The DIFM push

Jan. 1, 2020
New leadership has prompted retail giants Pep Boys and Advance to reconsider their customer base.

New leadership has prompted retail giants Pep Boys and Advance to reconsider their customer base.

It has been said that the only constant in life is change. That has certainly been the case recently at two of the oldest, most venerable names in the automotive aftermarket.

At Pep Boys, 2007 brought a new five-year plan and a new leadership team. However, CEO Jeff Rachor had been at the helm of the Philadelphia-based company for just over a year when he left May 7 to pursue a new venture.

When asked what brought him to Pep Boys from his previous position as president of Sonic Automotive, a Fortune 300 company in Charlotte, N.C., Rachor responds, "I saw it as an irresistible challenge to participate in the renaissance of an 86-year-old brand." Today, however, it is former COO Mike O'Dell who is guiding the fortunes of the company as interim CEO: 565 stores that had $2.1 billion in sales in 2007.

Meanwhile, as vice president of finance and investor relations, Judd Nystrom is a key member of the new team of executives who have come to Advance Auto Parts from consumer electronics retailer Best Buy. What brought him to Roanoke, Va.-based Advance, which has more than 3,200 stores and 2007 revenues of $4.8 billon?

"I saw a 76-year-old company that has a rich tradition of growth, but one in which that growth has slowed a little bit in recent years. That presents a tremendous opportunity," Nystrom says.

Are the renaissances underway?

DIFM leads the way

As mentioned earlier, Pep Boys has 565 stores that had $2.1 billion in sales in 2007. The future of the company, under either Rachor or O'Dell, lies in a focus on the do-it-for-me (DIFM) business.

"We launched our five-year plan in November, and the overarching umbrella of that plan is to lead with our DIFM business," Rachor told Aftermarket Business when he was the company's CEO. "Some of the first steps surrounding that are to really recommit to our core automotive roots."

Since then, Rachor has decided to return to his own core roots in the automotive retail market, joining MSD Automotive Partners LLC, in Chattanooga, Tenn., as CEO. MSD Automotive will own and operate car dealerships across the U.S.

Where does that leave Pep Boys? While Manny, Moe and Jack were early leaders in the automotive aftermarket 86 years ago, in recent years the company had introduced a significant amount of merchandise that wasn't true to its automotive heritage.

Therefore, the first step in the five-year plan is a merchandising transformation: ramping up hard parts coverage and upgrading the company's overall automotive hard parts assortment. That began under Rachor and will continue under O'Dell.

"I came to Pep Boys after participating in the turnaround of the automotive business at Sears," O'Dell notes. "It's really like déj?u for me. Pep Boys, like Sears, had lost its way in terms of customer focus. But, also like Sears, the components are in place here to have very successful top-line sales and very profitable bottom-line profit stores."

O'Dell, who told Aftermarket Business that he believes the "interim" will not be part of his CEO title for very long, pointed out that he was part of the team that devised Pep Boys' recent five-year plan, and he will stick with it.

"Look at the fundamentals of this business, especially on the DIFM side," O'Dell says. "People still need their cars fixed. Cars are more complicated than ever, and people are more time-compressed than ever. We've got the infrastructure, we've got the people; it's more about the focus than anything else."

This focus on DIFM is a sound strategy, says Dan Smith, president, Capstone Financial Group.

"The DIFM market is really the way to go for most areas of the country," Smith adds. "The demographics are just about perfect for it. There are so many things that are causing the DIFM side of the business to grow, including the increasing complexity of vehicles. So it looks like Pep Boys has really started paying attention to the demographics."

Tony Cristello, vice president, BB&T Capital Markets, agrees. "Pep Boys has struggled over the past few years with their business model," he says.

Cristello notes that with its large number of service bays, Pep Boys has been driven harder than most to have more productivity coming through those bays. Add in the struggles with the merchandise mix, and the result was an unsuccessful strategy.

"The service bays were underutilized, and they had sort of lost their identity as a parts provider," Cristello says. "Under the company's new plan, there's a much more intense focus on running the service shops, and using the retail side of the business to fuel the service business."

That means inventory and parts coverage to have the right parts to fix the vehicles, and also having enough skilled people to take care of the customers who come into the service side of the business.

"It's a tough model, balancing the two," Cristello notes, "but I think if they're going to be successful. This is the right strategy."

A 'relentless' customer focus

Advance Auto Parts also has its eyes on the DIFM side of the market.

"Do-it-yourself (DIY) has really been in decline for the last several years, in terms of customer traffic," says Nystrom. "And that's one of our challenges and opportunities, as DIY is 73 percent of our business."

According to Nystrom, Advance plans to capitalize on the opportunities in the DIFM market with a "relentless focus on the customer." The company has conducted extensive research on what's important to the DIFM side of the market, and has found that the most important factor to commercial customers is speed of parts delivery.

"This is the most important element to our customers, and it's an area in which we have a structural advantage," Nystrom says. "In 88 demographic market areas across the country, we are No. 1 in terms of store count. We can get a product to a shop faster than anyone else. The key is to have the right products in the right stores at the right time, which is why 'availability excellence' is one of our key initiatives."

Smith calls Advance's new team of Best Buy execs, and the customer-focused, retail mindset that they bring to the industry, "one of the more interesting developments that we've seen in automotive retail in a while. They've caught on quickly to the idea that the commercial DIFM segment is the way to go."

Cristello agrees, but he notes that Advance would like to move from a roughly 75 percent to 25 percent DIY/DIFM business mix to a mix closer to something like O'Reilly's 50/50 mix. That won't happen overnight.

"Systems are going to be the key, as are parts coverage and inventory levels," Cristello says. "But these are all things that the company is trying to improve. The management comes from a company (Best Buy) that certainly understands metrics and data mining and the importance of understanding the customer and taking a customer-centric approach.

"The indicator of their success will be not only in their ability to have the right parts coverage and build the right inventory mix; that will have to translate into results at the customer and traffic level."

New initiatives and long-term plans

The focus on the commercial DIFM side of the business is only one part of Pep Boys' new strategy. The company is also looking to get more productivity out of its larger "super center" retail boxes through various business development initiatives, and then, ultimately, looking forward to reinitiating growth through the execution of a hub-and-spoke strategy.

The business development initiatives have already begun. The company recently launched its "Burning Rubber" tire initiative, which is designed to give tires a larger presence in the stores, and is supporting increased tire sales through appropriate training, marketing, personnel and inventory.

Pep Boys also recently partnered with lanelogic, a used vehicle trading network, to create CarOffer.com. Through this partnership, a customer can sell his or her used car to lanelogic for cash once the car has passed an inspection at a Pep Boys center (see Aftermarket Business, March 2008, p.13 and 22)

The long-term element of Pep Boys' five-year plan is growth. According to both Rachor and O'Dell, this will be achieved through a hub-and-spoke model that addresses the company's need for greater store density, and ties nicely back into the focus on DIFM.

To that end, the company has plans to open neighborhood service centers with smaller footprints, which would allow them to use their existing super centers as hubs to provide parts distribution and support to these new "spoke" locations. Smith applauds Pep Boys' long-term vision, but notes that challenges exist in the implementation of the new model. "A hub-and-spoke system requires a certain infrastructure," Smith says. "It's not something you can wake up on Wednesday morning and say, 'I think we're going to start delivering to DIFMs.' It takes an evolution — if not a revolution — in the way you do business."

In the bigger picture, O'Dell said the company's ultimate vision is to be the automotive solutions provider of choice for the value-oriented consumer, and the company will follow five priorities to get there:

  • Associates: Inspire and develop teams among them.
  • Customers: Always put them first.
  • Sales: Maintain the core automotive focus and become recognized as automotive superstores.
  • Profits: Enhance them through margin control and spending disciplines.
  • Growth: Offer new products, new services and new locations.

"There are no secrets here," O'Dell adds. "Those are the priorities for us to achieve our vision. That's the message both internally and externally."

Designing the dominant model

At Advance, Nystrom points out that the automotive aftermarket is still an open book in terms of developing and implementing a dominant business model. In most other industries, a business model emerges that sets the standard — groceries from Costco or apparel from Nordstrom's, for example. "In this industry we don't see a dominant business model that's aimed at the customer," Nystrom says. "There are dominant business models from a financial performance standpoint, but none that are aimed at the customer. And in this industry, over time, the dominant player that emerges is going to be the one that focuses on and wins customers."

In addition to its focus on the DIFM market, Advance plans to make priorities of what's important to its DIY customers: product availability, convenient location and product quality. "By knowing what's important to our DIY customers, we know where to begin spending our capital to make sure it's targeted in the right areas," Nystrom says.

Advance is also planning to heavily target the Hispanic market by increasing its advertising to the Hispanic community, and hiring more bilingual team members at its stores. The company is also targeting what it calls the "traditionalist" market through its "Keep the Wheels Turning" campaign. These are both examples of the targeted customer focus that Nystrom sees becoming synonymous with Advance.

"Our previous campaigns were probably not aimed directly at the customers we were trying to attract," Nystrom says. "But by using our customer research, we've been able to point our advertising directly at groups who over-index in their 'spend' in our stores and get a larger portion of their business."

Impact on the Independents

What do the changes that are playing out at these two major industry icons mean for independent WDs? Simply the continuation of the changes that constantly swirl around the competitive landscape in the automotive aftermarket.

"When you look at what Advance is doing, they certainly appear to be fully committed to it and headed in the right direction," Cristello says. "I think CEO Darren Jackson and his team understand the importance of the commercial side of the business and they've learned a lot since their acquisition of AI a few years ago. But will they ever carry 400,000 SKUs throughout their system? Probably not.

"And as for Pep Boys," Cristello continues, "they're moving toward the commercial side of the business and away from focusing such on DIY, but I don't think they're going to try to become a professional jobber. Rather, they're going to try to identify themselves as more of a professional installer."

Even former Pep Boys CEO Rachor had agreed with that assessment. "I think that no matter how good we get at providing parts coverage for our DIY and DIFM customers, there will always be a need to supplement our inventory," he says. "We can't have every single SKU on the shelf, and local distributors will continue to play a key role and continue to be a key resource for Pep Boys."

Smith adds that most smaller, local WDs, "do a pretty good job of securing their own customers. I doubt the changes at Advance and Pep Boys will have a lot of effect on them at all."

Cristello agrees, but with a caveat: "It's fair to anticipate that these players are striving to raise the competitive bar in our industry," he says. "They're going to be aggressive. So I think it becomes incumbent on everyone to be aware of what they're doing and be sure you're doing everything you can to not give your customers a reason to look elsewhere."

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