O’Reilly Cutting Parts Prices For DIFM Customers

[Counterman]

While O’Reilly Auto Parts launched its dual-market business strategy in 1978, the company’s roots are in serving DIFM customers. Over the years, the company has built up enough brand equity with repair shops that O’Reilly has been able to employ a premium-pricing approach with much of its professional-customer base.   

“Throughout our history, we’ve been steadfast in earning our professional customer’s business by providing excellent customer service from highly trained professional parts people with rapid access to industry-leading inventory at competitive prices,” O’Reilly CEO Greg Johnson said during the company’s Feb. 10 conference call. “This unwavering commitment to customer service has allowed us to drive exceptional value for our customers and capitalize on competitive advantages to earn pricing premium in many of our markets.”

The unprecedented events of the past two years have changed O’Reilly’s calculus on growing its DIFM business. With some smaller independent parts sellers struggling to cope with the supply chain disruptions, demand volatility and inflationary pressures of the current market environment, O’Reilly sees an opportunity to grab a larger slice of the DIFM pie.

On the heels of record financial results for the full year and fourth quarter of 2021, O’Reilly recently rolled out targeted, companywide price cuts for DIFM customers, with the goal of winning new business and capturing more sales from existing professional customers.

DIFM Market ‘Very, Very Fragmented’

Johnson outlined the new DIFM pricing initiative during the company’s Feb. 10 conference call.

He asserted that the turbulent market conditions of the past two years – characterized by supply chain shocks and wild swings in customer demand – “have been more disruptive on the do-it-for-me side of the business, which remains very, very fragmented.”

The challenging environment in the DIFM market has magnified the gap between the large national retailers like O’Reilly and some of the smaller independent players, Johnson noted.

“Against this backdrop, we have been very successful in gaining professional market share and growing substantially faster than the overall market through the strength of our industry-leading inventory availability, tiered distribution and hub network and world-class professional parts people,” Johnson added. “However, we believe that the current disruptive environment presents an opportunity for us to enhance our competitive positioning and leverage our competitive advantages to drive accelerated long-term market share gains.”

Over the past few quarters, O’Reilly has tested several DIFM pricing strategies in multiple markets, and the company was “very encouraged” by the results,” according to Johnson. “After dialing in our strategy,” O’Reilly rolled out the professional pricing initiative companywide at the beginning of February.

Johnson emphasized that O’Reilly’s “service-over-price philosophy” isn’t changing. COO Brad Beckham echoed Johnson’s comments, noting that the goal of the initiative is to turbocharge O’Reilly’s gains in DIFM market share “based on all the services we offer along with a very competitive price.”

“We strongly believe that the lion’s share of the professional business in the marketplace is won day-in and day-out through exceptional customer service and rapid inventory availability,” Beckham asserted during the conference call. “However, we believe we can generate solid long-term returns by further investing in professional pricing.

“As an important part of our professional pricing initiative, we are intentionally not positioned as the lowest-price competitor in each market, and our store and sales teams remain as committed as ever to earning our customers’ business by out-hustling and out-servicing our competitors.”

‘Not a Race to the Bottom’

The pricing initiative was a hot topic during the question-and-answer session with investment analysts.

One analyst asked if the pricing initiative could be a slippery slope leading to additional price cuts in the future. In his response, Johnson insisted that it’s not “a race to the bottom.”

“I want to reiterate that this is a targeted approach. This is a very scientific approach that we’re taking,” Johnson said. “This is not across the board. This price enhancement was done by category, by SKU. And based on our performance, our supply chain strength, we still feel that we can charge a premium to our professional customers.”

Responding to a similar question from another analyst, Johnson emphasized: “We are not doing this to be the lowest price in the marketplace.”

“We’re not saying price is not important,” he added. “What’s more important to that professional customer is the relationship we have with them, the inventory availability that we have and our consistent performance and ability to get that part to them [on time] so they can complete the jobs they’re working on. Our professional customers will always prioritize that over price, assuming that we’re competitive on price. So we feel like this move will enable us to take additional market share, both from existing customers and from customers we may not be getting business from today.”

Beckham asserted that the pricing initiative is aimed at repair shops of all shapes and sizes, from the shade-tree mechanics and independent garages to the regional players and national chains.

In particular, company leaders believe the pricing initiative could help O’Reilly make inroads with its existing customers that are sourcing parts from O’Reilly and other suppliers – “maybe a piece from our public competitors, a really big piece from the independents and then another piece of their monthly purchases from a specialty company.”

“We’re already delivering to these shops,” Beckham added. “In some cases, we’re delivering part of the job that maybe they had to get another item from somewhere else. We just see tremendous opportunity [here], and our customers are telling us that with our inventory availability, our service, our people, if we can make some adjustments [on price], we really have a huge opportunity to turn into the first and only call for those garages.”

During the Q&A session, CFO Tom McFall provided more color on O’Reilly’s approach to setting price levels vis-à-vis its competitors.

“We have a wide range of competitors and … some compete solely on price. A lot of specialty, one-line suppliers get business by being absolutely the lowest price, and that’s not our business model,” McFall explained. “ So when we say we’re going to be within a competitive range, obviously it depends on how expensive the part is.

“… And what we have to remember is the biggest cost for our professional installers is their labor. And that ability to turn those bays is what turns their profit. So we want to make sure that we’re pricing holistically, for the quality of the product, the availability of the product, the team that we offer, the services that we offer – so we look at it in aggregate.

“There’s always going to be someone … who will be the lowest price. And if that’s how you sustain your business, if somebody comes along and decides to drop the price, you’re going to be in trouble. We want to have a relationship and a partnership with our professional shops that helps them make money over the long term.”

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