Amazon’s swirling digital winds encircle commercial repair shops

April 18, 2017
While investors and many industry executives are preoccupied with the Amazon DIY threat, they should not downplay Amazon's interest in the commercial repair shops, which represents $95 billion in market share.

Amazon.com is kicking into full gear – including lucrative supplier contacts to help them corner the $50 billion do-it-yourself (DIY) auto care segment. When the New York Post published an article in January, they portrayed it as bad news for the national retailers, who could lose their DIY base to Amazon.com.

However, while investors, the press and many industry executives are preoccupied with this DIY threat, they should not downplay Amazon.com’s interest in the commercial repair shops, which represents $95 billion in market share. They should also entertain the strong possibility that Amazon.com may need a partner to connect them to the industry’s tech-savvy repair shops.

On February 8, O’Reilly Auto Parts CEO Greg Henslee assured Wall Street investors that he isn’t afraid of Amazon.com’s entry into the DIY segment. “Unlike an online site, a parts store employee can narrow a problem down to a single diagnosis. Given the complexity of selecting parts and repairing vehicles that DIYers face,” Henslee said, “we’ll get them lined up with a technician to help solve their problem if they can’t.”

Two dozen industry experts interviewed for this column agree that parts stores like O’Reilly Auto Parts, one of the industry’s largest, are better suited to identify and recommend the right item than an online site such as Amazon.com. Managers who work for warehouse distributors, manufacturers and consulting firms also noted that an online store may struggle to handle product warranties and labor claims. Most parts stores have in-house customer service processes set in place that allow them to haggle with their suppliers, which can take months to settle.

Currently, Amazon.com is far off from serving every marketplace with same-day and one-hour delivery. According to their 2015 annual report, this service is limited to about 30 cities worldwide, which is not enough to win the daily trust of thousands of repair shops that need products quickly while the vehicle is on the lift. As Henslee pointed out, when there’s a high immediacy of need, the nation’s 36,500 auto parts stores can deliver their products faster.

Manufacturers and consultants contend that Amazon.com and their traditional bricks-and-mortar rivals are competing in an evenly priced marketplace. Five years ago, Dorman Products unveiled Minimum Advertised Pricing, where sellers can lose their license to sell products if they advertise a resale price below a set figure. An afternarket sales executive who offers the company's products to the eCommerce channel explained that they price their products up to 30 percent higher to all of their online customers to prevent them from undercutting their physical competitors.

With these arguments in mind, consider why Amazon.com is capable of giving the likes of O’Reilly Auto Parts fits over losing their commercial business. For starters, by signing contracts with major brands like Dorman Products, Cardone, Bosch and Federal-Mogul, Amazon.com may have a better shot at selling brakes, chassis and ignition parts directly to the shop technician, who is less dependent on a counter person for advice.

As well, given the scale of contracts of billions of dollars at stake, it would be naïve to presume that topics such as claims, delivery, pricing and troubleshooting were ignored when the suppliers were negotiating with Amazon.com. Although Amazon.com has never provided details about how it may navigate the auto care industry, its founder Jeff Bezos has confidence in his vision that in the long run his online platform will thrive. He wrote to his shareholders that his customer-obsessed company culture is about an ”eagerness to invent and pioneer, willingness to fail, the patience to think long-term and the taking of professional price in operational excellence.”

Recent events prove that Amazon.com is capable of disrupting any industry. Last June, The Economist named Amazon.com the undisputed disrupter to the world’s biggest retailer, Wal-Mart. The primary reason why Wal-Mart lost their customers to Amazon.com is that in addition to offering selection and low prices, Amazon.com provided convenience via easy ordering and affordable delivery (including its $99 Prime service).

In fact, the convenience of researching, purchasing, and ordering products is why Federal-Mogul’s CEO, Dan Ninivaggi believes that a repair shop has much to gain from buying from Amazon.com. Ninivaggi told Automotive News that by 2020, he predicts that all customers will be doing online product research before purchase. Contrary to Amazon.com’s annual report on limited same-day delivery, he said that shipment and product coverage is already improving their competitive edge; however, it’s unclear who has become the carrier. What is certainly clear is that Amazon.com recognizes that a repair shop demands a seamless flow of parts to quickly fix and get their customers’ vehicles running.

It’s easy to speculate that over time, repair shops will seek mobile connectivity to improve their businesses. Rather than making phone calls to counter people at a parts store, they will take advantage of the immediate accessibility and flexibility of online ordering with mobile apps used beneath the lift. Big data analytics will help buyers make effective product selections and identify what parts they need. In the future, Amazon.com will serve primarily as a utility and less as an online store. The repair shop will be able to save time and money through a few clicks of a button.

Federal-Mogul, which sells engine parts, chassis, brakes and wiper products to O’Reilly Auto Parts, began cozying up with Amazon.com in 2016. So to speculate one step further, would Federal-Mogul’s holding company, Icahn Enterprises, consider an alliance with Amazon.com? What makes this question interesting is that Icahn Enterprises differs from their traditional rivals because their 800 retail stores also operate commercial repair shops within the same space.

In this potentially symbiotic relationship, both companies would be able to work off each other’s strengths. Icahn Enterprises’ Pep Boys and Auto Plus stores have roughly 6,000 repair bays located throughout the nation that operate within one hour’s drive from any of Amazon.com’s distribution centers. In addition to those outlets feeding off Federal-Mogul, ordering parts, chemicals, and supplies from one single source would make product transactions efficient. Product returns, warranty defects, and labor claims are better off processed in a singular clearing house. This streamlined vision is much cleaner, more efficient, and more lucrative, with both businesses buying and selling from each other.

A Pep Boys senior-level manager, who requested anonymity, could neither confirm nor deny the possibility of Amazon.com and Icahn Enterprises jointly servicing their commercial shops. But the manager suggested analyzing the Icahn Enterprises annual report, which states that its goals are to “strengthen distribution channels and enhance our automotive segment’s ability to better service its customers.”

Odd bedfellows have prevailed many times before, so it would be imprudent to rule out an out-of-the box partnership between Amazon.com, which loves to pioneer, and Icahn Enterprises, which thrives on unlikely business combinations. Both companies are ambitious and unorthodox.

As technology accelerates toward intuitive functioning, it’s essential to embrace Ninivaggi’s vision that a digitally empowered repair shop could propel Icahn Enterprises above higher ground and allow Bezos to keep his online company aloft. If this model flies, it could prove to become a compelling template for independent repair shop business.

Sources:                                                                                                                                                                             

1.              2015 Amazon.com Annual Report and Form 10-K, 1/31/2016

2.              Automotive News, 2/20/2017

3.              The Economist, 6/4/2016

4.              2016 Icahn Enterprises L.P. Form 10-Q, 11/2/2016

5.              The New York Post, 1/23/201

6.              Reuters, 2/9/2017

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