The U.S retail auto parts industry generated over $56.3 billion in revenue last year and has grown at an annual rate of almost 2% over the last five years. This is despite the fact that DIY customers are slowing and online competition is increasing (Amazon.com). The largest four players – Advanced Auto Parts, O’Reilly Auto Parts, AutoZone, and NAPA Auto Parts – comprise almost two-thirds of that market.
The biggest challenge facing the industry is shrinking demand from its key customers: individuals and households, which combined for over 60% of last year’s sales. These customers are in a low-growth or no-growth category, as demand for auto parts is a countercyclical. This means that demand is greater when the economy is tight. With the economy currently improving, sales of new cars are up and people will pay someone else to fix them when they need repair. Additionally, modern vehicles are becoming increasingly complex making self-repairs even more difficult.
Realizing that this core customer group may not provide enough future demand, the retailers are working towards strengthening their commercial, or B2B, side. “The number-one shift within this industry is the brick-and-mortar guys pushing the volume on the professional installers,” said Bret Jordan, a managing director at the investment banking firm Jefferies. Some retailers have more work to do than others in this regard. According to Jordan, the breakdown on commercial vs retail consumer business among the big four is:
Auto parts retailers are also expanding their inventory to include a variety of accessories, ancillary goods, apparel, tailgating supplies, and toys. The goal is to come in for a quart of oil and leave with three or four other items that you didn’t need.
The four major chains have a huge footprint in North America and continue to open additional stores. The most recent data shows the breakdown:
AutoZone – 5,313 stores across 50 states and Puerto Rico, 488 stores in Mexico, 8 stores in Brazil, 26 IMC branches
O’Reilly – 4,712 stores across 45 states
Advanced Auto – 5,058 stores and 127 WorldPac branches
NAPA – 6,000 stores plus NAPA Canada
There is consolidation, with the bigger chains buying regional and local brands. Advanced Auto bought General Parts International (owner of Carquest) for $2 billion last October. This deal included 2,664 Carquest locations. O’Reilly purchased Bond Auto Parts late last year and added 48 locations in the Northeast.
Some might say the market is saturated with approximately 43,000 auto parts suppliers in the U.S., but Geno Coradini of JLL says, “It is less about saturation and more about a few components that differentiate one retailer from another, and it is a constant race to provide the right parts at the right price, and being able to provide them in short order.”
Amazon.com has also been more heavily focused on the auto parts sector. In January, they announced several major deals with auto parts suppliers to increase their online inventory. Only time will tell if Amazon’s threat to the brick-and-mortar stores will be successful. Commercial auto repair shops need the parts they want immediately, and even Amazon’s same-day delivery may not be fast enough for the mechanic with a car on the lift and needing the part within an hour. Similarly, DIY customers may be willing to wait for some parts to get a better price, but most will need the part right away and forego the wait of an online order.
Auto parts retailers have experts on hand to give advice on the correct part and even how to install it on your vehicle. “There is always a guy there that says, ‘Do you really want that type of oil?’ Or, ‘The type of windshield wiper you really need is this,'” said Spencer Bomar of retail advisory services firm Avison Young. As cars get more complicated, he notes, everybody needs that little bit of extra service.