Wednesday, March 17, 2010

What About Recessionary Dealer Purchase Loyalty?

We recently conducted two dealer parts manager surveys that asked about dealer purchase loyalty. When we apply our professorial mindsets, we might expect that dealers would be less loyal during a recession and would migrate toward cheap IAM parts for their high-volume customer-pay maintenance and repair businesses.

Not so.

The 2009 NASPC Parts Manager Satisfaction Survey (PMSS) was launched in September of 2009 when there was not a lot of good news around. Over 8,500 dealers participated in the survey and rated satisfaction with a long lineup of issues. We have asked about purchase loyalty every year since the start of the PMSS in 2002. And each year we get very consistent scores, both as an industry overall and by OEM. We’ve noticed a few things over time: (1) that purchase loyalty is gradually increasing, (2) that it is not terribly sensitive to the typical torpedoes that sink satisfaction (changing Ts&Cs and problems with order fulfillment), and (3) OEM surveyed “purchase loyalty” rankings are consistent even outside the annual PMSS.

OK, the scientists among us might argue that the PMSS loyalty values do not foot to internal OEM-specific dealer purchase loyalty calculations. The pragmatists would counter: (1) Are you sure that you are really measuring what parts managers actually do? (2) OK, if the surveyed responses from parts managers are off, then it would be relatively the same for every parts manager (all +8,500 of them) and every OEM, … wouldn’t it?

We have had crews of people inside dealerships measuring purchase loyalty and have validated the numbers in the survey. You can learn a lot by sitting behind the parts counter with an audit sheet and sourcing the parts that go on each customer-pay RO. Dealers go to their shelves first, then other dealers, then the new car “lot” , then a jobber … only if the repair can’t wait. They have a stock of IAM belts, hoses, brakes, and filters for used cars and demanding customers (we will get to this at the conference by looking at HE). Bottom line in the chart above, don’t look at the y-intercept, look at the slope of the line. You can take the slope to the bank. What do we notice and what can we induce? (1) There is not a lot of variability in purchase loyalty from OEM to OEM. (2) Dealers for OEMs (“E” for Europeans, “A” for Asians, and “D” for Domestics) that show higher purchase loyalty were less willing to look to the IAM during the dark days of the recession.
Time Out: Hmm. If there is not a lot of variability among the OEMs in purchase loyalty, then there cannot be a lot of up-side in spending a lot of incremental time and money on efforts to improve dealer purchase loyalty. Regardless of where you think the “y-intercept” is on the scatter chart above, the slope is cast in concrete. All you can do is move up and down the slope … unless you have a “Super Soaker” game changer idea. And, I’d be a tad suspicious of this. So, a new brilliant strategy to increase dealer purchase loyalty can only yield a few percentage points … and most likely only time-shift demand… and nets to naught. It might make more sense to focus on customer service retention, where the big deltas and opportunities are. For example, if you’re a $1B company, a 1% increase in purchase loyalty gets you $10M in revenue. Now, if you’re the same $1B company with 33% service retention, that means the market for your parts is $3B. A 1% increase in service retention gets you $27M.
The big question is why is dealer purchase loyalty so high and why didn’t it sink like a rock in 2009’s recession? (We estimate it did go down by about 1% for the industry.) Here’s why:
  1. At many OEMs, RIM controls order flow and sourcing.
  2. Highly automated systems at dealers manage inventory and place automatic orders to OEMs – it is exceptionally easy to do business with the OEM as a source.
  3. Concentrated dealer bodies make it convenient to order needed parts from other dealers – D2D systems and locators facilitate this.
  4. In 2009, lots of dealers went out of business and sold their parts inventories for cents on the dollar to other dealers.
  5. Loaner cars take the sting out of customer repair wait times. All OEMs have next morning emergency orders and many/most have daily stock order deliveries.
  6. Sourcing parts to individual customer-pay ROs is time consuming for the parts department – they might have to make several calls to find the part in-stock at a familiar jobber.
  7. In 2009, parts departments shed staff (we will see the numbers at the conference), so they had fewer people to work on individual RO sourcing from a set of close-by jobbers.
  8. OEM field organizations sometimes wander through dealer parts departments and will take notice of infestations of non-genuine parts. This will not make the field rep happy.
  9. During tough times dealers do not want to rock the boat with the OEM – so, they want their partner happy. Rocking the boat is for good times when dealers are in more control of their destiny.
  10. The third biggest gripe dealers have with the OEMs is about returns – and, the OEMs are generally pretty good about returns. Managing separate return programs for different suppliers increases workload and aggravations … even if those local NAPA jobbers are saints.
  11. The thing dealers love about genuine parts is their unquestioned quality, backed up by a rock-solid warranty. Managing different levels of supplier parts quality and warranties constitutes a hassle.
  12. Service managers, advisors, and techs prefer to work with genuine parts – they fit and work better than non-genuine. So, there is almost no “pull” signal from service operations to use cheaper non-genuine parts. The “pull” signal comes from specific customers who request cheap parts, and from fixed operations management who might feel uncompetitive (and parts prices are always to blame, never labor rates). Combating internal “uncompetitive” pressures can lead to reduced dealer parts margins, migrating to different order types, pressure on the OEM to reduce prices … all the usual suspects.
  13. Many dealer parts mangers’ bonuses are tied to OEM purchases, parts accounts, order discounts … being loyal. So, there are thousands of economic incentives out there that keep them loyal.
Bottom Line: Don’t fool yourself into thinking that you can make a big splash by increasing dealer purchase loyalty. That battle has already been fought and won. The OEMs won it. Channel your growth energies into higher risk and higher reward initiatives that represent Genuine incrementality for you and your dealers/distributors. We will talk about this in Indy.

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