Boston, MA—Originally, Stifel, an investment firm, hired Joe Sparacino to raise capital for growth. But as time passed, he began reaping the big bucks for his storytelling of the auto care industry.
What attracts serious investors to the industry, explains Sparacino, is the human supply chain talent that motors inventory, warehousing and transportation.
And sustained demand for spare parts is more than a one-off phenomenon for the automotive aftermarket that yields steady returns year after year. "I think we play a nice role in taking that story from operators who know their business inside out and translating all the good things about those businesses to investors and lenders and providing capital for growth that fuels the industry," said Sparacino.
His interview with Aftermarket Business World coincides with the labor market where 131,400 people found distribution jobs, reported the U.S. Bureau of Labor in December 2020. The agency noted that surging online orders had pushed businesses to beef up their inventory reserves, ready for delivery from the fulfillment centers.
Pandemic uncertainty or not, Sparacino believes that deal-making to enable companies to scale up to their potential is not spooking investors. In October 2020, Kohlberg and Company bought a stake in Parts Authority, a rapidly expanding wholesaler, for an undisclosed sum in which Stifel advised the buyer.
Miles driven, registered vehicles and increasing age factor into why the industry indicators make ripe for the industry, explained Sparacino. But he added that the winners would be the ones who manage the supply chain by consistently stocking the vehicle-specific assortment closest to the repair bay.
Parts Authority, whose rapid distribution business model combined with targeted acquisitions of smaller wholesalers, fits the ideal criteria to attract lenders like Kohlberg. "We worked on the buy side, advising them of Parts Authority. And that was the key to their story of having a well-articulated strategic and proven competencies working with third-party e-commerce providers, for which there's been a shift in demand this year."
One standout theme shapes Sparacino's worldview of the aftermarket that he has known for 15 years. "Everything comes back to the supply chain," quipped Sparacino in which Stifel to date has sealed 36 deals that include Remy, Vista Pro and Valvoline Car Care products.
Less obvious to the investor, explains Sparacino, is how the complex distribution chain from the raw materials to the finished goods requires an interdependent network that is anything but linear. As e-commerce sites forge unconventional alliances with traditional warehouse distributors and manufacturers, behind the scenes activities from inventory rationalization to packaging considerations to reliable vendor sources demands intense coordination. "From the supply chain manager's perspective, they have to put it all together, have it there at the click of a button, ready to ship, and to the customer accurately on time," said Sparacino.
2020 overall has been a boon for the entire industry. AutoZone posted a 12.9 percent sales gain of $3.2 billion in its first quarter ending on Nov. 21. Months earlier, The Wall Street Journal “Heard on the Street” column singled out AutoZone's double-digit performance by encouraging investors to "ease up on the brakes."
Internet retailer FCP Euro openly celebrated its crossing the $100 million annual revenue mark. Scott Drozd, its CEO, has set his sights on raking in $500 million by 2025. "We will continue to invest in unparalleled customer service, which we're confident will fuel continued growth for the foreseeable future," he said in the company press release.
In stark contrast to American restaurants, department stores, movie theatres and other service industries, Sparacino isn't surprised about the resilience demonstrated by the aftermarket during the pandemic. Literally, within weeks of the outbreak, mom and pop repair shops and international conglomerates alike kept the movement of goods flowing, especially in e-commerce home delivery and contactless shipping. "We have not seen the wave of bankruptcies or restructuring that you see in other sectors of the economy," said Sparacino.
Besides the aftermarket qualifying for the "deemed essential" status to remain open during the shutdown, Sparacino says that connecting with the e-commerce-empowered consumer will mean that merchants and factories must reposition their online presence. "Anywhere along that supply chain, you've got to have something to satisfy the demand growing and e-commerce side."
Still, some open-ended questions about the post-pandemic aftermarket linger. How seriously and how soon will manufacturers begin near-shoring their facilities closer to North America? Last year, stalled exports from China caused intense pipeline cramps as backlogs accumulated during the country's traditional New Year holiday shutdown. At that time, recalls Sparacino, the shortage of reliable transportation triggered shipping rates to rise. Alluding to cost control, he said, "I don't think anything can match having a local presence." And when it involves balancing supply with demand, he added that "having talented people focus on transportation costs whether its inbound ocean freight or trucking, it's about constantly managing those costs."
Sparacino speculates that the 25 percent tariffs on steel and 10 percent on aluminum imports from China will not disappear anytime soon. Any form of tax abatement or further hikes enacted by the Biden administration is unlikely, he said. What remains unclear is how much of the dollar changes in pre-tariff prices were pushed onto the customer, acknowledged Sparacino. "Price is usually not the factor at the end of the day when fitting the part on the car. Consumers are less elastic to the price because there’s a need."
Despite these externalities that threw nearly everyone into the coping and adapting mode, Sparacino foresees more e-commerce-driven creativity as more specialists enter the marketplace. To that end, the industry leaders will be the ones who communicate value on what the company brands stand for in the shopper's eyes.
One lesson that resonates with Sparacino is how companies will creatively merchandise their products online. It boils down to identity differentiation. "E-commerce allows you to tell the story as to why your product is not a commodity and why you should put trust in the brand. It's a way to influence the sale and remove commoditization."
