Neil Pattemore The giant factors are beginning to specialise – are there any business lessons from this?

Neil Pattemore
Business analyst at XEN Consultancy for the aftermarket

You may have noticed in last month’s magazine that there has been a spate of acquisitions in the parts distribution sector recently.

Andrew Page has acquired Solid Auto, whose reputation for sourcing hard to find parts and expertise in Japanese and Korean vehicles is well renowned and provides an obvious expansion to the range and expertise of Andrew Page’s portfolio. Page also added 21 sites from the collapsed Unipart Automotive in July 2014.

Elsewhere, The Parts Alliance has bought SAS Autoparts, who have several branches in the Leeds area as another of the parts groups expands still further.

There are several ‘levels’ in terms of the size and of the international trading profile of the various companies, including the U.S. car parts giant LKQ Corp (owners of ECP) acquiring Italy’s Rhiag Group from private equity firm Apax Partners LLP, through to Equistone Partners Europe SAS (a private investment company) acquiring control of French car parts maker Mecaplast Group, all the way up to the German giant ZF acquiring the international TRW Automotive Holdings Corporation. So why this rash of recent take –overs? What’s the big attraction and what’s in it for the smaller parts distributors?

Perhaps the obvious answer is the economies of scale which occur not only for the enlarged organisation being able to benefit from the synergies of reduced internal costs, but also to their suppliers who can benefit from reduced customer numbers whilst maintaining, or even increasing their supply volumes. All this should lead to the enlarged organisation benefiting from increased profits, increased competitiveness or lower prices to their customers.

It can also create brand differentiations, as is the case with the acquisition of Solid Auto. Being able to expand the range of products available, especially when there is a niche or high level of
knowledge and expertise involved, can create added value to the wider product range on offer. This can in turn help protect a product or service from the competition and encourage loyalty.

As companies grow in size, they can become more difficult to challenge as they acquire even greater abilities to fight their competitors on a variety of issues, such as price or choice of products. However, conversely, big is not always best and smaller, more ‘nimble’ businesses can often provide an excellent local service tailored to the needs of their specific customers.

Equally, with the increased buying and distribution volumes, larger organisations can defend their market share more aggressively against not only existing competitors, but also as a barrier to new entrants to the market. This becomes especially important in the international arena where global competitors serving a global market are using acquisition and consolidation to gain a competitive advantage.

As distributors get larger, they can also start to exert increased pressure on suppliers to achieve better control of distribution channels to achieve some form of ‘exclusivity’ of product or ‘preferred supplier’ status – either way gaining an advantage over their competitors.

However, as companies consolidate and get ever larger, there comes a point where the legislator or regulator becomes interested to ensure that a monopoly situation is not created. In the parts
distribution sector, this may be a difficult issue to address, as there are both high-level supplier agreement elements, as well as the highly fragmented local issue of competition at the point of delivery to a workshop.

This is where the real day-to-day competition exists, as workshops are interested in the key elements of parts distribution – the right part at the right price at the right time. Local distributors certainly understand their local market requirements and can deliver in every sense of the word, but unless they belong to a larger buying group, they may struggle to compete on price. Perhaps this is where the key issue comes to light – not just having the right stock on the shelf, but being able to buy this stock at the right price.

This leads into another developing part of the sector – on-line selling of replacement parts. This appears to be an attractive proposal to some parts suppliers, but has the fundamental risk of alienating their own trade customer base, whilst creating the problem of consumers buying products at lower prices, but still needing a workshop to fit them – creating conflicts of interest and potential liability issues for both the parts supplier and workshop. Not exactly a win- win situation.

That isn’t to say that smaller businesses should not have a consumer-facing an internet presence, but remember that the ‘net these days means far more than just having an erratically updated web page.
Instead, forming an all- encompassing social media outlook is the way to do it – just remember that it takes resource to keep it going.

So at the higher level, it makes sense to look at acquisitions or mergers and the advantages this will bring, but at the level of supporting the local workshop, small may well remain a distinct advantage for some time to come – discuss!

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