O'Reilly Auto Parts: Parts professional continuing to master dual markets

The logo for O’Reilly Auto Parts is a bright, kelly green. Upon closer examination, you’ll notice a shamrock inside the letter “O,” which suggests “the luck of the Irish.”

But when you look inside this auto parts chain, it’s easy to see that success for O’Reilly Auto Parts was not achieved through luck. A unique combination of strong culture and values, and a well thought out strategy, has kept the Springfield, Mo.-based company firmly ensconced in the country’s top five auto parts chains. One of the unique aspects of O’Reilly is its nearly even split between wholesale and retail business.

Starting in 1957 with a single auto parts store in Springfield, O’Reilly Auto Parts has grown to more than 1,200 stores in 19 contiguous states. With the goal of reaching $2 billion in annual revenue this year, they have worked hard to preserve the values and culture of a small company. It’s what executives call “The Team O’Reilly” approach. The 10 values that make up its culture are: respect, honesty, teamwork, expense control, hard work, professionalism, enthusiasm, excellent customer service, dedication and a win-win attitude. The values are prominently displayed on the wall at each O’Reilly store, and each employee receives a small card that contains the company’s values.

“The key to our success has been the broad-based culture of our company,” explains chairman David O’Reilly. “We set out several years ago to formally define the values that my dad and granddad operated from that helped our company to grow. We instill those values in all of our team members. As we have grown, we have really worked hard to keep that culture intact.”

Sharon Zackfia, re-search analyst for William Blair & Company, LLC, acknowledges that “culture” is most likely  O’Reilly Auto’s greatest strength. “Their culture is very unique and has allowed them to keep their eye focused on customers.”

Earlier this year, O’Reilly relinquished his role as CEO and co-chairman of the board to assume his current post as chairman. The company announced the promotion of Greg Henslee as CEO and co-president, and Ted Wise was promoted to the post of COO/co-president. Both have served as the company’s co-presidents since 1999.

Larry O’Reilly, who had previously served as co-chairman of the board with David, is now vice chairman of the board. Other family members still involved in the company are Charlie O’Reilly, a director and vice chairman of the board, and Rosalie O’Reilly Wooten, a director. The four O’Reilly family members are joined on the board by five outside independent directors.

Henslee, who has been with O’Reilly Automotive for 20 years, has administrative responsibility for all corporate operations and takes the lead role in investor communications. The areas of finance, merchandise, purchasing, inventory control, distribution, information systems, advancing technologies and corporate all report directly to Henslee. Wise has been an O’Reilly Automotive employee since 1970 and has direct responsibility for store sales/operations, store acquisitions, store expansion/real estate, advertising/marketing, risk management and human resources.

David O’Reilly says some people look at their company and its co-presidents and shake their head. “This is old hat for us,” says O’Reilly. “We have had that type of arrangement since 1993” when he and his brother, Larry, held the co-president titles. “It is a unique approach and fits in with our aptitude for a team approach to management.”

O’Reilly adds that, “it works really well for us and leaves little room for egos.”

Wise says when you scan the O’Reilly organizational chart, you consistently see employees with 10-, 20- or even 30-plus years of service.

“Even though we are a $1.7 billion company this year, with the goal to become a $2 billion company in 2005, we go back down to the store level and preach and teach the O’Reilly team approach,” explains Wise. “That we are all part of a great company that respects each individual contributor and each individual store is an important part of our success.”

The wholesale/retail divide

O’Reilly Automotive has always been one of the most difficult to peg since they employ a “dual market strategy” of equally serving both professional technicians who service the do-it-for-me (DIFM) market, and the do-it-yourself (DIY) customers.

“That’s our goal,” Wise makes clear, “an even split between the two. Right now the numbers probably come in a little bit higher on the retail side than the wholesale.”

O’Reilly’s roots are deeply entrenched in serving the professional technician. “We emerged as a wholesaler, and our core competency has always been in serving the traditional installer base,” David O’Reilly acknowledges. “Along the way we learned that, ‘by the way,’ we could also be a retailer.”

Henslee says O’Reilly’s dual market strategy started in the late ’70s and has steadily grown as they’ve learned to be a better retailer. Wise believes that since the company has been serving both markets for so long, “it’s just the way we do business. It’s not that we came in overnight and told all our retail stores they have to be wholesale overnight. Or we didn’t come in overnight and tell all our wholesale stores that you need to be a retailer, because that’s a big transition to make.”

With so much longevity in the company, Wise says O’Reilly has been fortunate to have a core of people who were with the company when it developed its dual market strategy. “We have a certain amount of pride in developing this,” says Wise.

O’Reilly, Wise and Henslee all acknowledge that being both a wholesaler and retailer is not easy. “You are walking a tightrope all the time,” says O’Reilly. “There are some installers who don’t want to buy from a retailer. But we have assured them that we have people dedicated to their needs, and if we are meeting their needs they kind of forget about the retail side of our business.”

O’Reilly works hard to keep their wholesale business thriving. “We tell them (wholesale customers) that by being a retailer we can have more inventory and they can get better pricing,” explains O’Reilly. “It’s a synergy of one inventory and one location.”

Zackfia, who has been following O’Reilly Automotive for more than two years, believes it is one of the best-poised companies to capitalize on the growth in the commercial automotive parts business. And her observation is that they have been able to hold their own as retailers against competitors like AutoZone and Advance Auto Parts. “While DIY sales are growing slower than commercial, they are competing very well as a retailer.”

A program group founder

When program groups began developing in the ’70s, O’Reilly Automotive was a relatively small company primarily serving the wholesale market. The company was one of the original founding members of the Auto Value program group that later evolved into the Aftermarket Auto Parts Alliance.

“As we’ve grown, there’s obviously been some question as to why we stay in the group,” Wise admits. “But we still see a value of being involved in a group of peers like this because most of the Alliance would probably be considered more traditional WDs and jobbing stores.”

Wise points out that with half of their business serving wholesale customers, they continue to benefit from belonging to the Alliance, especially in the areas of negotiations and benefits. O’Reilly has more than 200 independent jobber customers who buy from them.

“They are small parts stores in small markets, for the most part,” says Wise. “They buy from our warehouse, but they are not O’Reilly stores.”

Those independent stores utilize the Auto Value marketing program for independent jobbers through the Alliance. “From a group standpoint, that’s a huge benefit toward us because we can’t let them be O’Reilly parts stores.”

Growing, growing, growing

David O’Reilly acknowledges that the company is not the largest auto parts distributor in the country. But he asserts that “market by market, we want to be the No. 1 supplier.”

In fact, the company’s mission statement sums up its bold ambition: “to be the dominant supplier of auto parts in our market areas.” The company’s goal is to put together the best combination of inventory availability, price, quality and service. “We like to think that through our hard work and our people that we’ll be the best in each market.”

O’Reilly’s strategy has been to grow into contiguous markets, and typically from a distribution center out into the markets they serve. Right now they have stores in 19 states, mostly in the Midwest and Southeast areas. They will typically serve stores up to 200 miles away from a distribution center. The company just opened its 11th distribution center in Atlanta earlier this year.

“We’ve been growing down into Alabama, Georgia, North Carolina and South Carolina from our Mobile and Nashville distribution centers,” explains Wise. “We’ve been stretching those distribution centers to where they are delivering maybe 250 miles to stores, which set the stage for our Atlanta center to come on board.”

Wise says the new Atlanta center is currently serving about 45 stores. “And then we’ll start growing out of that distribution center another 200 miles east.”

This strategy has allowed O’Reilly to grow its supply chain both through acquisitions and “green field” stores. About 25 percent of their growth has been through acquisitions, such as Hi/Lo Automotive and Mid-State, while the rest has come through ground up stores or leased spaces.

O’Reilly has also entered new markets through smaller acquisitions. “Those are typically independent jobber customers, small auto parts stores, and those are in markets where we want O’Reilly Auto Parts stores,” says Wise.

Expansion plans for O’Reilly are quite ambitious at more than 13 percent annually. In fact, Jerry Marks of Raymond James & Associates, Inc. stated in an Equity Research report: “…we view O’Reilly’s expansion plans as the most aggressive in the industry.”

Keeping the parts moving

On average, O’Reilly Automotive will stock more than 100,000 individual SKUs at each of its distribution centers, enabling them to provide overnight or same day delivery. It has also allowed them to have access to hard-to-find parts and get them to the stores on a timely basis. Each store averages 23,000 SKUs.

To help combat the challenge of parts proliferation, O’Reilly Auto Parts has a sophisticated inventory management system that helps the company set inventory for each market they serve. Henslee says they have the infrastructure to help move dead inventory and a goal to minimize returns to the manufacturer. “What we are very proud of is our ability to set inventory that is on its way up,” comments Henslee. “We want to recognize demand and get inventory in our stores while the opportunity is available.”

Wise believes parts proliferation is probably O’Reilly’s biggest challenge. “From a customer standpoint, you can’t have too much inventory,” he quips. “But from a pure business standpoint, the less inventory you have on hand, the better turns you have. You have to walk that fine line.”

To keep customers moving through their stores, O’Reilly participates heavily in motorsports via involvement on a national level with NHRA and the NASCAR Busch Series. But Wise says probably their most important involvement in motorsports is at the small local racetracks in the communities where they have stores. Participation includes track sponsorships, track races and fairs. Wise estimates that O’Reilly Automotive participates in nearly 1,200 events a year.

“It allows us to be a big fish in a little pond. Our customers, both professionals and hard core do-it-yourselfers, are typically a big race fan on the local level,” says Wise.

The company is also involved in the local college sports sponsorship, most notably its sponsorship of Texas Tech head coach Bobby Knight.

Other marketing initiatives for O’Reilly vary based on the audience they are trying to reach. The company’s retail advertising has the highest concentration in radio advertising, followed by print and television.

I’m not sure that there’s one thing that is most effective,” admits Wise. “I think it’s having the right combination.”

For the professional customer, O’Reilly relies heavily upon their store personnel to develop relationships. “It’s a pretty high pressure business and it’s awful easy to lose a customer over a little mistake,” describes Wise. He says whether it’s your fault or the customers, he candidly states: “It’s always your fault.”

“But if you have a relationship with that customer, it’s a heck of a lot easier to keep that business ongoing through good times and bad,” Wise concludes.

Going public, acting private

O’Reilly Automotive went public in 1993, and the company’s stock performance has been steady over the years trading on NASDAQ. Most analysts rate the company highly. Zackfia currently gives O’Reilly an “outperform” rating, while Marks’ company rates O’Reilly at “market perform.”

“We went public for good reasons,” insists David O’Reilly, “but in doing so, we did not want to change the culture that we worked so hard to cultivate.”

O’Reilly says they have worked hard to avoid an “ivory tower” mentality between management and employees. “We still want everyone to feel like they are equal in this company.”

“I hear people all the time, when they are around our top management, that it’s just different,” comments Wise. “We act like we’re a small company and people like the idea of working for a big company that acts like a small company, as far as how they treat their team members.”

Through going public, O’Reilly Automotive has been able to offer stock options to employees and to help the company accelerate its aggressive growth.

The job of communicating directly with analysts falls principally on the shoulders of Henslee and O’Reilly’s Chief Financial Officer James Batten. Henslee says while analysts are intrigued with the company’s culture, “they are more concerned with the numbers in how we are performing as a company. They base their opinion on us on the numbers and our track record as a company.”

Protecting the future

Henslee believes the aftermarket as a whole is in a healthy state right now, leading him to be confident in the future of his company and the overall industry.

David O’Reilly cringes about using the words “seasonal” and “unpredictable” for the auto parts business. But he says that with Sept. 11 and the war on Iraq not having as strong an impact as before, “it looks like things are solidifying” and the big picture looks bright.

Wise also is bullish on the aftermarket’s future. However, his concern is with their technician customers being able to get the diagnostic information they need to repair today’s late model vehicles. Wise is a board member of CARE (Certified Automotive Repair Equality) and is helping in the push to pass H.R. 2735.

“It is critical right now that the independent aftermarket gets some sort of legislative commitment or law in place that will protect the future of the aftermarket,” suggests Wise.

Whatever the future holds for the aftermarket, the employees of O’Reilly Auto Parts want to play a role in helping their retail and wholesale customers succeed. And they believe that their culture and their dual market strategy will help them continue their aggressive expansion.

David O’Reilly puts it all in perspective when he says the old adage that “everyone sells parts” is true. “Everyone has locations and well-run businesses. We believe the difference that sets us apart from the competition is our people and the attitudes that they project to our customers.”