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Counterman Exclusive Interview: Federated CEO Rusty Bishop


6/9/2011
By Mark Phillips

Rusty Bishop tackles questions about consolidation, the overall business environment and what the future holds.
 
Mark Phillips
Is there room in the program groups for consolidation?

Well, I see you are starting with the easy questions! I guess there is almost always room for consolidation in any industry; however, program groups are a little different in that the main focus is serving and adding value for members. Most groups like Federated are not-for-profit entities, channeling all benefits to the membership. So the real question is: would there be a benefit to the members if there was consolidation among groups? The reality is that groups like Federated serve members and suppliers, and try to find ways to work together to be more effective and

efficient.


When independent shop owners needed support with advertising, merchandising, computer systems, training, leasing, credit cards, and other programs to remain competitive with large national chains, it was more efficient and effective for Federated to create its Car Care Center program rather than each supplier or each member to try to do so independently. There are hundreds of examples where Federated has leveraged costs or resources to improve services and support for members and suppliers, and doing so today is more important than ever before.



We work together with members and suppliers on things like catalog initiatives, leveraging the internet, improved training delivery, technical data integration, improved inventory forecasting, reducing returns and a host of other initiatives designed to improve marketing effectiveness and drive costs out of the system. We are working with suppliers to combine our members’ volume to reduce logistic costs, especially on imported lines; to merge member information for more effective data management; and to pool resources and talent for better ideas and direction. We have to be competitive and have found that working with preferred suppliers to drive down costs creates mutual benefit.  Dedicating the majority of our total volume to one supplier creates advantages in marketing and other areas that can support mutual success.


So the bottom line from my view is that the key to success for program groups is getting members and suppliers to work more closely together. If consolidation can improve that effort, then we should work to make that happen. However, if through consolidation, efforts get diluted and there is a lack of unified direction, then I can see how it might not benefit members. Certainly there are many areas today where sharing cost across a larger base would be an advantage but, at the same time, with the complexities in the marketplace, it is more difficult to get a large group of distributors to agree upon direction. While we could merge groups and all just keep doing the same things, I am not sure how that creates any added value for members or suppliers. If there are tangible benefits for group members to consolidate that provide added value to all constituents, then we will see that happen. After all, this is a very efficient industry that is constantly changing and driving continuous improvement.



What benefits exist in consolidation?


If we assume that two groups today with members who compete and have different suppliers, computer systems and marketing programs could consolidate and agree upon the same suppliers, systems, marketing, etc., then the benefits would be huge to everyone involved. But the consolidation would also require a great deal of change and some things would be sacrificed. What we have seen with some consolidations is that there may be a benefit to the groups but not necessarily to the members. Size is not a strategy unless it creates value for members and suppliers alike. To truly create value through consolidation, further cost effectiveness must be achieved in marketing, training, systems, inventory, warranty and returns, data, internet, catalog, manpower, customer service, communications, quality, logistics and the hundreds of other areas that are important to the participants.


If consolidation allows us to deliver more for less, then it is a good strategy. But delivering less for less will only allow our retail competitors to have a bigger advantage than they have today and that would not be a benefit. Cost reduction is also not a strategy if more value is given up than the savings achieved. I believe there are benefits available through consolidation but would want to make sure that the net overall improvement achieved for members offsets any sacrifice.



How has the business environment improved so far in 2011 over the past two to three years?


The business environment has been very positive for most aftermarket participants over the past two to three years as consumers seek to keep their cars longer, discovering the value of maintenance again. Our entire industry should be very proud of the overall value we provide to the American consumer. When the recession hit, the aftermarket was able to quickly and effectively help motorists adjust their spending. Consumers were able to forego the purchase of a new vehicle, maintain their old one cost effectively and spend the money saved on other expenses.


The aftermarket delivered great value and was rewarded with solid growth during the recession when other industries suffered. We saw a slight dip in miles driven as consumers adjusted to the new reality, but that bounced back quickly. We saw some focus on lower cost products and an increase in DIY activity, but now we are seeing demand for premium products and services growing again. We believe that the drivers of the market remain solid and that consumers have learned the value delivered by the aftermarket. While new vehicle sales will improve, much of the savings that the aftermarket created has been redeployed to other areas. This means that many consumers will now plan for maintenance and repair costs rather than replacement. This should serve our industry well for many years to come.



What are the strengths of the aftermarket over the OE?


There are so many strengths; it’s hard to know where to begin, so let’s start with parts. The OE manufacturers design parts for new vehicles where everything is new, tolerances are tight and exact, and everything fits together perfectly. In the aftermarket, our components must work with related worn OE parts, improve inferior OE designs that wear out or break quickly, and perform as well or better than the originals. The OEs may know more about vehicles, but I believe the aftermarket knows more about parts. The majority of aftermarket parts, including remanufactured parts, have found ways to improve on the original design to increase life or performance. Just look at the facts. Consumers are keeping their vehicles longer, yet these vehicles are safer and perform better.


The next area of strength is our distribution system. While the OEs can usually get a part within a day or two, our industry operates in a matter of minutes. And, we do so for every make and model, not just one. Plus, we supply an array of accessories, performance parts, farm and fleet, and many industrial parts supplied to factories and municipalities. It takes a unique group of people to handle this broad array of parts and vehicles, and do so, in most cases, better than the OE who focuses on just one make.


Then, we get to the shops and the technicians that repair every kind of vehicle quickly and cost effectively even as the OE dealer has every advantage in terms of communicating with consumers, access to technical information, repair processes and equipment, training and so on. Because professional technicians at independent shops must fix what comes into the bay, not just one model, they need access to systems that independently provide more overall information than an individual OE dealer. At Federated, we have a variety of programs that not only supply information, but also allow members to offer a nationwide warranty, roadside assistance and other such benefits so they can compete more effectively with the OE programs.


So how does the aftermarket do it? I believe that this industry is still the example of the American dream. It is the epitome of hard work, ingenuity and dedication with a focus on overcoming obstacles and the pride of accomplishment.  Better parts, better service, better people – that is the aftermarket’s strength in a nutshell.



With fuel prices creeping up over $4 a gallon, what effects if any, will be seen in the aftermarket?


If we all start using high gas prices as an excuse, telling everyone how bad they are; we might see more impact than we do today. The reality is that fuel prices do have an effect on the aftermarket but if we change our focus, we can turn them into a positive. The other day, I heard a retail radio ad trying to promote air filter replacement that talked about high gas prices and how much more it costs to drive a car today. As an industry we need to stress the positives. A more effective message would highlight how proper vehicle maintenance can increase gas mileage and help save money. There are too many organizations that use a negative approach and end up hurting the entire industry.


Financial analysts are saying that the only thing that could impact the aftermarket is high gas prices. I suggest they look at the last few years when we had high fuel prices, a recession and double digit unemployment, and the aftermarket was strong. High fuel prices have an impact, but the effects are mixed. We need to focus on promoting the positive aspects of our industry because consumers have shown that they will adjust to higher fuel costs. We need to remind everyone that a 10 percent improvement in fuel economy through vehicle maintenance can offset a 40 cent increase in gas prices at $4 a gallon.



What effect has e-commerce had on margins for parts?


I believe that e-commerce has had an impact, but can’t say how much or give a definitive amount. I would suggest that margins were already compressed and that there isn’t a lot of room for them to go down regardless of the effect of e-commerce.


The reality is that today there is so much more information available that it seems inevitable there will be a negative impact on margins. Let’s face it, many of our distributors and stores are competing with pricing on the internet from competitors that are miles away and sometimes don’t even carry parts. Shops can quickly compare prices from many different suppliers without lifting the phone. The result is that there is a lot of information available on prices, but not enough on parts. While e-commerce can be a great tool, we need to focus on making sure that the content is richer and complete. Just featuring a price and a picture is not a good use of the power available with e-commerce.


Our industry cannot afford margin compression or a major mix shift to lower priced parts at any level and we need to all work on how to provide more information to users so that they can make informed decisions. E-commerce should be a strategic benefit, not a threat, if used correctly. Unfortunately that probably isn’t the case today.



How is data being used to streamline operations and as a tool for inventory management?


The short answer is that data is used in hundreds of different ways. Federated has a number of initiatives in this area and there is a lot of member involvement. We are making improvements in “back room” costs through integrated information with suppliers, lower EDI costs, three-way matching and other such cost savings, and we are also working to improve scanning systems and processes. We have had some major efforts underway to increase speed and efficiency, and we are using the internet to store and communicate data across the membership, including inventory and availability. There is a lot of work being done on forecasting sales of new items and identifying the end of a part’s life, along with using data to analyze future needs and inventory requirements. In terms of data utilization and management, our industry is still in the early stages of what can be accomplished, and at Federated, we are excited about the opportunities that exist.



What are the biggest challenges for the rest of 2011 and beyond?


There are many challenges that face our industry but I don’t feel there are any that cannot be overcome. We obviously are challenged with inventory becoming more complex with vehicle and model proliferation and are exploring new tools to address this area. We are learning the value of data and the power of using it, and the challenge of managing it. We are challenged to provide better catalog information along with interchange, product features and images so that we can improve service to our customers and eliminate the cost of paper for our suppliers. We must keep up with the financial benchmarks set by the retailers and work hard to remain competitive. We must also find ways to attract and keep good people even as the passion for vehicles has declined, making this more challenging. We are challenged in many areas, but we always have been.


I believe that the aftermarket will remain viable and strong unless something comes along outside of our control. That’s why I believe the Right to Repair Act is so important. It’s more like “right to exist” for aftermarket companies. With the complexity of today’s vehicles, having ready access to technical service and repair information is essential.


This is a great industry and, absent the government letting the OEs take over the business, we will always find a way to make it better. Today, we have the largest vehicle parc in the world, the best independent repair system, the best parts distribution system, a society that is dependent on their vehicles to support their families and the greatest aftermarket in the world. Whatever the challenges, we will find ways to improve and grow, create good jobs, and maybe even make the parts here again someday. I am truly fortunate and proud to be a part of this great industry.













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