Pep Boys puts expansion on hold while it ratchets up on-site service: New marketing campaign to stress one-stop-shopping - Statistical Data Included

DSN Retailing Today, Jan 21, 2002 by Katherine Hutchison

PHILADELPHIA -- AutoZone may be grabbing the spotlight lately with its numbers, but Pep Boys is shaping up to be the biggest auto parts turnaround story of the new millennium. Restructuring pains mostly behind it, the 80-year-old company is armed with a business model that Pep Boys says differentiates it from rivals and plans to come out swinging this year.

Like many of its competitors, Pep Boys is giving store expansion a back seat to improving the performance of its 628 existing stores. It's new marketing campaign launching early this year under the direction of Home Depot alum Jeffrey Palmer will promote its service offerings and "one-stop-shop" advantage.

Despite drops of 7.6% in comp sales and 10.5% in total sales for its first fiscal nine months, Pep Boys reported $11 million in earnings for the three-month period ended in November, its fourth straight quarter of improved earnings. Profit margins are up, inventory levels are down and its battered stock has jumped more than 500% since the start of 2001, from about $3 per share to over $17.

The 2001 sales declines resulted largely from actions the retailer announced last year to save $70 million annually After several years of rapid growth, Pep Boys closed 38 stores and two distribution centers, cut 1,300 jobs, reduced store hours and took steps to pay down debt. The company posted a loss of $51 million for fiscal 2000.

Besides the cost cuts and other measures, profits from service, an increasingly important part of the chain's business, have helped keep earnings humming. Its 6,500 service bays generate about half of its total revenue. Pep Boys is the only auto parts retailer to offer service and management wants to better exploit this.

"Our service offering is a competitive advantage," said chairman, president and ceo Mitch Liebovitz. "Our challenge is to maximize that advantage." "When Mitch took over, 4% of our sales were from service. Now it's 45%," executive vp and cfo George Babich told DSN Retailing Today. 'We're still nowhere at capacity in our service bays."

Liebovitz wants to make Pep Boys category-dominant. "Like Best Buy and The Home Depot, we have the largest stores in our retail niche," he said on a recent conference call. "We stock more SKUs than anybody else, and we have the ability to install everything we sell."

Hertz operates rental counters in some Pep Boys stores, and Liebovitz and his team are seeking similar agreements with other rental, towing and insurance firms to beef up service revenue. So he appointed long-time senior vp Fred Stampone to coordinate business development last summer.

Also high on the agenda is a more aggressive branding strategy. On Nov. 6, Palmer, whose marketing tenure includes Circuit City, in addition to The Home Depot, was named senior vp of marketing and advertising, an area Stampone had previously handled. Pep Boys' senior management and its turnaround situation attracted Palmer to the company.

"There are similarities in marketing all big-box retailers," Palmer told DSN Retailing Today. "The Home Depot serves DIY, DIFM and contractor customers. Pep Boys serves the same audience."

Less than a month into his tenure, Palmer fired advertising agency, DDB Worldwide in Chicago, and put the Richards Group, a Dallas firm that has handled advertising for The Home Depot, on the account. "It was a preference on my part to go with people I was familiar with in the retail environment," he said.

Liebovitz has said he wants to drive younger customers into stores, but Pep Boys will have to find an answer to AutoZone's spectacularly successful "Get in the Zone" campaign. Palmer indicated whatever they come up with will make room for Manny, Moe and Jack, because Pep Boys has no intention of retiring its symbolic trio. "Manny, Moe and Jack are an icon in the American landscape. We'll try to figure out how best to use them," Palmer said.

While Palmer, new to his post, balked at revealing what his marketing approach would be, Babich was more forthcoming about Pep Boys' expectations for its new branding whiz. "Our marketing campaign will be different from AutoZone's," Babich said. "Just half our business, DIY, is comparable to theirs." But with the Do-It-For-Me sector growing at a faster rate than DIY, he noted, Pep Boys' new strategy will try to play its high-margin services offering to the hilt.

He is not worried about comparisons to No. 1 AutoZone. "Our offering is so much different. No one else has the same format we have."

The company's past advertising focused heavily on its tire business as it strove to become a leading tire retailer, and favored cable TV sports programming, Babich explained.

"We were advertising 17% of our [business] mix to males between the ages of 25 and 54. The inverse of this is a huge opportunity: to advertise the other 83% of our offering to the other 75% of the population. Jeff has got a huge opportunity to put all the elements together: a local market focus that demonstrates to consumers the breadth of our offering."