Auto Parts Business Is Being Rebuilt

By JAMES F. PELTZ

May 14, 1998 12 AM PT

TIMES STAFF WRITER

The retail auto parts industry is being realigned, with the field’s top players buying competitors and using public stock sales to expand their shares of the $32-billion market for do-it-yourself mechanics.

Not surprisingly, the car capital of the world--Southern California--is at the center of the shuffle.

CSK Auto Corp., which runs the Kragen chain, recently gobbled up Trak Auto Corp.’s 82 stores in Southern California for $35 million and reopened them as Kragen outlets. CSK also went public, raising $159 million to bolster its balance sheet for more expansion.

Chief Auto Parts Inc. followed by disclosing plans to sell its first stock to the public, but instead agreed this week to be bought by the industry’s biggest player, AutoZone Inc., for $75 million. That deal, under which AutoZone also will assume $205 million of debt, would immediately give Memphis, Tenn.-based AutoZone the leading share of the huge California market, because nearly 400 of Chief’s 556 stores are in the state.

And another big rival in the West, Pep Boys--Manny, Moe & Jack, has continued its expansion effort and this month moved into its 34th state, Washington, with a store in Everett.

What’s driving the changes? The number of people getting their hands dirty by fixing their cars hasn’t grown much for several years--about 1% to 2% annually, industry executives estimate. Two reasons: Cars are more complex than ever, and the strong economy and low jobless rate enable more drivers to pay for service.

Yet the parts chains continued expanding in order to generate growth. The result: Too many stores are now chasing too few consumers.

“It’s been tough times the last two to three years,” said AutoZone President Timothy Vargo, although AutoZone itself enjoyed a 17% earnings gain in its fiscal year ended Aug. 30, on sales of $2.7 billion. “The profits are not coming on stream like people thought they would.”

Beth Richard, analyst at Everen Securities Inc. in Chicago, said that “we’re at a point where the pie is being split up between too many pieces, and that’s forcing the ones that have strong balance sheets to look at how they can take out that overcapacity” by purchasing their rivals.

It’s a scenario that’s already being played out in the supermarket, drugstore and banking industries, among others. It’s also occurring among manufacturers of auto parts, as demonstrated by the recent takeover battle for Echlin Inc., which last week agreed to a $4-billion deal with Dana Corp.

And auto parts executives said more deals are coming in their industry. “There will be continued consolidation,” said James Bazlen, president of Phoenix-based CSK Auto, which also runs the Checker and Schuck’s auto parts chains. “The stronger players are looking to expand.”

AutoZone, in fact, wants to open an additional 300 stores in California over the next three or four years, either by building or acquiring new outlets, Vargo said.

The parts chains see mergers as a quick way to gain market share in valuable regions, and to leverage their existing operations. CSK Auto, for instance, is able to use its existing warehouses (in Commerce and Dixon, Calif.) and distribution system to feed its newly acquired Trak Auto stores.

CSK Auto also can spread its advertising costs over those stores and its existing 65 Kragen outlets in the Los Angeles area, and it can wrestle better terms from parts suppliers because it will be buying larger numbers of fan belts, oil filters, antifreeze and the like.

“We were under-represented in Los Angeles . . . and the Trak stores were struggling,” Bazlen said. “We saw the opportunity.”

There’s an abundance of other merger targets as well, because the auto parts retail market overall remains highly fragmented, with thousands of small operators. Altogether they’ll account for $32 billion in sales this year, estimates the Automotive Parts & Accessories Assn., a trade group in Bethesda, Md.

But there’s another parts market that the companies are targeting: Commercial users, such as auto service chains, tire stores, fleet owners, car dealers and mass merchandisers such as Sears, Roebuck & Co. that operate fix-it shops for cars.

Those parts sales amount to about $44 billion a year, and “that segment of the business is growing in the 3% to 5% range,” said CSK Auto’s Bazlen. He and others see commercial work offsetting the meager growth of do-it-yourself sales.

Pep Boys takes it a step further, offering both parts and service at its “supercenter” stores.

If the economy weakens, the do-it-yourself segment should pick up. Regardless, AutoZone’s Vargo rejects the notion that there’s fewer driveway mechanics today because cars are more complicated.

“I can show you quotes from the 1960s where they said, ‘People won’t be able to work on their cars because the cars are too complicated,’ ” he said. Today’s new cars still have starters, alternators, water pumps with hoses, batteries and shock absorbers, “and all those parts were on 1978 cars and located in exactly the same places. And it’s those categories that drive our business.”

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UNDER THE HOOD

A flurry of activity is roiling the retail auto-parts industry, with competitors buying rivals and selling stock to the public to expand their market shares. Some of the major players:

Company: AutoZone/

Stores: 2,001

States with stores: 38

Annual sales: $2.7 billion

Fiscal year end: 8/30/97

Company: Chief Auto*

Stores: 556

States with stores: 5

Annual sales: $465 million

Fiscal year end: 12/28/97

Company: Pep Boys

Stores: 711