64. Amazon Business Series: Auto Parts Retailers v. Amazon, Part 3

Parts 1 and 2 of this blog series looked at Grainger’s profit woes and new ways to assess the Amazon Business challenge to all distributors. Now Amazon competes with auto parts retailers for business. Using part 2 guidelines, what would you advise auto parts retailers to do?

Amazon Competes With Auto Parts Retailers for Business

Do the Auto Parts Retailers Have a Problem? In January, Amazon (AMZ) signed more direct-buy agreements with aftermarket auto parts makers. The stock prices of the Big Four retailers (Genuine Parts, O’Reilly’s, AutoZone, and Advanced Auto) took a hit. But in April, stock analyst reports claimed that the fears were overblown, that Amazon couldn’t put a dent in the Big Four’s moats, and that the stocks were now a bargain.

Analysts detailed the powerful supply chain barriers the Big Four have created. Professional mechanics need local, technical advice, high fill rates, quick deliveries and pick-ups, and easy return of unused parts. In this case, AMZ’s better prices aren’t enough to win.

What was Missing from the Analyst Reports?

It may seem like the Big Four have nothing to worry about. But here’s what wasn’t said:
AMZ’s auto parts sales for 2016 are estimated to be $3 to 4 billion and rising to $5 to $6 billion in 2017 due to January’s expansion moves. Not bad!

There is also an increasing trend for factories selling to AMZ direct.

When it comes to delivery response time and prices, AMZ has same-day delivery in 40 cities at an average price of 23% below the Big Four. There was also no mention of AMZ’s 30-minute delivery experiments.

Customer segment sizes were expressed only in terms of sales. What’s missing is the net profitability of the customers who self-select to buy from AMZ, who don’t need services. Does this suggest that AMZ will skim the super-profitable 5%, leaving the loyal, most unprofitable 5% to the Big Four?

There were unmentioned, potentially lethal, assumptions, such as AMZ is currently doing what they will still be doing in 2019. The reality just might be that they will smoke the Big Four in innovative, customer-centric value creation.

What to Do

So, what do you advise the Big Four to do as Amazon competes with auto parts retailers for business? How about getting line item profitability analytics to find and stop the cross-subsidies among customers and SKUs? Then, innovate value for the winners.

How about stop offering free services to excessively unprofitable customers by implementing minimum orders, unbundled delivery, and restocking fees, or crank up your innovation rate? Customer-centricity will reward both suppliers and the best reps who can and are worth value reinvention.

You can apply other insights from Part 2 to this case. Don’t try to imitate AMZ, like Walmart is doing (read more about this in Part 4). Innovate value for your profit-core customers, and think about these questions as you do.

  1. How would you rate your innovation rate to create best customer cost/benefit value, especially for ‘I know-what-I-want’ millennial buyers? Is this gap a problem? What will you do about it?
  2. How can you know the net-profitability of both customers and SKUs if you don’t have a cost-to-serve model at the line item level? What other startling discoveries might line item profit analytics reveal? Do you know what you don’t know?

Want to learn more? Email me at Bruce@Merrifield.com.