CONSULTANTS TO THE AFTERMARKET

Bill Wade

 

Tires, Toothpaste and Truck Parts: Not Exactly Sam’s Choice

By Bill Wade

First, know that I don’t have an "I-told-you-so" bone in my body. But the November, 2004 issue of this magazine carried a column detailing concerns with China as the end all solution for supposedly price sensitive heavy truck parts.

Most of the problematic scenario I painted there has recently come true. Quality concerns, shifting currency valuations, exploding longshoreman wage demands, evaporating government rebate support and environmental concerns have lined up as a perfect storm to rain on the Chinese parade toward manufacturing dominance.

Source of supply is certainly an important issue. However, there are two ways to increase results in this market ... improving how you buy and improving how you sell.

My personal bias has always been that innovation in sales pays a far greater dividend (and lasts longer than) a purchase advantage. Customer service can become a virtually unassailable competitive advantage, whether the competition is another independent distributor or an OEM dealer.

With these observations as background, there are some real questions (at least to me) of the value of private brands as a major distributor weapon in the heavy truck parts wars.

We are not alone in facing this question. Total private label share of US retail sales is expected to hit about 22% by 2009, a 50% increase in 9 years. Wal-Mart has already achieved 40% of its sales on store brands and store brands are present in 95% of consumer product categories.

The simple reason that private brands are succeeding is that too many name brands lack the development skills to avoid becoming unchanging commodities that can be reverse engineered – quickly, accurately and cheaply – then made and sold for a lot less, without any perceived loss of value by the end user.

Distributors and groups have deployed a range of private labels that roughly fall into three historic patterns:

  • The original, generic lines were typically of inferior quality and sold at the lowest price as a minimal solution (the 30/30 warranty ... 30 feet or 30 seconds ... which ever comes first).

  • After declining to low levels of total sales, “value labels” are making a comeback with better quality augmented by unconditional (never to be remembered) guarantees.

  • About 50% of all private labels are “copy cat” products that clone the quality and look of the best selling brand items as close as is legally (mostly) possible.

The automotive aftermarket is awash in these. They have killed the supplier margins necessary to support vital functions like tech training and sales support.

Some groups are considering “premium” label HD products similar to “President’s Choice” in grocery chains or “Kirkland” at Costco.
These products may actually be of better quality than the traditional national brand, but still sell for less. The trick here is critical mass and absolute supply chain control.

The long term survivors in heavy duty private brand efforts will be total supply chain value propositions with focused business models that allow deep discounts on both copy cat and unique product brands (like Trader Joe’s and Ikea ).

These players will grow the fastest, make the best return on assets, but private label will continue to be restricted by tight strategic scope.

The real danger is that distributors will put too much emphasis on the better margin percentages that they get on private labels instead of focusing on the profit dollars generated to cover duplicate inventory and other costs.

Interestingly, studies have concluded that 50% of private brands are net losers from a profitability perspective ... even though they have higher margin percents built into their lower price.

Offering knock-offs of the most popular commodities at lower prices with fatter margin percents has usually resulted in quick “new” sales. Four key questions persist:

  • What percent of these are new sales are to fleets that were already buying the branded products that yielded almost the same total margin dollars (albeit at a lower margin percent times a higher price)?

  • With long supply lines from Asia, plus container quantity shipments, are the clones really turning-and-earning with equal or better fill-rate satisfaction for customers that have switched from standard brands?

  • Private labels can no longer be dismissed as a cheap and nasty alternative to the real thing. Must suppliers bow down before the all-powerful distributors, or can multi-level offerings exist?

  • Brands are not dead, but premium brand manufacturers must fight to justify any price gap and perceived quality advantage. What does research tell us about the behavior of consumers and price instability?

These concerns won’t fade as fast as the concern over poisoned cat food. Bruce Merrifield and I are working on some ideas to answer some of these questions. More to come soon.

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