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Something pretty significant happened in the industry on February 9, 2007. A relatively small internet parts retailer (with about $59.7 million in net sales in 2005 and $83.5 million in the first nine months of 2006) became a publicly traded company. U.S. Auto Parts Network, Inc. (NASDAQ:PRTS) is obviously another candidate for the AutoRetailStocks.com index should another company in the index be acquired or taken private.

I didn't make a big deal about the announcement, in part because I was out at the National Auto Dealers Association [NADA] Convention. But, it really goes to support my view that SIGNIFICANT change cometh in the automotive aftermarket space over the next ten years (and it is going to impact EVERYONE). Some of you may remember October 23, 2006 Amazon (NASDAQ:AMZN) announced they were getting in the game of selling automotive aftermarket parts.

As you may recall, I did an hour long conference call with Steve Frazier, Amazon's vice president of automotive to try to understand why a consumer would buy an automotive part online when usually the purchase is pretty need driven (the car isn't running) and therefore rather time sensitive. I pointed out that a couple years ago when the folks from Amazon called me (back in my Wall Street Days) trying to learn about the automotive aftermarket, how I told them that trying to get into such a slow turn (most auto parts turn less than 2x a year) business didn't make a lot of sense unless you were going after specific niche accessory products. But the slow turning hard parts (where the real margin is) really didn't seem like a business for an online retailer.

And yet in my note I still said that Amazon entering the market was likely to help push toward an even bigger change (in the industry) and DIY (do it yourself) retailers need to adapt, or risk losing significant share in the coming years. Sure enough over the course of the next few weeks, many of the management teams (at the DIY retailers) seemed to dismiss the competitive threat of Amazon coming into the market (just as I had done a couple years ago).

Only Tom Gallagher (CEO of Genuine Parts (NYSE:GPC), the primary distributor of NAPA auto parts) had the courage to say: "we take every competitor seriously." And it is this humility (something I talked about in yesterday's note) that probably explains why Genuine Parts has one of the best and longest track records out of ANY publicly traded company in America for increasing its dividends to shareholders.

It all comes down to a resource center
But what I said in my note (back in October) was:

Sure, initially Amazon is primarily targeting the DIY customer. The auto enthusiast looking for a hard to find part, or the online "junky" that just likes to buy most everything online. But I think Amazon's entrance into the auto parts side of the business actually presents the potential to change the way consumers go to market (something I have been advocating the DIY retailers try for the last year) in the coming 10 - 20 years. . .

Imagine if Amazon were to advertise this competitive (price) advantage and approach to the customers. Explaining to the customer that they could get the product at a more affordable price by ordering online first, and then bringing the part to the repair shop? Eventually, Amazon could have its own list of 'Amazon approved, or Amazon preferred repair shops.' From there Amazon could simply provide a software link up so the customer can order online, and go straight to the repair shop to have the job done. And voila, the industry has just changed dramatically.

Even from there, you could see further evolution as Amazon develops an online 'auto help' site, that allows customers to go online, or call in with questions. And a knowledgeable (ASC certified) person on the other end of the line (phone or chat line) could help diagnose the problem and then place the exact repair order to the repair shop. This service could potentially compete with the telematics and remote diagnostic services that I think ultimately evolve at the franchised dealers over the next 10 - 20 years.

And this is the real threat (well and opportunity for consumers) online retailers present to the automotive aftermarket. We have already seen this play out in the collision side of the market with insurance company's direct repair programs [DRP]. Instead of the customer taking their vehicle to a collision repair shop (like they did back in the 1980s and early 1990s,) and then trying to get reimbursed for the repair, today insurance companies refer (they don't like that "steering word") customers to repair shops in the insurance company's DRP network. And in order to qualify as a DRP repair shop, you have to meet specific requirements like using a certain % of alternative parts and sometimes meeting certain customer satisfaction scores.

Similarly, I think if online parts retailers can focus on becoming a resource center for the customer on vehicle problems (before the DIY retailers shift to this focus) they can control where consumers take their vehicle in to get repaired. And whoever controls that (where consumers take their vehicles), controls the parts sale.

U.S. Auto Parts (PRTS) is yet another indication that the industry may very well move in this direction over the next 5 - 10 years. No they are not controlling where consumers get their vehicles repaired (yet). But if you go to their website, they do have a 24 hour online (or customers can call) help/chatline. Now I have to admit, it needs serious improvement in order to start moving toward my vision for the industry. I went on their chatline and (this week) and asked about a coolant error my Audi computer was displaying. They told me simply to take my vehicle to a repair shop (not even specifying which one).

But the idea, that there is an auto parts website now out there beginning to offer free support/advice (basically something the DIY stores already do for people in person) about your vehicle becomes pretty compelling. Especially since most consumers cringe when going to a repair shop because they have no idea what is really wrong with the vehicle.

The DIY retailers really have all of the pieces in place to become this resource center and the voice of the customer to the repair shop (helping to deliver a more efficient and customer friendly repair). Just like insurance companies speak for the customer with collision repairs (through the DRP programs). And like I said, whoever controls where the customers go, also controls where the parts are being procured from.

The question becomes can they (DIY retailers) shift their culture from that of a "push" retail mentality (of always trying to have the right part, at the right place, at the right time), to a "pull" mentality of trying to figure out how to be the FIRST place any customer (commercial or DIY) turns to because it is ultimately the best resource center.

In either case, I think the consumer wins 10 years from now. The only question (in my mind) is who among the parts retailers (online or at the store) leads this shift. As leaders emerge, shareholders should take note.

Source: Aftermarket Auto Parts: Growing Online Trend Benefits Consumers