AutoZone: Bringing Customer Focus to the Wild West of Auto-Parts Retailers
AutoZone: Bringing Customer Focus to the Wild West of Auto-Parts Retailers
AutoZone is a leading automotive parts retailer and a leading distributor of automotive replacement parts and accessories. AutoZone operates over 5,000 stores in the United States (including Puerto Rico locations. In recent years, AutoZone has focused more on expanding their store count outside of the United States, and now operates 441 stores in Mexico as well as 7 stores in Brazil. These locations stock a wide variety of products for cars, trucks, sport utility vehicles and vans. These products include new and refurbished automotive hard parts, maintenance items, as well as accessories. In addition to AutoZone’s retail sales channel, 4,100 locations also operate a commercial sales program that provides timely delivery of parts to repair garages of varying size and scope, automotive dealers, and service stations. Additionally, a large percentage of products carried are available for sale through www.autozone.com.
Great People Providing Great Service
The aspect of AutoZone’s operating model that may be its largest competitive advantages lies in the customer centric focus that is instilled into each and every “AutoZoner” from day one. As the largest auto-parts retailer with a focus on the DIY (do-it-yourself) customer, AutoZone understands that providing high quality and effective service is the best way to capture repeat business. CEO William Rhodes alluded to this competitive advantage following AutoZone’s most recent earnings call, stating “We are pleased to report our thirty-seventh consecutive quarter of double digit earnings per share growth. Our strong culture enables us to provide exceptional customer service, which is a key point of differentiation.” This culture of exceptional customer service is immediately apparent when one takes a look at the AutoZone pledge and values, shown below:
AutoZone employees, take this pledge and the accompanying values very seriously, and it is not uncommon to witness employees (and vendors) chant the pledge in unison in advance of business meetings. Below is a video of the beginning of an AutoZone meeting that was used as reference for AutoZone Brazil during the company’s early expansion into the country.
Improving Inventory Availability
Always looking for an opportunity to iterate and improve productivity in existing stores, AutoZone CEO William Rhodes has recently turned his attention to opportunities that will leverage the company’s scale in order to optimize inventory placement. Over the past few years, AutoZone has worked diligently to implement novel techniques to improve in-store product availability for the end user. Historically, AutoZone relied heavily on their eight U.S. distribution centers to supply and replenish all 4,000+ retail locations. More recently, they have looked at ways to utilize stores as a secondary distribution source. Certain locations are now designated as mega hub stores, which are open 24 hours, offer retail up front, with a distribution center in the back. This significantly expands the parts holding capacity of a store, making it more likely for a specific location to have exactly what the customer wants.
What Next?
AutoZone has done a tremendous job of connecting its operating model to its overall business model of providing automotive parts to consumers primarily through their retail stores. By focusing on the consumer and working toward ensuring that they can effectively service this end user, they have delivered best in class results such as thirty-seven consecutive quarters of double digit earnings per share growth. As an auto-parts retailer, AutoZone has benefitted from a depressed economy, which led to consumers delaying new car purchases, instead opting to continue to maintain their older vehicles. With the economy slowly recovering, and consumers more likely to make that new vehicle purchase, AutoZone has looked to expand their commercial offering in order to reach those consumers that are now taking their vehicles to the dealership or service center instead of maintaining the vehicles themselves. Historically, AutoZone has set itself apart from its peers, and continues to lead the way when it comes to retail execution within auto-parts. Whether they can do the same as they are forced to adjust their core business model will be their next challenge.
Sources
http://www.fool.com/investing/general/2015/07/15/these-2-graphs-should-worry-autozone-inc-investors.aspx
http://www.autozoneinc.com/about_us/our_story.html
http://loyalty360.org/resources/article/autozone-puts-customers-first-to-instill-brand-loyalty
http://www.chainstoreage.com/article/th-straight-quarter-eps-growth-autozone
Thanks for the post, Eric. The employees’ fervent dedication to customer service reminds me of the Nordstrom case we did in FRC. I wonder how AutoZone’s employee management system is structured to balance upholding of customer service without creating perverse incentives that jeopardizes overall operating efficiency (time reporting, low-value activities). Further, I wonder how the tradeoffs between cheaper rent of the mega-distribution center and gains in integrating storage capacity to storefront play out over the years, particularly as large commercial accounts become a stronger part of their fulfillment obligations as the economy recovers.
Thanks Eric! Its great to see their dedication to their employees and how that dedication to service translates to a more successful operations compared to their competitors – Pep Boys, O’Reilly Automotive and Advance Auto Parts. Its not only their dedication to their employees that stands out its also their dedication to their supplier relationships. At Citigroup, I remember their interest stabilizing their supply chain and discussed ways they can provide financing for their lower rated suppliers at their own cost of credit. Its great to see the focus exceptional focus on values and partnerships permeate across other business stakeholders!
Hi Eric — great post! One thing that comes to mind is the capability to retain customers through both “good times” and down cycles – if indeed customer throughput does go down after the purchase of a new car, it is possible that Autozone could have a delayed loyalty effect with customers returning to Autozone after the warranty period of a new purchase due to the positive customer service experience they had in a previous period. Excellent service is a positive for customers in any fiscal scenario, and one wonders how this may contribute to their customer retention in a more significant way than the other aspects of their business model. Really interesting topic.
Very interesting article! It’s amazing to see the cult-like customer-centric culture they have and how it’s boosted their sales. I was comparing them to their competitors (e.g. Advance Auto Parts and O’Reilly), they seem to have better similar gross margins (52% vs. 45% and 52%) but better EBIT margins (19.2% vs. 10.3% and 18.9%). However their revenue growth has been the weakest (6.96% vs. 10.26% and 10.02%). Was wondering the following:
1) Do you think their move to “hub” type distribution will hit their EBIT margins? (given lower turnover due to need to store more decentralized inventory)
2) Do you see the expansion to outside US geographies as a solution to their sub-optimal revenue growth?