Parts Town: A Case Study on How to Disrupt a Sleepy Market
Distribution businesses are not often thought of as sexy. Functioning as middlemen in highly fragmented industries, these businesses often require large amounts of capital investment and generate thin margins in return. Parts Town (“PT” or “the Company”), however, has effectively aligned its business model and operating model in a way that breaks this mold and has disrupted the otherwise sleepy restaurant equipment parts market
Parts Town’s core business is parts distribution, serving as the middleman between restaurant original equipment manufacturers (“OEMs”) and their end-users (i.e. think small knob in McDonald’s fryer breaks and franchise owner needs a fast and reliable way to replace the knob). Operating out of a single distribution center outside of Chicago, PT carries SKUs from over 200 OEMs and serves a broad range of customers, including technicians and service providers, large restaurant chains, family-owned restaurants and other institutions, such as hospitals and universities.
In order to be successful as a distributor, Parts Town must deliver value to everyone in the chain (OEMs and end-users) while still generating a profit margin for itself. The Company’s self-stated mission is:
“To be recognized as the team that changed the restaurant equipment parts market by setting extraordinary new standards in customer experience, web-based solutions, and supply chain partnership [1].”
While this is no small feat to achieve, these strategic operating focuses are what sets PT apart from its competition and has allowed PT to generate a revenue compounded annual growth rate (“CAGR”) of 35% over the last decade [2].
Supply Chain Partnerships and Pricing [3]
Parts Town has become a value-added partner to restaurant equipment OEMs by taking on the mantle of “master distributor” (either on an exclusive or semi-exclusive basis) and allowing OEMs to get out of the parts distribution business, which they generally dislike. These master distribution relationships end up being a win-win for the OEM and for Parts Town. The OEM does not have to manage the distribution and logistics associated with supplying thousands of small SKUs (historically via 50+ different dealers) and servicing a broad customer base. Parts Town, on the other hand, is able to pick up all of the OEM’s customers and further build its position as a “one-stop shop” for restaurant replacement parts, while offering price savings and better service to these end-users.
A key component of these relationships is the pricing benefit Parts Town receives in return for being the trusted partner for the OEM’s parts distribution. While I cannot disclose specifics, Parts Town receives a significant discount to the list price and in turn has a pricing structure that varies by customer type (i.e. independent restaurants tend to pay full list price, while larger customers can buy at discounts to list while still leaving good margin for PT). Furthermore, the industry focuses on percent discount versus the dollar list price, so PT benefits from the OEM-generated list price increases that occur annually. Overall these exclusive or semi-exclusive relationships are a key driver behind PT’s success and allow PT to command higher gross margins than your average distribution business.
eCommerce Platform and Innovation
Parts Town’s website is the industry leading platform and a key competitive differentiator, in an otherwise behind-the-times industry. The website has 360° views of more than 25,000 parts and is more user-friendly than the competitors with features that make identifying parts simpler (a big deal in this industry!) and tracking past orders more efficient [4]. In addition to the Company’s public site, PT also offers customized restaurant chain partner websites where franchisees can find a curated offering of parts that fit the specific pieces of equipment in their restaurant’s kitchen. Other recent innovation initiatives include the launch of PT’s mobile app and a mobile image recognition system leveraging the 360° images (pictured below), which allow for even easier identification and re-ordering of commonly needed parts [5].
Customer Service and Corporate Culture
Across all customer categories, PT is heavily focused on customer service. as this is a key source of value for end-users (and indirectly OEMs because if customers are happy, OEMs are happy). PT offers same-day shipping on all orders placed before 8:00pm, a policy that the traditional dealer distribution system could never fulfill and is extremely valuable for restaurant owners who oftentimes can’t operate effectively when a piece of equipment is down. PT also has a “three ring” answer policy (i.e. they do not use automated systems) for customer service calls and technical support, in addition to other high touch consumer outreach programs used to increase loyalty.
Lastly, the Company’s culture is an important part of the model as it ties together the other operating initiatives via the high value placed on innovation and customer service. The Company’s culture resembles more of what you would expect from a tech start-up than you would from a traditional distribution business and as a result, PT has remarkably low turnover rates (even within the call center department), implying high employee morale and savings on hiring and training costs.
Conclusion
While most may not find the restaurant equipment parts distribution industry to be anything exciting, I continue to be impressed by Parts Town’s ability to carve out a unique and sticky role for itself in the industry. Through a focus on OEM exclusive relationships, industry leading innovation and best-in-class customer service tactics, Parts Town adds value to both ends of the supply chain, and as a result has achieved a revenue CAGR of 35% over the last decade with annual sales of over $100 million in 2014 [2] [6]. While Parts Town has plenty of runway left within this market, who knows which other sleepy distribution markets they can disrupt next!
Sources:
[1] http://www.partstown.com/about-us
[2] http://www.chicagobusiness.com/article/20140531/ISSUE02/305319973/fast-fifty-2014-no-34-parts-town
[3] Personal discussions with CEO, December 2013.
[4] http://www.partstown.com/about-us/its-finally-here-partspin
[5] http://www.prweb.com/releases/2015/08/prweb12920719.htm
[6] http://www.inc.com/profile/parts-town
Thanks for this post – its always interesting to learn about someone succeeding a super obscure niche. I’d be curious what you think about their policy to answer the phone within three rings: how important do you think it is to their customers that they not use an automated answering system to route calls? Their policy of 3 rings or less seems very customer-friendly, but I’d be curious to see how costly it is for them to staff their call center to support this goal. A limited automated system could greatly reduce this cost, but perhaps its too important to customers to sacrifice.
Well-written post. Interesting that they are operating like a startup, bringing the underserved (and not super visible) industry into the 21st century. As you’ve mentioned, they could easily replicate this model in other “laggard” industries. How do you see their operating and business models evolving as they continue to grow and mature? At what point (if ever) should they diversify into other industries? Which industries?