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The Program Group Puzzle


6/1/2005
By Brian Cruickshank

As the program group universe continues to consolidate, groups are looking to find their niche in the ever-increasing quest for shareholder value, retention and recruitment.
 

Steve Sattinger strode onto the stage on a typically quiet March morning in New Orleans during the recently held Parts Plus national member meeting.

The Parts Plus chairman and president of Merle's Automotive had an important announcement to make: He would be the first to publicly announce to the Parts Plus membership the group's recent merger with Cartersville, GA-based program group Independent Auto Parts of America (IAPA). It was the group's first live acknowledgement of the recent merger, one that Sattinger said would greatly fortify both groups within the market. With enthusiasm and confidence, Sattinger explained the rationale behind the merger, which was first announced on January 14. As the crowd of Parts Plus member WDs, stores and auto care centers listened, Sattinger cited the additional strength of the newly combined group: a total of 51 members with an annual volume boosted to an impressive $2 billion. Truly, Sattinger said, there is obvious strength in numbers.

While this is true, the not-so-hidden truth behind the merger was based in large part on a merger between two warehouses - Qubec, Canada-based Uni-Select and Tonawanda, New York-based Middle Atlantic Warehouse Distributors Inc (MAWDI). Indeed, this merger went well beyond national borders, since Uni-Select is a Parts Plus member and MAWDI is a major member of IAPA. Because of this inter-group activity, whisperings of a program group merger were in the air as soon as the two WDs announced their new arrangement in late 2004.Inter-group mergers and acquisitions such as this are one way groups may find they make more sense together than apart. In the end, IAPA found that without its largest (and founding) member, MAWDI, a new alliance with Parts Plus made perfect sense.

For others, group mergers come through the result of the natural store and warehouse attrition that have become commonplace within the market.

And so, the Parts Plus/IAPA announcement was not the last program group merger of early 2005. Just six weeks after that initial announcement, RPM and National Pronto announced a merger on February 28. For groups such as RPM, a merger made sense because of comparatively limited membership numbers and volume.

"We had been looking for about the last two years at the different possibilities to grow our volume base because we strongly believe that volume and compliance are necessary components to providing our members the types of programs that will allow them to compete in the marketplace," said former RPM Executive Director and now, Pronto Director of Supply Chain Management Mike Mitchell.

As RPM looked out into the program group landscape, it was looking for specific criteria that would mesh well with its members and group identity. As most will concede, that's not often an easy thing to find.

"We had a couple of false starts," he continued. "At (RPM's) meeting in November, the board charged us to take another look at the universe and see if there was something out there that made sense. We had about ten parameters that we thought would define a complimentary group that we could associate with.

"When we met with Pronto, almost immediately the culture and the chemistry between their leading members and our leading members was evident. Everything intuitively seemed to fit. Then, when we started looking at the numbers and the nuts and bolts, it seemed fairly clear we had some very similar approaches."

For RPM and Pronto, the merger allowed each group to gain something it wanted, but couldn't easily gain on its own. In the end, both groups found that their separate paths were crossing and once examined by both groups, differentiation between them had gotten to the point that they were better together than apart.

Even before these recent mergers, program groups have discussed the synergies of uniting. Some of these mergers are discussed and then result in a successful marriage, such as the 2000 mega merger between All Pro/Bumper to Bumper and Auto Value.

However, other mergers are discussed from time to time, but many in the end are abandoned because of issues relating to culture, WD overlap, supplier constraints and, of course, member politics. In these cases, the groups find that their separate group differentiation clashes too much with the other, and continuing to forge a separate path is better for each group's respective members.

In 1998, for example, APA and National Pronto Association had investigated a potential merger, but decided there were too many issues to overcome. At the time, then-Pronto president (and current ASA President) Ron Pyle said prophetically that while the merger between APA and Pronto didn't make sense then, it did not necessarily mean that future program mergers were out of the question.

Since Pyle made those statements, there have been no less than four mergers among the market's program groups that have blended separate group uniqueness into a smaller universe of brands: Viper/Pronto; Pronto/RPM; All Pro/Bumper to Bumper/Auto Value; and Parts Plus/IAPA.

As individual warehouse populations get smaller, group differentiation will become even more crucial.

GROUP STABILITY
Often at the core of these group mergers is acquisition activity at the member level. The market has witnessed over the last several years unprecedented merger activity of warehouses. Some of these mergers have been between members of different groups, such as the merger of Uni-Select and MAWDI. Far more common, though, are those mergers between members of the same group. The list of recent mergers is long, with the most notable including Genuine Parts Co.'s acquisition of NAPA member NAPA Hawaii, GPI's acquisition of fellow CARQUEST members Straus-Frank and Auto Parts Warehouse; O'Reilly's very recent merger with Alliance member Midwest and Parts Depot's February announced merger with Tropical International. Each of these acquisitions further shortens the list of current and potential group membership.

As a result, many groups are quick to protect their members and are always on the lookout to add new, quality membership.

"(Member consolidation) is just a dynamic that's going to happen in all industries," said Aftermarket Auto Parts Alliance President Dick Morgan in a recent aftermarketNews interview. "It's happened in industries before ours. Our industry is one of the last ones to get started. If you look at other industries - like groceries, hardware and plumbing supplies - the consolidation happened much sooner. You really can't make a strategy for it, other than to keep a running list of prospects, so that if you lose one company, you've got a list of others to take its place."

Federated Vice President Mike Schultz takes a similar view: "The consolidation of some groups is a logical 'next step' considering the number of distributors that have been sold in the last two years. If a group loses some of its members because of consolidation with other distributors to other groups, they may have no choice but to look at merging with another group. (Federated) is fortunate that we have a great mix of members ranging from the very large to the medium-size distributor. Our scale is such that industry consolidation does not to put us into a position where we would need to look for a marketing partner."

Nevertheless, even Federated members need to find value in membership. Finding value for these members - and potential new ones - ultimately boils down to differentiation: What makes one group different than the rest.

THE DANGERS OF "ME TOO"
In the 1970s, there were 21 different program groups. Today, the total is down to a baker's dozen.

How many groups there will be in the future will boil down to two factors: mergers among members and how the uniqueness of each group matches the needs of these existing members. Without a strong roster of members and/or without a unique brand or purpose, members will look elsewhere.

"I think groups are going to continue to consolidate because there's no avenue to grow," said APA President Dan Freeman. "As one or two groups grow, they do it at the expense of another group. That's a trend that will continue. We feel we've put ourselves in a position that (APA) will be one of the survivors because we're a very diverse group. Because we are different, that gives us an opportunity to survive. There's a real danger in being a 'me too' group."

Freeman hits on an important idea: the importance of being 'different.' Being a 'me too' group can be disastrous in a highly competitive environment.

GROUP DIFFERENTIATION
Where do today's groups fit into the over all program group landscape? But perhaps the more important question is how do these groups differ from one another? They are, after all, chasing the same installer business. Nearly all groups need to maintain membership, so attracting and retaining members begins and ends with differentiation. How a member views itself and addresses the market will ultimately determine which group retains its membership.

At first blush, it's difficult to separate one group from another, but the Counterman staff has attempted to categorize the market's program groups to get a better view on how these groups are differentiated. Taking a general look at the program group landscape, one can divide the groups into five subcategories.

The Dominant Member Groups
These groups, such as CARQUEST and NAPA, tend to be more closed (i.e., not looking to add members) and are characterized by having one major, dominant member WD - in this case, General Parts, Inc. and Genuine Parts Co., respectively.

These groups have strong, focused, multi-tiered marketing and often have the highest level of compliance among their member stores.

In the end, these groups have managed to turn what started as a true program group into more of a product brand. These product brands in some cases have become so strong that they even trump the group brand in the consumer's view.

The Multiple Member Groups
These groups, such as Automotive Distribution Network (the merged group of IAPA and Parts Plus), Aftermarket Auto Parts Alliance and Federated, are characterized by many strong members, some of whom are significant market consolidators.

These groups continue to build their brands, many of which are considered quite strong. Since these groups are populated by many members, rather than a small minority, the groups are often driven by member committees, often each with an equal voice in group decisions.

Because of WD consolidation, these groups must be constantly vigilant about their members, always on the lookout for new members and growth opportunities.

Even within this tightly defined sub-category, there are great differences. "There are several reasons Federated stands out among the other groups," said Schultz. "First, we have a great membership that supports our approved suppliers by being committed to line commonality. We have what I believe is the strongest, most dedicated and hardest working management team in our industry. Our marketing programs are consistent in their message and with their frequency. We are the only group that has regional managers in the field. Federated is also one of the select groups that offers a member-owned co-managed warehouse that keeps members very competitive."

The Store & Warehouse Groups
Groups such as National Pronto Association and AIM/CMB might be seen as having a more concentrated store-based strategy. These groups tend to be more of a buying group, although they do have strong marketing programs, focused at the store and installer levels. These groups are in definite growth modes, as they win over new members through active recruitment.

However, it's difficult to pigeon-hole a group into one of these subcategories. While Pronto, for example, may have a significant store-based strategy, it still has many three-step WD members.

"Almost every one of our customers in a rural market is more like a traditional jobber, servicing retail and wholesale trade," said Maggs. "We have members who service both. Sturdevant's has a number of company-owned stores, yet they also service 60 or 70 independent auto parts stores that do retail and wholesale. You have to look at the opportunities that are out there. There is controlled business and there is independent business. We still have several members who service the three-step market. All of the programs we created can be taken through the WD down to the three-step market. The fact is, as it gets much more competitive, there are more and more controlled stores than there are independent jobbers out in the marketplace."

The Focused Two Steppers
These members within these groups, such as IWD/Auto Pride, APA and Trustar, tend to concentrate on more two-step distribution models rather than traditional three-step.

The members are very independent, and thus the groups tend to have fewer compliance constraints. They sometimes can be focused (but not necessarily) on niche markets such as undercar specialists or import nameplates.

"I think that (the import parts market) is one of our niches," said Freeman. "To be successful, if you're an independent entrepreneur-type of automotive parts distributor, you got to be in this market. If you've got the same thing as AutoZone and Advance, you won't be in business for very long because you can't compete on price and advertise like they do. To draw a customer base, you'd have to rely on niche-type of marketing to be a little bit different.

"Some of the niches our members are involved in are, of course, import specialists, but also lots of members who are paint and body, fleet/municipality, small bay expertise people - they deal with two or three bay operations, truck/heavy duty, industrial and national accounts. Everyone has to be involved in some those niches or all of them."

The Super Specialists
And finally, there are the super specialists such as the Engine Parts Group. These are more pure buying groups and specialize in very specific areas such as chemicals, engine hard parts or accessories.

In the end, how groups view themselves is less important than how their members view them. Those groups that continue to show value to their members - value that cannot be found elsewhere - will ultimately determine who figures out the program group puzzle.













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