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Auto parts retailers have been spared from sharing the same fate as Barnes & Noble, Toys R Us and so many other companies rendered redundant by Amazon. About 80 percent of AutoZone's business comes from people repairing their own cars with the other 20 percent coming from professional mechanics. Amazon's gaining traction in stealing away some of the consumer market. Daniel Acker | Bloomberg | Getty Images An employee, right, helps a customer change a license plate bulb outside an AutoZone store in Princeton, Illinois. Amazon has crushed many iconic American companies, but auto parts retailers like O'Reilly and AutoZone have managed to fend them off.
Stores that sell car batteries, mufflers and other parts are facing new pressure since Amazon started selling auto parts. Big retailers like Walmart have also jumped into the fray, in part, to compete against Amazon.
So far, auto parts retailers have been spared from sharing the same fate as Barnes & Noble, Toys R Us and so many other companies rendered redundant by Amazon.
For years, the $130 billion business selling aftermarket auto parts was one of the steadiest segments in retail, with mild cyclical fluctuations and slow trend of consolidation, MoffettNathanson analyst Greg Melich told CNBC. The segment even managed to make it through the recession reasonably well, as drivers repaired instead of upgrading their cars.
But pair of warm winters and a variety of other factors in 2016 and 2017 took a toll on the segment, just as Amazon and Walmart stepped up their efforts to grab market share. Now there is an oversupply of sellers in a market that has been experiencing slower demand, and may see slower growth in the next few years, Melich said.
"The battle of the titans between Walmart and Amazon is only just starting," Melich said. "The smart companies are doing what they should do, which is lean into the more service oriented part of the business on the commercial side."
Amazon pulls in about $6 billion in annual sales from "do-it-yourself" auto parts customers and is partnering with Sears to sell tires.
Walmart has also stepped up its game in the segment over the last three years, even at the expense of profit margins, Melich said.
In 2018, MoffettNathanson expects Amazon and Walmart to have a combined share of about 23 percent of the "do-it-yourself" market — with Amazon at about 8 percent and Walmart around 15 percent. Just 5 years ago, the two retailers had up to 17 percent of that market.
The more a retailer serves consumers, the tougher it will be for them to compete against Amazon.
About 80 percent of AutoZone's business comes from people repairing their own cars with the other 20 percent coming from professional mechanics. About 60 percent of O'Reilly's sales comes from the do-it-yourself consumer market with mechanics making up the rest.
The split is reversed at Advance Auto Parts with 40 percent of its revenue coming from consumers. Just 25 percent of the sales at Genuine Parts, which owns NAPA, comes from people popping their own hoods to fix that troublesome rattle.
"Amazon is obviously more of a risk to an AutoZone which does a majority of their business in DIY," Jordan said. He added that AutoZone is making a big push into serving commercial customers where there's more potential growth.
The increasing technical complexity of cars means it is ever more difficult for ordinary customers to service what they own.
That bodes well for sales of parts on the commercial side. More sophisticated parts cost more money. A halogen headlight for a 2005 Jeep Wrangler might cost $15, but a new headlamp on a luxury vehicle — the sort that can swivel to follow the shape of the road — might cost hundreds of dollars, Jordan said.
So far, Amazon has not been able to crack the code of the commercial auto parts business. Parts sellers need a mind-boggling degree of inventory — enough parts for the wide array of cars on the road, Jordan said.
It also does not yet have enough points of distribution around the country to replicate what auto parts stores do for commercial customers, and it might not be the best use of their resources right now to invest in that, Melich said.
Of course, he added, that could change in just a few years. Amazon didn't have a strong grocery distribution network, that is, until it bought Wholefoods Market.
The online market for after-market car parts, by some estimates expected to top $10 billion in the next few years, represents an interesting opportunity both for established retailers that could grab market share as consumers move online—and companies like Amazon, that will look to grab those same shoppers.
Investors have been sensitive to the threat Amazon presents for a while now. Early last year, when news broke that the company was targeting the market, sector stocks took a tumble. Is it useless to resist the oncoming behemoth?
Perhaps not. In a Friday report, Raymond James analysts reviewed some of the major players’ sites, comparing those of Advance Auto Parts, AutoZone, O’Reilly Auto Parts, Amazon and privately-owned RockAuto. By their measures, Advance holds up best.
ILLUSTRATION: RAYMOND JAMES “Advance’s and O’Reilly’s websites offer a slightly more attractive alternative to Amazon’s,” the analysts wrote, “particularly for DIY customers that are either 1) looking for useful browsing features, 2) seeking information on parts, or 3) wanting to buy online and pick up in store.”
More generally, investors seem to like the business. Earlier this month, Credit Suisse predicted improved sales in 2018 and a boost from tax reform. And on Friday, JPMorgan called it “one of the best sectors in retail,” adding Advance to its “Focus List” with a $138 price target on the shares, about 12% above current levels.
So it seems that Amazon has switched most of their prime member orders to the USPS, probably to save costs. The issue is that the US Post Office does not make deliveries if you are on a private road, unless you have a mailman going outside the policy. I even spoke to the post master of the local office and he's getting complaints from residents who are not getting their packages and have to go pick up at the post office! The mailman is even dropping off a slip that says "Sorry we missed you" or "Delivery attempted" when in fact the package never leaves the post office and they just use that form. It's a joke and my taxes at work, can;t get any more packages from USPS and that includes the majority of them from Amazon.
With Amazon's main carrot being delivery and Prime within two days, that's going away for me and for others on private roads unless they switch back to UPS. There is no point if I have to go to the post office to pick it up, no convenience there. Amazon should have negotiated better with the USPS.
Activist investors targeting auto-parts retailers are taking hits to their investments, and Amazon isn’t helping.
When hedge fund Starboard Value LP disclosed a stake in Advance Auto Parts Inc. in 2015, it said the stock, then at $171, could more than double. The retailer’s shares have instead nearly halved since then, after warning weak sales will continue for an industry that’s also drawn interest from billionaire Carl Icahn. Advance Auto’s peers O’Reilly Automotive Inc. and AutoZone Inc. also have also plunged this year amid disappointing demand.
Perhaps the biggest bogeyman weighing on the shares is Amazon.com Inc., which sent shockwaves across the retail industry in June with its $13.7-billion acquisition of Whole Foods Market Inc. The online juggernaut has also been making inroads with autos, launching a car-research site and a parts marketplace last year. While car-part distributors -- with their technical expertise, trove of components and ability to quickly deliver to mechanics -- are more insulated from e-commerce than other retailers, though they’re not invincible.
“We fear an increased level of price transparency -- these companies either more aggressively price or promote their products to drive the same level of sales growth,” Seth Basham, an analyst at Wedbush Securities, said of the auto-parts retailers. “I don’t think it’s a primary driver of what’s been hurting same-store sales in the industry this year, but that doesn’t mean there can’t be a bigger impact going forward.”
The more immediate challenges dragging on the industry include economic uncertainty for low-income customers, higher gas prices and warmer weather that has eased the wear and tear on consumers’ cars, Advance Auto Chief Executive Officer Tom Greco said Tuesday.
Starboard’s view is that Amazon is a mild headwind -- at most -- to the industry, a person familiar with its strategy said. The New York-based hedge fund is pleased with Advance Auto’s efforts to cut costs and bolster its online presence and sees earnings improving early next year, said the person, who asked not to be identified because the matter is private.
Further encroachment by online rivals could pose a threat to industry profit margins that are in excess of 20 per cent -- part of what initially drew investors like Starboard and Icahn to the aftermarket parts business.
With the average age of vehicles on American roads approaching 12 years, investors also are betting an older vehicle fleet will mean more repairs and parts replacement. To capture that expected growth, Icahn has strung together several companies that deal in automotive parts, including service and retail chain Pep Boys, Auto Plus and parts supplier Federal-Mogul.
For now, e-commerce represents a sliver of the $277-billion aftermarket parts business, according to estimates from Wedbush and the Auto Care Association, an industry trade group. Online sales were about $11-billion last year, with EBay Inc.’s roughly 40-per-cent share being the largest, Wedbush estimates. Amazon had about a 25-per-cent share, though it’s growing at a rapid clip, Mr. Basham said.
Amazon launched the Amazon Automotive store in 2006 and has been expanding its inventory since then. It’s added a parts-finder filter that lets shoppers enter the make and model of their cars to find the correct parts.
“We’re continually expanding our selection and improving the customer experience with things like our Part Finder, Amazon Garage and, most recently, Amazon Vehicles,” a company spokeswoman said in an email.
Icahn Automotive, which owns Pep Boys and Auto Plus, and Starboard declined to comment. Spokespersons for O’Reilly, AutoZone and Advance Auto also declined to comment.
In trying to assess the potential threat from Amazon and other online parts sellers like RockAuto and EBay, analysts are honing in on retailers’ exposure to the consumer-facing “do-it-yourself” market, as opposed to the “do it for me” approach in which retailers sell to professional mechanics. The do-it-yourself market could be more vulnerable because consumers who aren’t in a hurry to buy a new wiper blade or spark plug may go online to find the cheapest price.
The do-it-yourself segment already is lagging, according to the Auto Care Association, which estimates sales will grow at a compound annual rate of 3.8 per cent in the five years ending in 2017, compared with a 4.4-per-cent increase for the do-it-for-me market.
The slower growth also is a reflection of cars getting increasing complex and loaded with technology, which contributes to more repairs necessitating technicians, said Behzad Rassuli, senior vice president of strategic development at the Auto Care Association. Some bumpers, for instance, now are built with embedded sensors that need to be properly calibrated.
“The opportunity for the consumer to repair their own vehicle has been dwindling,” Mr. Rassuli said.
Mr. Icahn said as much when speaking about his acquisition of Precision Auto Care Inc. in June, the latest addition to his chain of auto-repair shops. He’s also planning to take advantage of higher utilization of cars driven by the growth of ride-hailing businesses, he told the Wall Street Journal in an interview at the time.
Greg Henslee, O’Reilly’s CEO, has said the impact of companies like Amazon will be limited because they will struggle to sell component to consumers who don’t know what’s wrong with their car. Online retailers “will continue to take a little bit of market share here and there,” Mr. Henslee said on an earnings call in February. “I don’t see them nearly as one of our most prominent competitors.”
Even if their expertise diagnosing car troubles offers some protection, traditional parts retailers still are under pressure to improve their digital experience, especially since a buyer will often go online to ensure a part is in stock before picking it up at a store.
Advance Auto is investing heavily in technology to ensure a “consistent experience every time, both in-store and online,” Mr. Greco said on the company’s earnings call Tuesday. He told analysts consumers will have a “faster and more frictionless experience” online.
If you’re a parts retailer, “you’re definitely concerned,” Wedbush’s Basham said. “You’re thinking about ways to defend your turf and to capitalize on the way consumers are changing their behaviour.”