February 28, 2008 At first glance, Counterman’s Super Stores list might look a lot like last year’s and the year before and the year before that. But through acquisitions, mergers and steady growth, the list has changed ever so slightly. Although the names might be the same, their respective places on the list have shifted in several cases.
All signs point to more noticeable shifts this year. While there were no dramatic changes in 2007, some news that unfolded in recent weeks could spell big change in 2008.
O’Reilly Proposes to Buy CSK
Just prior to press time, it was announced that O’Reilly Automotive, number three on this year’s Super Stores list, has proposed to acquire CSK Auto, which ranked number five this year. O’Reilly is offering CSK $8 per share in cash for its common stock. The entire deal is estimated to be valued at $845 million, including the assumption of approximately $490 million of CSK debt. A few days after O’Reilly’s offer, CSK adopted what’s known as a “poison-pill” shareholders rights plan in an attempt to thwart O’Reilly’s hostile takeover bid. CSK’s stock has fallen some 70 percent in the past six months due to sluggish sales, increased costs and higher rent. The company posted $5.8 million in losses in December.
While CSK may be struggling financially, it still would offer O’Reilly something very valuable geographic coverage. If the acquisition were to happen, CSK would add 1,342 stores and 41 distribution centers to O’Reilly’s footprint, for a total of 3,172 stores and 56 DCs. O’Reilly’s rank on the Super Stores list would remain the same, as the company would still hold fewer stores than AutoZone and Advance. More importantly, though, the location of CSK’s stores and DCs would fill a gap in O’Reilly’s current coverage, giving the company a presence in the western U.S., where CSK has a strong brand reputation and lots of premium real estate!
Under the Radar
While change is in the air in early 2008, the past 12 months have been relatively quiet, with one exception: the acquisition of Strauss Discount by Japanese retailer Autobacs (more on this later). The added significance of this was the fact that the acquirer, Autobacs, was not listed among the top 20 chains. Historically, a top 20 chain is generally acquired by another top 20 chain.
Although no major mergers were announced in 2007 (with the exception of the Strauss deal), there was store count growth, a trend that has been ongoing for some time. In 2001, the 20 largest store groups accounted for 11,329 locations. This year, the list represents nearly 15,000 stores (actually 14,965), an increase of 4.1 percent over 2007.
Based on Counterman estimates, the top 20 store chains own approximately 43 percent of all the stores in the entire U.S. aftermarket. At this pace an average store-count growth of 4.7 percent per year the top 20 store chains would own half of all the stores in the market by 2011. If the proposed O’Reilly acquisition of CSK were to happen, the top three store chains alone (AutoZone, Advance and O’Reilly) would own about 30 percent of all of the approximately 35,000 stores in the U.S. (This, of course, doesn’t take into account any new stores that might open this year, which are generally offset by store closures, but not necessarily at a one-to-one ratio.)
Changes Among Retailers
At the top of the list is Memphis-based mega retailer AutoZone. The company has continued to grow its store count by an average of 5 percent per year over the past five years.
AutoZone’s plans for 2008 include a continued enhancement of hard parts assortment and late-model coverage, the rationalization of excess inventory, store refurbishes where necessary, a continued focus on ASE certification for its store personnel, expansion of test stores and growth of its commercial program.
Advance Auto, too, has increased its store counts markedly. In 2003, the company operated 2,435 stores. By 2008, it owned an impressive 3,228 locations an increase of nearly 33 percent in five years.
In late November, Advance named a new president and CEO, Darren R. Jackson, who replaces interim president and CEO John Brouillard.
“Our goal is to become the industry leader through a relentless focus on the customer,” said Jackson at the end of 2007. “We expect to achieve our goal by expanding and innovating around customer needs, being a strong customer advocate and maximizing the talents of our team members.”
Late last year, Pep Boys’ new chairman Jeff Rachor announced the details of a five-year strategic plan that will include the closing of 31 stores, which is about 5 percent of Pep’s total store count. About 550 employees will be impacted by the closures. Rachor, however, is confident that these plans will serve as the foundation for Pep Boys getting back on its feet and re-establishing itself in the parts distribution market. Time will tell if Rachor is correct.
In April, it was announced that Japan-based Autobacs Seven Co. had reached an agreement to buy New Jersey-based Strauss Discount Auto out of bankruptcy. Monro Muffler Brake originally intended to buy the business, but backed out of the deal after Strauss declared bankruptcy.
What is particularly interesting about this acquisition is that for the first time in recent memory, a distributor from outside the top 20 list acquired a top 20 company. Typically, it is the large distributors that acquire other large distributors.
Aside from changing the company’s name to Autobacs Strauss, it does not appear that Autobacs has made any significant changes to Strauss’ branding. According to Strauss President Joseph Catelano, the company still does business as Strauss Discount Auto. Strauss and its 91 locations add to Autobacs’ only other U.S. location the “Super Autobacs” store in Stanton, CA.
In addition to the latest news about O’Reilly Auto Parts’ bid for CSK, O’Reilly made some major changes in 2007 as well.
After nearly 30 years of affiliation, O’Reilly Auto Parts and Aftermarket Auto Parts Alliance jointly announced in June the end of their decades-long partnership. Effective at the end of last year, O’Reilly no longer is a shareholder in the Alliance. O’Reilly’s departure from the Alliance brings the number of top 20 chains that are members of a program group down to 15. It’s interesting to note that of the five largest operators, only one (General Parts Inc.) is a member of a program group (CARQUEST). And, of the top 10 chains, only three are privately held (General Parts Inc., Fisher and Replacement Parts).
O’Reilly’s new independent jobber program, called Parts City Auto Parts, will attempt to fill the void created when the company left the Alliance.
Parts City, like the Alliance program it replaces, provides marketing and advertising programs designed to help independent stores grow sales to both their retail and installer customer base. O’Reilly/Ozark Automotive independent jobber Auto Value and Bumper to Bumper Stores are being converted to the new Parts City program. The marketing plan includes print and radio advertising, store promotions and grassroots marketing assistance.
As for O’Reilly’s own stores, store count, like that of AutoZone and Advance, has been impressive. Over the past five years, O’Reilly has added 830 stores. If the company acquires CSK, it would add another 1,342 stores as well.
Changes Among Wholesalers
The changes among wholesale distributors were not as major as those announced by their retail competitors. There was growth albeit small among their ranks.
The importance of import parts, however, has become evident as more and more store chains add or create some kind of import parts program. Recently, the market has seen the acquisition of such import specialists as Autopart International (acquired by Advance Auto) and Worldpac (acquired by General Parts Inc.). This trend continued in 2007 with Uni-Select’s announcement that it was unveiling an import parts program called “Import Parts Source” (IPS).
Uni-Select USA says it intends to make import parts as easy to specify and obtain as parts for domestically produced vehicles. This is increasingly essential for the aftermarket since import nameplates have grown five times more than domestic nameplates in the past decade and import replacement part growth is more than double the domestic rate. In fact, there are more import cars registered today than domestically produced vehicles.
Uni-Select itself is one of the fastest growing distributors in the aftermarket in terms of store locations. As recent as 2004, the company wasn’t in the top 20. But after its 2004 acquisition of MAWDI, Uni-Select jumped into the top 20, securing its position as the ninth largest store operator in the nation.
Since then, the company has continued to add store locations, jumping from 161 locations in 2004 to 233 locations in 2008, an impressive increase of nearly 45 percent. The company’s addition of 26 stores over the last 12 months puts Uni-Select at the top of the store-growth list (as a percentage of total store ownership).
Other wholesale chains that increased their respective store counts by 5 percent or more included Auto-Wares, Hahn Automotive and VIP Discount Auto Center. Store count growth though small was also noted at Fisher, BWP, KOI and Auto Parts Headquarters.
The only distributor in 2007 to lower its store count was Parts Depot, which consolidated 21 stores in the Southeast. Last year, the company operated 125 stores and this year it has 104, dropping it from the 11th spot in 2007 to 13th in 2008.
Looking ahead, if the past is any guide, there will be acquisitions, store additions and store closures among the top 20 in 2008. What is certain is that these companies will continue to control a larger and larger percentage of the total universe of stores, making their influence in the aftermarket substantial.