Wednesday, October 3, 2012

Are Our Strategy Gurus Missing Something? Why Can’t A DRP Strategy Work For Customer Pay?

Staples is changing its tune. The top chart in the cluster below is from a 1997 strategy assessment we did of the US automotive industry. Fifteen years ago it was clear and “easy” to see what was happening. There was a giant sucking sound dragging us from local stores to price-driven large stores to technology-enabled convenience. The chart below the sucking sound slide shows the evolution of Staples. They recently announced the closing of a bunch of stores and eating a charge of more than $1 billion. Easy. They got caught with bloated assets in an Amazon-designed shopping world. Well, if you are Staples, maybe this is just getting back on track. Staples is the 2nd largest online retailer in the U.S. and Canada. Why do they need bricks and mortar?

This was inevitable.

Dinner with DRP (Direct Repair Program). I had dinner last weekend with a friend who works at a local collision DRP. Huge facility. He told me that they specify aftermarket parts for all vehicles over one year old. The OEM dealer is allowed to match the price of the aftermarket; if they don’t, the DRP orders the aftermarket parts. The DRP gets between $35 and $40 a labor hour, flat rate, to work on the wrecks. Obviously, the technicians get a lot less than this. They are instructed to “fit” all the parts, and if an aftermarket part does not fit, they return it and go with genuine. He said that the biggest targets for aftermarket parts are the domestics and Honda. LKQ’s nirvana … Oh, ah, heavy truck folks, they are targeting you, too. Knew they would. My DRP friend said that that they actually do pretty good work, but he’d never put aftermarket parts on his car. But, he does what he’s told. Easy. Again, no surprises here.

Of course, this was inevitable.

But, surely, this can’t happen to us. Are we immune to that giant sucking sound? Staples sure wasn’t. Fifteen years ago, like us, they must have seen the signs that their big boxes were destined to be phased out. The 2000/2001
Internet collapse made them strategically numb to the inevitable, and they are now taking a charge of one billion dollars to make the switch. Amazon saw the same stuff and suffered mightily, but they started at where the giant sucking sound was taking everybody. Now, all they have to be worried about are like-competitors, which is a lot better than worrying about everybody. Plus, in addition to selling you everything under the sun on Amazon.com, they will also sell you shoes on Zappos.com, baby items on Diapers.com, pet supplies on Wag.com, toys on Yoyo.com, and even replacement auto parts through AmazonSupply.com. The list goes on and on. Mitt, Staples really needs you now.

Where’s the giant sucking sound taking us? So, how does the giant sucking sound drag our aftersales customers from local stores to price-driven large stores to technology-enabled convenience? I think the answer can be seen in the collision DRPs. Look at our dealers as being the high cost local stores … because, that’s what they are. A disruptive innovator might come along and develop a DRP-like model for customer pay maintenance and repair. They’d need to focus on all aspects of customer pay work for which dealers charge $95 an hour. They would have to do better than dealers on the stuff that customers value most (see chart on Tier-1 customer values – thumbs down are values where independents are seen as being “better” than dealers). This should be a lay-up for them. Number one on that list is having the vehicle ready when promised, and number two is charging a reasonable labor rate. Hmmm. $40 an hour vs. $95 an hour? Heck, that’s a lot of money.

Why can’t a Trader Joe’s-like entity (lets’ call it Trader Dave’s) come into the market and clean up? If there were a MyGuy concept operating in the grocery industry, it would be at Trader Joes. Nail the Tier-1 values, do spectacular work, quickly build a positive social network reputation (which drives word of mouth), control variable costs, leverage right-to-repair to gain access to everything the OEMs have, and be nice at the checkout. I’m sure we can find an offshore source of organic brake rotors to keep customers happy.

Time Out: Do you know who owns Trader Joe’s? Organic farmers in Oregon? Surfers in SoCal? Nope, it’s owned by Aldi, a German discount store chain at which 95% of the products are Aldi branded (that’s why almost everything at Trader Joe’s has their name on it). According to The Wall Street Journal in January 2009,”Aldi is so cheap that Wal-Mart Stores Inc. closed its discount outlets in Germany [in 2006] partly because shoppers found the U.S. giant too expensive in comparison.” Just think about that for a minute, your favorite neighborhood Trader Joe’s is owned by a company that makes even Wal-Mart seem too expensive.

Bottom Line: Fifteen years ago we mapped out a very simple business migration path that has been validated with countless restructurings and bankruptcies. Think Circuit City or Borders. These companies saw this just as clearly as we did. But, they could not escape the giant sucking sound. They couldn’t escape because they had invested too much in their status quo –billions of dollars on all of those big boxes. Don’t get caught in a sunk-cost fallacy. Staples is reducing their big box exposure while they still can. The OEMs loosely franchise dealers who’ve invested billions, too. All in all, the OE dealer networks are a perfect fit for our migration model. What’s to stop a “Trader Dave’s” from figuring this out and offering a product/process that makes customers happy and instills trust? Not much.

Of course, this is inevitable.

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