Are Auto Parts Retailers Resistant to Amazon.com?

The auto parts retail and distribution industry is consolidating among four major players: Advance Auto Parts (AAP, Financial), AutoZone (AZO, Financial), O’Reilly Automotive (ORLY, Financial) and Genuine Parts (GPC, Financial) NAPA.

Decades ago the auto parts distribution world was ruled by dealership parts departments. Even as little as 10 years ago the big four only controlled about 25% of the parts market. Today that figure is closer to 40%. Unsurprisingly as the market became dominated by a few large firms and economies of scale kicked in, returns on capital for the parts companies are appealing.

(Data via GuruFocus.com)

The oligopolistic nature of the market is likely the main driver of the high returns on capital. While there are substantial barriers to entry for a new competitor, there is substantial competition between the incumbent firms.

Additionally we are likely to be entering a new growth phase in car repairs. Cars that are one to five years old are typically under warranty and have few repairs. Any repairs that are performed are usually done at dealerships with parts procured through the dealership network. Cars that are over 10 years old usually have fewer repairs performed as owners usually just pay for only critical repairs and defer other nonvital items. According to the ACA the number of cars in that middle five- to 10-year bracket peaked at 103.7 million vehicles in 2011. The number was projected to fall until 2018 at which point it would finally start growing again. This means that in a few years the auto parts retailers should have a fairly strong tailwind at their backs.

Amazon-resistant retailers

What makes the auto part stores so tempting to investors is the belief that the business model is resistant to disruption from Amazon.com (AMZN, Financial). Recently Amazon has started to make a bigger push into the auto parts market by beefing up its online parts offering and attempting to break into the B2B (also called the Do It For Me [DIFM] market by auto parts retailers) market by partnering with smaller local parts companies that can make same day deliveries to garages.

Indeed, I’ve read a few stories of garages switching some of their parts purchasing to Amazon. So is the auto parts retail business as resistant to Amazon as people think? I believe the answer is still yes. To see why we have to take a look at the different markets the parts stores serve.

Sales to the professional repair market account for about two-thirds of the parts market. Typically these customers need their parts right away. Not in two days, not the next day but as soon as possible. Customers want their cars fixed quickly, and shops want to be doing work and making money, not waiting for parts. The big four have extensive distribution networks that allow them to deliver most parts in about a half hour give or take. That also means it’s easier to return parts or get a different part if the first one didn’t fix the problem. There is nothing for Amazon to disrupt since Amazon’s existing logistics network can’t match the big four. This is why Amazon had to partner with local parts suppliers when it began to move into this business.

Of course there are some professional customers who may find next-day or two-day delivery from Amazon acceptable – perhaps a dealership that does a large volume of used car sales. The dealership is fixing up the trade-ins it takes in before putting them out on the lot. It takes time to move a vehicle through the trade-in process anyway so waiting a few days for parts may not be a big deal, and the company might rather save money by going through Amazon.

The next category is the DIY customer. This category can be further broken down into people who want parts right away and the guy (or gal) who is going to wait until the weekend to do a repair. For the person who wants a part right away the only options are the local auto parts stores, which as we said earlier are largely dominated by the big four. For the person who is waiting for the weekend Amazon with its cheaper prices and free two-day shipping is a great option.

Except I’m a bit skeptical about how much disruption Amazon will be able to cause. There has always been a healthy online discount auto parts market and Amazon’s entrance is nothing new. One of the most popular online discount stores is RockAuto.com which has been around since 1999. There are a host of other online retailers like Summit Racing, JC Whitney and Jegs just to name a few. So the big box auto parts retailers have been competing with cheaper online stores for almost two decades. What is Amazon going to do that the other online retailers haven’t been doing?

I had (unfortunately the northeast winter rust monster ate it) an old Jeep I used to wrench on for fun and to help myself learn more about cars. Since I had another vehicle I could drive I was the typical weekend DIYer and could wait for parts. I typically bought everything from RockAuto because it had the best prices. I decided to do a bit more thorough research and recently checked the prices of three parts for three popular vehicles on Amazon and RockAuto. The results are below.

RockAuto easily beats Amazon on price. While I only looked at three parts I did scour various car forums and had yet to find anyone who found parts consistently cheaper on Amazon. Instead, Amazon seemed to be the go-to store for people who wanted their parts cheaper than the big box parts stores but also reasonably quickly (two-day Prime shipping). For people shopping solely on price it was RockAuto or other discount retailers and for people who needed something right away it was a physical parts store.

Advantages to physical retail locations

The parts stores also claim that there are a few other “in-store only” features that make their businesses resistant to Amazon. I’m a bit skeptical about some of the claims.

First, they offer in-store services like battery testing as well as tool rentals. This is definitely something that helps make physical retail more appealing than online.

Second, the physical retail location means you can take in your old part and verify that the new one you're buying is the same as the old. This to me is a huge selling point. Auto manufacturers are known to seemingly randomly change various parts throughout different model years of the same generation vehicle, and parts numbers sometimes end up not being updated. Being able to verify the new part is the same can sometimes be critical.

The third thing is the one I’m most skeptical about. Parts stores claim they have trained, knowledgeable staff who can help you find the right part. Browse any of the threads discussing parts stores on any of the car forums out there, and you’ll read horror stories and tales of incompetence about employees at all of the major brands. In fact, I once had someone at one of the big four try to sell my fuel line hose as transmission oil line hose (fine, you put your face next to it with 200° oil flowing through it). From what I’ve read I get the feeling that over the years the stores have put less emphasis on hiring people who know cars and more emphasis on keeping costs low and hiring lower wage employees. There still seem to be enough knowledgeable staff around that most everyone can find the one gem of a physical parts store in their area.

From my reading of various car forums it seems that NAPA has the most knowledgeable staff with O’Reilly’s coming in a close second. The caveat is that it varies from region to region. Where you live the local AutoZone could be the best and the local NAPA terrible. Nevertheless, from my reading it seems that NAPA generally had the best reputation followed closely by O’Reilly’s.

Summary

Right now investors are drawing the right conclusion about the susceptibility of the parts stores to Amazon. Amazon’s logistics network as it is currently configured just isn’t a threat to the bulk of the parts stores business. Additionally the DIY market has always had competition from discount online retailers, and Amazon being another entrant should not have a large impact. I’d be more worried if I was RockAuto than if I was NAPA. The recent drop in stock price from some of the auto parts retailers like Advance and NAPA (Genuine Parts Company) may be an appealing entry point to investors and indeed it is an investment we are considering for our portfolios.

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