, IRF marketing, inventory stocking, etc? Why not support dealer stocking of parts for 6 to 8 year old vehicles? Why not support best practice sharing across dealers? Why not track wholesale sales by part, dealer and IRF to assess performance and communicate program information.

Collaborate in dealer wholesale with other OEMs to provide appropriate counter help, account marketing, stocking, and delivery. At the North American Service Parts Conference we identified collaborative wholesale as the single biggest opportunity out there to increase sales. The problem with anything collaborative is that it involves, well, collaboration. That means collaborating with dealers, other OEMs, and with a third-party provider. Not a lot of takers here, yet – it is the third pig’s brick house.

Fill in the blanks with technology and extend D2D and drop shipments to wholesale accounts. Assign dead geographies to existing dealers and give them a piece of the action, even if it requires no action on their part. This will help with customers in dead dealer geographies. Dealers are more willing than ever to cooperate with growth – this might be the perfect time to crash though some barriers. These sales strategies work fine for Mary K and Cutco, why not auto parts.

Think about setting up service-only franchises that are not the dream child of some imperious retail architect. Develop a cheap template that gets franchise coverage in dead areas to do both warranty and customer-pay work.

Stimulate retail by helping your dealers go after the up-tick in DIY. This includes help with web templates, possibly getting them on eBay, DIY marketing in local newspapers, in-store displays, fliers, and training.

Stimulate retail with e-marketing and e-education. At the conference we learned that most OEMs are rolling out new Google-based e-marketing strategies that will take customers right into the closest dealer appointment systems. Make sure your dealers know what to do with these “leads” – make sure they can give a quote for service that is comparable to the Firestone store. Also, make sure you take the free pass opportunity to educate customers on your websites as to Trust, Value, Cost, and Convenience.

Sell service contracts to new and existing vehicle owners with a “lose your job” insurance contract to mitigate deferred maintenance and repairs and to help the OEM and dealer generate near-term cash.

Sell service contracts and maintenance agreements through stores like Costco – tie service loyalty back to dealer.

Measure and reward dealer loyalty with a year-end bonus for all dealers that increase the percent of parts they buy from the OEM in the second half versus first half of 2009.

Inspect, inspect, inspect – dealers leave a lot of value on the table – capture this information electronically through their DMS.

Blocking and tackling - accessory packages for showroom vehicles – with discount and payment terms – maybe pay on point-of-sale.

Bottom line is that we are all in the Never-Been-There-Before Club. It is a time for extreme caution, and anxiety. Decisions will be made with less resources and more speed. I said to check the boxes above, but don’t just check them. Think. Most readers will skim the list and nod North/South. OK, if you are sure you are OK, do just three things: (1) fill out a 3x5 card and develop a list of problems that fit your company, (2) take out another card and do the same for “not-problems” – stuff both cards in your purse or wallet, and (3) read David Brooks’ op-ed in Tuesday’s NYT.


** I have left out Heavy Truck since this segment does not participate in Market Watch

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