Tag: Business

The Drive: We’re talking at a really interesting time. The phrase inflection point, I think, gets thrown around a little too much, but there is really no other way to describe this moment where you’ve got electrification underway with new cars. You’ve got used cars on the road being older than ever. You’ve got this boom in ecommerce. You’ve got the supply chain crunch. You’ve got this inflationary environment. Just from a basic level, it’s been a crazy four years since you started at CarParts.com. How is the business structured now versus when you started? What changes have you seen and brought into the fore?

David Meniane: You know, I’ll tell you, everything you’ve said, I see opportunity, opportunity, opportunity, right? Number of cars on the road going up, average age of a car going up, online penetration, direct to consumer model—opportunity. Now, inflation is definitely something to consider, but for me, it’s an opportunity to double down on the fundamentals and still kind of deliver that value to the customer at competitive prices. We’ve made a lot of changes over the last four years. But also, our business is pretty robust and has a long history. We started 25 years ago, and we started offline, delivering headlights to body shops in California. And over time, we transformed into this ecommerce platform. And really, four years ago, the big pivot was to leverage that ecommerce platform, and start tacking on supply chain and data.

And so over the last four years, the majority of the investments that we’ve made—sure, we’re investing in customer experience and with the front end, the user journey. But the majority of the investments that we made were in the supply chain, expanding our warehouse, adding inventory, building up data science and data analytics. Over the last four years, we’ve opened four buildings, we’ve invested literally hundreds of millions of dollars in our supply chain, millions of dollars in data science capabilities, and that’s the big piece.

And, you know, I think if you look at some of the other direct to consumer retailers, the supply chain, the data, the customer experience, these are the three pillars of their success. So we took that and applied it to our business model.

TD: Data is in some ways controllable, you know, you can get a lot of smart people in a room and put together all the modeling you need to predict how the market’s gonna move. You can invest a lot into expanding how much control you have. But ultimately, if you’re not making the parts themselves, you’re still beholden to the supply chain. You’ve run up against the bump stop of how much of the process you can own right now. How do you manage these relationships with factories to keep the parts coming in, and build that inventory?

DM: What’s really interesting about our business, and what makes it very unique, is long tail aspect of the assortment. We carry anywhere from 80 to 90,000 individual SKUs in our warehouses. The data science investments that we’ve made really align with those inventory investments in that we have to figure out how much to carry of each SKU in what building.

And so when the pandemic hit in 2020, we made a big commitment, and we knew that inventory was gonna be the main driver to our success. We made huge commitments to overbuy inventory almost immediately. We were one of the first ones in the business to go to our suppliers and tell them that we wanted to buy more. We expanded our footprint and extended the levels of safety stock.

What the supply chain disruption created was variability in that supply, where one day you have inventory, the other day, you don’t. And you don’t really know when it’s going to arrive. And the one thing that you can do as a distribution company or supply chain company like us is overbuy and overstock. So for the last two years, we bought so much more inventory that we could kinda withstand the ebbs and flows in the supply chain. Now, it’s not perfect. There’s port disruption, there’s COVID, you’ve got a lot of things going on. But if you look at some of our competitors, when they were announcing results that were good, our results were exceptional. We had 11 consecutive quarters of double digit growth, and a lot of that was driven by just being proactive and making additional investments just to carry more inventory.

TD: What kind of risks do you open yourself up to by overbuying as a default practice so you can maintain those margins?

DM: You take on less risk than in a perishable business, you know, like in grocery or seasonal items, where if you overbuy, then you’re gonna be stuck with it. For us, the good thing is that our inventory is gonna last for 10 to 15 years.

A lot of times, our sweet spot is when a car’s going to be between eight and 15 years old, so we’re going to carry extra inventory. But if we don’t sell it today, we’ll sell it tomorrow or the day after. A lot of what we do is replacement items, so lights, mirrors, bumper covers, brakes, suspension, pumps, sensors. People need those parts today, and they’re going to need those parts tomorrow.

We don’t do a lot of discretionary items, where you’re going after that discretionary income, when someone buys a brand new car and wants to buy accessories. That’s not our bread and butter. It’s mostly replacement parts. But I think we do it better than anyone else because of the direct supply chain. You get the best product on the market, but it’s 50{49e09b23eae7466ccc7574c19ebb3019301c9a11d2999feff81a3526451546a5} cheaper because it’s direct to consumer. We got a good business going.

TD: So it’s need-based, not want-based.

DM: And that’s the terminology we use internally, yes.

TD: I’m always curious about how businesses actually function, like, on a day-to-day, real operational level. Walk me through the process of identifying a part that you don’t currently carry and saying, “Okay, we really wanna stock this.” How does that part then end up for sale on the site?

DM: You bring up a good point, because I think what makes our business so good is that it’s always SKU by SKU. And you see a lot of companies out there, the bigger they grow, the more averages they use, and the more formulas they use. We have a very different approach. We built merchandising, inventory forecasting, and data science capabilities, but we also have a lot of people at our headquarters. And the reason we have more people than a traditional retailer is we look at it line by line.

We get different demand signals from different sources. Sometimes, it comes from the manufacturer saying, “Hey, I’m expanding into this category,” or, “I have these new part applications.” Sometimes, we look at what’s on the market, and we look at where we have gaps. We carry multiple brands, so we carry national premium brands, and we also carry our own brands. We’re always looking at gaps in the assortment.

Then the last thing is that we’ve developed some good capabilities, internal models, that look at vehicles in operation, specific part names, specific categories, and then we look for gaps. For example, you’ll look at a 2008 Ford F-150 XLT and identify that these are all the part names we need to carry. So, what are we selling, what are we not selling right now for that truck?

One good example, if you look at industry data, is foreign nameplates. Historically we’re very strong in, you know, GM, Chrysler, and Ford. But the fastest growing segment out there is Korean nameplates. It’s Hyundai, it’s Kia. We’re making a lot more investments in Korean name plates because it’s not the biggest segment, but it’s the fastest growing segment. 7.7{49e09b23eae7466ccc7574c19ebb3019301c9a11d2999feff81a3526451546a5}. You also have the rise of EVs, right? 

TD: It’s interesting—on the new car sales side, we see the numbers going up for Kia and Hyundai. We see the direct impact that product changes on their end have made in the popularity of those cars and those brands here in America. We don’t often think about how there’s a rising tide affecting ancillary industries, like car parts, like the aftermarket. But, of course, there would be more parts that you would want to stock for those cars because more people are driving them now.

And the electric vehicle business is the question of the day. The common line that EVs are less complicated with fewer moving parts and that’s a problem for the aftermarket—it’s an overstatement, but there is some truth there. How do you see EV parts supply both tracking and being different from the current ICE supply?

DM: It’s still very early for EVs. It’s 2 or 3{49e09b23eae7466ccc7574c19ebb3019301c9a11d2999feff81a3526451546a5} of the cars on the road today. And a lot of times, we have a lot more cars [we’re] trying to catch up with because the sweet spot for us is, like I said, 8 to 15 years, right? For a car to get into that zone for us, it takes time. Having said that, the majority of what we sell, about 90{49e09b23eae7466ccc7574c19ebb3019301c9a11d2999feff81a3526451546a5}, is agnostic to the powertrain. Whether it’s a combustion engine or an EV, we’ll sell the parts. They all still need brakes, suspension, bumpers, lights, mirrors, et cetera. Some parts are gonna be different, and some parts are gonna be the same.

The other thing too is as we expand our assortment, there’s opportunities for us to work with different factories that make different investments. You talk about the ripple effect on the demand side, which is the parts, but on the supply side, all the manufacturers, especially overseas, are seeing it. EVs are pushing forward, and so we need to start making investments in toolings and developing parts for EVs.

If in 10 years, you don’t carry parts for Tesla, you’re gonna be behind, right? Obviously. So, we’re working with our manufacturer tooling, and we’re working with our manufacturers to just get ahead of it. The good news is we have plenty of time.

And, you’re in the business so you know that there’s also… the infrastructure for the country has to catch up on EVs. Pricing has to come down. At some point, the government subsidies, they’re gonna go away. But really, it’s the infrastructure that has to catch up. If you wanna go from LA to Vegas in an EV, sometimes it’s not that simple.

TD: It brings up another question, and that is about your relationship with OEMs. Because especially as they’re dealing with their own supply constraints as they are trying to bolster their own part departments and keep those businesses going, you’re both supporting their products and also competing with them. How is it between you and OEMs? Do you talk to them? Do you meet with them? Is it more of like a don’t ask, don’t tell situation?

DM: We talk to them, but I think there is also a line between OEM and aftermarket. Our OEM cousins, I like to call them. When I think about right to repair and some of these other things, I just wanna be on the side of the consumer, and I wanna empower the consumer to decide. Do they want OEM parts? Or do they want aftermarket? They can choose.

The odd thing too is that the calculation is also very economic-driven, in that after a certain time, if your car’s 15 years old, 16 years old, sometimes 20 years old, it doesn’t make economic sense to buy an OEM part. Maybe you can’t find an aftermarket replacement, so, you know, there is a need for an OEM part, specifically around insurance-driven business. I drive a six-year-old pickup truck. In a couple of years, I’ve had to replace a couple of parts. It’s not gonna make sense for me to buy an OEM part now. If I can buy an exact same part aftermarket for half the price or 60{49e09b23eae7466ccc7574c19ebb3019301c9a11d2999feff81a3526451546a5} of the price, I have to look at the residual value of my car and how much I can get for it when I sell it, and I gotta look at the part.

OEM parts, they do certain things great. Aftermarket parts, you know, there are a lot of things that we have going for us. It’s a $300 billion industry. I think there is a need for both.

TD: It’s funny you use that example, because I have a 20-year-old BMW. And when I first got it five years ago, I thought, “I really just wanna get OEM parts for it. I wanna keep it as OEM-stock as possible.” And then after the first $1,000 bill, it’s like, “Well, I guess I can choose something cheaper.” That’s a realization a lot of people have, I think.

DM: It depends on the job. It depends on your level of sophistication. If you’re DIY and you’re brand loyal, there are a couple of things where you’re gonna buy a branded part. And some things that maybe are less important to you or you’re comfortable with aftermarket. Sometimes, when the consumer is getting pinched, the difference between an aftermarket and OEM part is the difference between having done the repair and not doing it at all.

You know, we can sell you a headlight for $80 or $90. If you go to the dealer for an OEM part and have them install it, it might cost you 350 or $400 for the exact same headlight. What I want is the consumer to be able to decide. If I have the $350 and I want to go to the dealer, right, no problem. Our OEM cousins will take care of it. If they’re looking for maybe a more cost-effective solution, direct to consumer, hey, we can deliver the same part in two days for 90 bucks. Great.

TD: Right to repair is a huge topic of interest for the automotive community in general. Casual owners may not quite have a full grasp on what this fight could mean long term for the cars of the future. Are you involved in any way, or is there an official company stance, on the right to repair legislation being debated in multiple states?

DM: Yes. We have an official stance, and we are actually investing financially in it. We’re members of the Car Coalition that directly funds efforts to empower the consumers to give them that choice. We want the consumer to be able to choose between OEM and aftermarket, we want the consumer to own their data, and we want the consumers to be educated so that they can make their own decision.

TD: Semi-related, one specific area I wanted to cover is related to subscription features. Car manufacturers are now announcing plans to put options like heated seats behind a paywall, where you have to pay a monthly fee to keep using that feature. Say someone at CarParts.com identifies a white space for you in products that are designed to circumvent that subscription paywall. A company or factory says, “Hey, we can build a product that allows you to plug it into your car to get around that.” Is that something you would consider selling? Is that too adversarial? Is that poking the bear? This must have been talked about at some point already for you guys.

DM: Hey, Kyle, I would call my lawyer and ask him what I can or cannot do.

DM: I’ve learned a long time ago and when I say a long time, four years ago, that some questions I have to be careful with. The answer is I don’t know. I would call my lawyer.

TD: Got it. Got it. Back to the supply chain—Owning as much of it as possible is a key part of long-term success. This is obviously moving in the direction of a whole vertical integration model. The ultimate conclusion of that is owning your own factory and making parts. That’s not where you’re at now. But last year, you came out with a “Get It Installed” program, connecting customers to shops so someone can actually schedule an installation appointment at the point of purchase with you. How far does it go? How many more pieces of this entire chain can you grab for yourself?

DM: Listen, I think it’s about putting the consumer first, and empowering the consumer to make choices. So, the Get It Installed initiative is really to empower the customer to either get the tools and information and the parts that they need to fix their car, if they feel comfortable doing it. I have a lot of people that work with us that can do the repairs themselves. For me, I’m not as handy as I want to be. For certain jobs, I need help. It’s about giving the choice to the customer to say, “Hey, I feel comfortable doing this job, I’m going do it myself. If I can’t, it’s oh, here’s a mechanic that I can trust that will do the job for me.”

Most people are looking for a solution where someone you can trust will give you a couple of options. Hey, actually, this is not a big deal. You could do it yourself with a 15-minute video on YouTube. Or actually, it is a big deal and if you don’t fix it today, your car is gonna get worse, and I have a solution where you could buy the parts and the service.

The one thing on the vertical integration that is not really public but I think is really interesting is on the payment side. Because sometimes, our consumers and our customers are a little pinched on cash. You know, if they can’t afford a $1,000 repair at the mechanic, is there a way for us to do the parts and the service and allow them to stretch that payment over 12 months? You’ve seen a lot of direct to consumer retailers, especially for larger purchases, usually above $500, where they allow a customer to pay in four or pay in 12 installments.

The payment side for the consumer, allowing them to do a more expensive repair where you can bundle in the parts and service and pay over 12 months—I think that becomes really interesting.

TD: So, in that model, would you be fronting the cost, paying the shop, and then the consumer pays you back over over time?

DM: There are partnerships you could do where someone else takes on the economic risk. Because we’re a public company, there are only so many things we can do. We could act as kind of the front man for the customer, where we’d supply the parts, we’d connect them to the shop, we’d collect the payment, and someone else takes home the economic risk. There are companies out there that just focus on that.

TD: And what about logistics being another piece of the puzzle? Everyone struggles with the last mile problem. You’ve pointed to a 16-minute timeline from click to delivery as an ultimate goal. Doesn’t getting it that tight require owning the logistics?

DM: It’s a long-term vision. You start with a couple of days, and then you start checking that timeline. Especially in key markets, as we think about opening more distribution centers. If you’re in the Vegas market or in the Dallas market, we have to have a big footprint there, so there are ways for us in the long term to do that.

But in the meantime, we have partnerships with national carriers, FedEx included, where especially if you’re close to a distribution center, you can get the part the next day, or you could ship it directly to the shop. Obviously, the Get It Installed initiative is new to us. It’s just the beginning. But I think that as we keep moving forward, there are going to be opportunities to tighten up the whole experience and make the logistics better and better. It’s been done in other industries. It’s been done in tires really well. I think there’s an opportunity for us to do the same thing with other parts.

TD: With the talk of distribution centers, two-day shipping, owning the whole cycle… it’s hard to avoid comparisons to a certain company called Amazon. I have to assume they’re an inspiration, but also they’re competition. How do you see the task of taking a customer who’s years into buying everything in one place and getting them to consider a different, more specialized, but hopefully equally convenient source?

DM: Interestingly enough, Amazon is a distribution channel for us. If you’re on Amazon and you start buying auto parts, chances are you’re going to be buying one from us.  Amazon powers the front end and the consumer experience, but in the background, we have fitment data, we have supply chain, we have logistics, and that’s kind of what we focus on. Amazon has done a good job at being a store for everything. For us, we’re really trying to focus ourselves on being that destination just for auto parts. Also, fitment is extremely important in auto parts. That’s the secret sauce. We have 100 people here that only work on fitment data, and all the data is proprietary thanks to our relationships with the manufacturers.

The way our supply chain is set up, it allows us to store anything as small as a door handle or as big as a hood. Amazon’s really good at automated warehouses where everything fits in a nice square box. For car parts, the supply chain looks quite different. And the other thing I’ll say is CarParts.com is a pretty awesome name. The goal is to build CarParts.com as the direct destination for anything car parts. If you think car parts, you’re going to go to CarParts.com.

TD: I will say the URL is strong. The domain authority is strong. Although when I searched it earlier,  there’s this other site, carpart.com, that pops up too.

TD: You guys gotta take them down somehow, I think. I don’t know.

DM: I know. Well, listen, we have a hundred million visitors a year in CarParts.com. I don’t think they’re anywhere close to that, but point taken.

TD: As you try to keep growing and identify these new areas where you’re not playing currently, what is the process? This expands to your existing business too. What is the process for making sure these parts actually do what they say, and quality control in general? Since you’re not actually manufacturing anything yourself, how do you ensure that the part actually fits the thing the manufacturer says it’s going to or, you know, isn’t going to explode.

DM: You know, we’ve just rolled out our new core values for CarParts.com—after 25 years, we’ve decided to roll out core values [laughs]. The first one is safety first. And it aims at the safety of our people, but also the safety of our customers by really investing and focusing on quality control.

We have a team in Taiwan, we have a team in Shanghai. It’s factory visits, it’s factory inspections, it’s quality control, it’s independent testing. We have to do all of that. I think for a company like us that’s been through a big transformation, you could always do more. But what I can say is that our commitment is safety first. It’s literally number one.

TD: I like the nuts and bolts. I like the nitty gritty. So you have a team of people who go to the factory to check on things—do they then install the part in a test car and make sure it works the way the manufacturer claims? How does that actually happen?

DM: The teams that go to the factory, it’s mostly about manufacturing standards and tooling. For the quality control, we usually have an independent company do it. We also have a ton of automotive experts on the team, and most of them sit here [at HQ]. The way we built the teams is that everyone on the team has a different area of expertise, so we have experts for lights and mirrors, we have experts for body parts, we have experts for catalytic converters. We have a guy that only does brakes, rotors, and calipers. There’s a lot of expertise that we built. We’re a dot com company on the outside, but we’re really an automotive company. We’re run by car people. I’m pretty much the only guy that’s not a car guy, but most of the team are obsessive.

TD: On the idea of safety and quality, there was something else I wanted to bring up, and that’s the new lifetime replacement guarantee you rolled out last year. It reminds me of the famous L.L.Bean “return” policy where you could return anything at any time, even years later when the product is all worn out, and they’d just give you a new one. They don’t do that anymore. How does a lifetime guarantee translate into a sustainable business, so you’re not just giving people free parts after they buy the first one for the rest of their lives? But also, so you’re not attaching too many strings and annoying consumers with those?

DM: If you’re referring to fraud or abuse, there are always edge cases. We have mechanisms in place to control fraud. Ultimately, it’s more about messaging to our customers that we stand behind our products. We stand behind our company. We’ve been around for 25 years, and we expect to be around for 100 years. If you’re not happy with the quality of your product or you changed your mind, call us. Our return rate is actually extremely low compared to the rest of the industry. And I think it’s because we spend so much time and effort on fitment and on quality.

Ultimately, the goal is to have the customer come to us and then come back and come back and come back. The majority of our customers have more than one car. The majority of our customers are, you know, kind of DIY and so they can do the work themselves. So, to the extent one of our customers has three or four cars, and they’ll do some body work, they’ll do replacement work, they’ll do brakes. Ultimately, every customer is an opportunity to sell 10 different parts over 10 years or 20 parts over 20 years. A lot of times, if there’s one or two parts they’re not happy with or something happens, we stand behind it. It’s a long term play, and it’s been working really well.

TD: For the customer, in your experience, is there a switch that’s flipped at a certain moment that takes them from passive vehicle owner to, “My headlight’s stopped working, so I’m gonna buy a replacement on CarParts.com and fix it,” versus taking it into my shop and letting them deal with it?

TD: How do you guys gauge consumer intent and, and figure out when that person’s gonna actually go for a purchase?

DM: I think that’s the biggest opportunity. I think what we’re finding is that reaching the consumer in the age of social media and everyone on their phone, it’s becoming harder and harder. And that we have to be top of mind, and we need different points and times of interaction. A lot of times, they’ll do a Google search, and we come up. They’re not gonna do a purchase yet. Then, they go to YouTube, we come up. Then, they go to social, then they go to TikTok, and we’re there. The strategy is that we have to be everywhere, so that every time there is the beginning of a purchasing intent for auto parts, we’re there.

And we may not capture that customer on the first interaction, or the second interaction, or maybe the fourth. I think we have to take a long-term focus and just be there. It takes time.

TD: So you guys are on TikTok?

DM: We’re on TikTok, yes. We have to be.

TD: Same thing on our end. You know, as much as we would like to just like to write beautiful articles and have people read them and collect ad revenue the same we always did, you gotta go—

DM: You have to do something, right?

TD: You have to do something.

DM: You’re on YouTube and you’ll have long-form content. You’ll have the blog, you’ll have email newsletters. You just gotta be everywhere. Content is becoming really important for becoming a destination for auto repair. Like, having the parts is great, but maybe we could provide information, even if that information doesn’t get monetized. I just want to be top of mind for auto parts in general. Whether we make money or not. I think that’s the ultimate goal.

TD: On that note, obviously every stock has suffered recently, so whatever declines anyone has seen, there are broad, macroeconomic trends coming to bear right now. But even prior to this, it was pretty striking to a lot of us in the auto industry how a SPAC-backed EV startup could be valued higher than GM or Ford in terms of pure market cap.

TD: Just based off the fact that oh, EVs are the future, so let’s invest in that, right? That’s a simplification, but really that’s the base logic there. So in an industry like yours that is very entrenched in the old way of doing things, ripe for disruption but also not a very sexy business, how do you stand out? How do you catch the market’s attention as a good investment when people are content to just dump money into speculative EV stocks? This EV will be out in five years. Give us a hundred million. Oh okay, great. Sure.

DM: That will only get you so far. But ultimately, if you don’t have a robust business model, it doesn’t matter how much you raise, that money’s going to run out. If you have negative unit economics and you’re just spending money left and right, that money runs out. And it runs out really quickly. You’ve seen it in a lot of these SPACs.

The main focus for us is how we can be “sexy” to the customer? How do we offer a destination and the parts and the tools and the information that they need? With positive unit economics, delivering a great experience, having that customer come back, that’s a sustainable business. Listen, I’ve seen our stock at 88 cents and I’ve seen it at $24. I know our company is gonna get much more valuable over time if we put in the work. The main focus is parts, it’s supply chain, it’s technology, it’s the customer. Create a great business.

Today, we have a great business. It’s 11 consecutive quarters of growth, positive unit economics. We’re profitable as a company. We’re growing, and we have a very clean balance sheet. So, I’m excited about the next few years because I think we’re in a good spot. The stock price will go up and down, but, again, literally, when I joined we were 97 cents. A couple of years later, $24. That doesn’t change anything for me. We just have to keep executing and deliver value to the customer.

TD: And the lack of friction in the experience, I think, is key. I swear this isn’t a plug, but I bought a part on CarParts.com last fall, GM’s famous multifunction control stalk for my old truck, for those who know what I’m talking about. Then I was on the site yesterday preparing for this. And the cookie was still there, even though I don’t have a user account. The site remembered that I had typed in 1988 Chevrolet K5 Blazer as my model months ago and was ready to search for those parts again. It’s not rocket science, but with most other parts sites, I feel like they don’t invest in recapturing customers like that. It was seamless in a way that surprised me.

DM: We have a lot of work to do on that, but I think, yeah, it’s a start. And thank you for your business, by the way. I appreciate it. Every customer counts. Every part sold counts.

TD: Maybe it’s a stupid question, but is there any sense in exploring a brick and mortar version of CarParts.com?

DM: A lot of the direct to consumer retailers have done that. You know, things like YETI and Warby Parker. Or business is really year-make-model specific, fit specific. Never say never. I think for the next couple of years, our roadmap is pretty full in terms of expanding our supply chain footprint. But yeah, I’m saying never say never.

Some of the retail that’s working these days is the experiential retail. It’s not so much about buying a part, it’s about brand building and creating an experience and a destination. So from a marketing standpoint, you could make the argument there is a role to brick and mortar somewhere at some point.

TD: Perhaps also an install center, right? Instead of maybe-

TD: – instead of contracting that, you actually operate your own shops that install CarParts.com parts.

DM: Yeah. As long as we can get our name out there, it’s a potential opportunity for us to consider.

TD: Listen, I’m going to come knocking for credit for that idea in three years if it turns into something.

DM: Okay. [Laughs] I’ll remember it. I have a good memory, so I’ll remember it.

This interview has been edited and condensed for clarity.