As a bit of background, one part of LKQ’s business sells junked car/truck collision parts that are typically removed from totaled or wrecked vehicles. They call these parts “salvage” and sell them as if they are “Genuine.” This is like calling maggot larvae “caviar blanc.” Junk parts certainly are not “Genuine” … why do we let them get away with this?
Another part of their product line comes from their “Keystone” acquisition – these are “knock-off” parts. These knock-offs are sort of like $15 Rolex watches that you can buy on the street near NYC’s Times Square. So, it’s either new or used cheap junk. It sounds better in French: “neuf ou d'occasion pacotille!”
Last week’s big message was, quite understandably, Order Response Time (ORT). Dealers use close-by jobbers for parts that they do not have and can get quickly. They can return them pretty much no-questions-asked if things don’t work out. Compared to the OEM supply chains providing genuine parts, parts breath, fill rates, and warranty terms are lousy, but hey, they can get the part fast.
LKQ’s performance is particularly lousy compared to the big guys in the aftermarket. My reading of the chart is:
- LKQ’s parts breath is just plain awful – it only “works” for a very small percentage of dealers.
- LKQ’s fill rates are not much better.
- OTD is awful compared to the big program groups or jobber chains.
- LKQ’s warranty is awful – maybe that’s why they just changed it.
- Return policies lag what one would expect from the IAM, but represent the high point in this pile of scrap.
LKQ’s success is all about the worst parts of the US – it reminds me of the old Soviet industrial economy: LKQ sells a cheap sub-standard product with dismal service to unsuspecting citizens. This business model works because insurance companies are steadily increasing their control of the collision market; forcing body shops to buy crap like that saves them some money. Don’t get me wrong. I really like LKQ. Reasonably brained-out investors love companies that have a sustainable competitive advantage and a lock on a market. LKQ/Keystone is the biggest dog in town selling junk car parts. If you can’t find a junk car for cheap parts that kind of fit, you typically go for “Taiwan Tin”, a.k.a. Keystone. So, it is a great stock to buy. Another Orwellian Paradox of sorts.
Bottom Line: Selling Genuine Parts against the dog's breath of product sold by LKQ/Keystone is a pretty much hopeless proposition. At the end of the day, the end-consumer has no knowledge or appreciation of the differences between LKQ’s junk pile and “Genuine**.” Furthermore, the entire process is managed by trusted third parties (I call them trusted third pirates): insurance companies. These are the “good hands” companies who make ducks quack out their name. They are the good guys – just watch Yogi Berra on TV and have a good laugh. They are the guys stopping Barack in his tracks and making us worry about bankrupting the nation by providing health care to folks too poor to live beyond what should be a reasonable poor-man’s lifetime.
OK, it really isn’t quite hopeless, but it is difficult. Here’s what we need to do:
- Support lower repair cycle times. This results in lower repair costs for insurance companies, and they like this. We can do this through large collision wholesaling dealers that stock a lot of breadth and can deliver the part same-day if necessary. If the body shop needs additional parts, the dealer can get those through the PDC in a day or two, max.
- High levels of service will trump low part cost when it directly impacts the customers’ time. OEMs need to make sure they are providing large collision wholesalers the right tools to succeed: OEC repair link, inventory stocking support, special returns privileges, special express order (maybe drop ship) privileges to support key body shop accounts, and training.
- OEMs need programs to certify body shops on the use of OEM-specific repair processes, which should include the use of genuine parts. This would also help maintain brand images, as the vehicles are repaired to “Genuine” OEM specs.
- Maybe the consumer does not have a choice (and frankly the body shop has limited decision-making as well), but certainly they do have the right to know. Mr. and Mrs. Consumer pay their monthly insurance premium on a timely basis, hoping to never get into an accident. In the unlikely event this occurs, the insurance company can repair their vehicle to below pre-wreck conditions by using junk and sub-quality parts. This isn’t an assumption; it’s a fact. In many cases, the consumer never knows this has occurred; state legislators know this and allow it to happen. OEMs need to develop strategies/tactics to communicate to customers and body shops (and even insurance companies) the benefits of using genuine parts (for instance, point of sale materials at dealerships or body shops highlighting the benefits of OE parts, language in lease agreements requiring the use of OE parts, online/social media messaging, etc.). Someone needs to start making a stink about this. We see some good efforts here by GM and VW. Maybe others should take notice.
** Email Jessica to get the free NASPC white paper on Genuine firstname.lastname@example.org. All photos in these blogs are copied from Google’s internet image search engine.