One of the constant themes in discussion amongst the wider trade is the supply of parts. There always seem to be common threads to the conversation, but the biggie is that the parts vendor sell parts directly to private car owners at ‘cheaper than trade’ prices.
Special Price for ‘Trade’.
The situation is that garage owners expect special rates from the parts vendor, because the garage spends £2,500 – £20,000 per month with the parts vendor. But when we consider the financial aspects of the parts vendor doing business with a garage, as opposed to a retail customer, there may be a few reasons for this ‘selling cheaper than trade’ sales practice.
Upon brief consideration of the situation, from the parts vendors perspective, the following facts become apparent.
Cost of doing business.
Garages have multiple transactions, with credit for parts supplied and not wanted (returns). Consider that every invoice and credit that is raised has a cost to the parts vendor (people, systems, IT, restocking, returns management, damage and spoilt goods). The retail customer has a single transaction, is unlikely to return parts ordered and not wanted, and is therefore less costly to do business with (a more profitable customer/transaction for the parts vendor) and will get a better discount.
There is a significant cost to the parts vendor to run the garages ‘account’. The retail customer doesn’t have an account, is less costly to do business with and therefore will get a better discount.
2 hourly van drops.
Garages expect a 2 hourly van delivery and there is a significant cost to this. Some garages have become reliant upon this service. This can breed a culture within the garage of a lack of workshop planning and slack customer relation management practices. Consider that retail customer always collects from the store, is less costly to do business with and therefore will get a better discount.
The garage requires 30 days credit on purchases. This feature has a management overhead for the parts vendor (overdue accounts are even more costly as there is now a credit/funding cost too). The retail customer pays upon collection, is less costly to do business with and therefore will get a better discount.
Magic Money – The big rebate debate.
The parts vendor has a ‘magic’ garage customer rebate scheme. This is done by the parts vendor in an attempt to tie the garage into buying all their parts from a single vendor. This ‘rebate’ is essentially a retained percentage of the parts discount. It is retained by the parts vendor, dressed up as a rebate and presented back to the garage as ‘free’ money. It is in fact, simply speaking, a withheld parts discount. This is another reason why the garages purchase price is higher than the retail. The retail customer doesn’t want a ‘rebate’, they want only the best price.
Rebates – ‘Double Bubble’ for the parts vendor.
Incidentally, the rebate scheme gives the parts vendor double bubble, as the things the garage spend their rebate on (let’s say, for example, a training course) is sold at a retail value. The parts vendor is making a margin on this training course from their supplier, and therefore makes a profit on ‘sales’ from the rebate scheme. This goes for everything supplied under the rebate scheme. C’mon folks: You know that there is no such thing as free money. This free money is costing you dear. It’s a completely BONKERS situation, but one that many garages don’t fully understand.
The power base and business vulnerability.
Finally, the parts vendors are very interested in dealing with many retail customers rather than a smaller number of bigger garage customers. There is another reason, aside from the fact apart from the fact that selling to retail customers is more profitable, which relates to the spend value per account. If the parts vendor fall out with a single retail customer, they lose only a small spend value.
If they fall out with a single garage customer (for instance over the warranty labour rate, parts credit, quality of supplied parts – many risk factors exist here), that single account can ‘turn off’ tens of thousands of pounds of spend. There is an subsequent financial impact (and risk management) of a large account customer going bankrupt. The parts vendors actually have a critically lower level of business exposure by having fewer larger spending garage customers. The retail customer doesn’t present a significant level of exposure to the parts vendor (only perhaps the occasional credit card charge back).
Retail part sales makes for better business.
When we view the customer relationship from the parts vendors viewpoint, you can see why dealing with a car owning, retail customer, may make a more appealing business proposition than dealing with garages. Although this may make business sense from the parts vendors point of view, it causes problems for the garage business.
The primary problem is that the parts vendors approach may undermine the garage business model, as their parts margin can be (and often is) challenged by their customer (the ‘I found this online from the same supplier you use for less’ conversation). The garages supply price is exposed and many garages find justifying their parts margin is a very difficult task.
In many cases, the situation is a made a little worse, as the car owner is being quoted a lower price by the parts vendor than the garage is. This leads to suspicion and mistrust between the garage and the vehicle owner. The vehicle owner may feel ripped off by the garage and the trust element of their relationship is tainted. The parts vendor remains largely unscathed in this process at the point of transaction.
Garages Fighting Back
Some garages have begun to fight back, tired of the battle with customer supplied parts. These garages are now choosing to source parts directly from the main dealer, or from parts vendors who do not deal with the public. As the parts vendors have (until late) refused to differentiate between trade and retail, there has been a large movement to refuse to fit ‘customer supplied parts’.
The basis of this refusal is down to a legal obligation upon the garage to have to warrant customer supplied parts as being fit for purpose, if the garage fits them. This obligation can lead to the garage losing money if the customer supplied part develops a problem a reasonable time after fitment, as the garage have to supply the labour to redo the job as a warranty scenario, even though they didn’t benefit commercially from the supply of parts. Many garages feel that this tactic is their only option to retain control over the repair, the quality and their parts margin.
Parts margin is critical.
The garages business model has to make a margin on parts supply to maintain profitability. According to work done by The Garage Inspector , many garages cover the overheads of the business from labour sales – parts sales are where a large chunk of the profit from the garage doing business comes from. In addition to this, parts margin has to cover administering the supply, pricing, account, return as well as managing in-service warranty claims concerning replacement of failed parts.
The no-margin misery for garages appears to have reached a tipping point; the news that ‘we don’t fit customer parts’ has reached car owners, and the parts vendors. The parts vendors ‘retail sales strategy’, instead of making more money and reducing risks, has actually caused further alienation of garages.
The crux of the garage ‘push-back’ on buying parts from retail supporting parts vendors is the garage isn’t buying (because they can’t support the lack of ‘trade’ pricing). The car owner isn’t buying parts because they are unable to get their customer supplied part fitted by the garage. So it seems that the parts vendors strategy will ultimately lead to their parts sales volumes being squeezed from both directions.
Jilted – a broken relationship.
It’s very interesting to see this business evolution being caused by a garage revolution. The garages strategy may just be starting to work, affecting the parts vendors businesses, as some branches of a well known national parts vendor are beginning to enforce ‘trade only’ at their sales counters (online sales is a different matter and will be a much bigger ‘boil’ to lance).
The question may be “when is too late?” The relationship between many garages and the parts vendors is broken, really broken, due to the perceived disrespectful trade parts margin squeeze.
Perhaps, like lovers spurned, the relationship won’t be completely over, it will just remain fractious, untrustworthy, with an element of anguish and infidelity; it will just never be the same again.