O'Reilly's family strategy counters auto megachains - O'Reilly Automotive fights competition from big chain auto parts stores - The Power Retailers: O'Reilly

Discount Store News, Nov 4, 1996 by Richard Halverson

O'Reilly Automative is living proof that a regional retailer can prosper competing against national giants, even though some--like AutoZone--may be more than seven times its size.

And the Midwestern chain, tucked away in southwest ern Missouri at the gateway to the Ozarks, also provides proof that a family-operated, though public, company can be peaceful internally without the squabbles that have wracked other family businesses such as Herbert Haft's Dart Group, which includes Trak Auto.

Even though it's the darling of Wall Street, which dubs it the hottest auto parts retailer in the business, O'Reilly is well aware that it lives in the shadow of rapidly expanding AutoZone. "Zone," as O'Reilly executives refer to it, is very much on their minds these days as it moves into O'Reilly's original market niche (selling parts to professional mechanics) and starts opening stores in tiny towns of 6,000 to 8,000 O'Reilly finds the most profitable, thanks to lower costs.

Founded in 1957, O'Reilly built its reputation and expertise by serving the pros, and subsequently moved into the retail sector, selling parts to the DIY customer. Its dual-market strategy is a major strength.

But now a number of retail auto parts chains, including AutoZone and Pep Boys--Manny, Moe & Jack, are also attempting a dual-market strategy, trying to break into the professional installer market.

More serious for O'Reilly, AutoZone is opening stores in the small-town markets that O'Reilly finds are more profitable than units in its metro markets, such as Kansas City. Cheaper real estate, taxes and labor rates, as well as more honest, harder-working employees, mean that small-town stores produce a better profit margin than metro stores.

Already 104 of O'Reilly's 208 stores compete with AutoZone and 38 with Pep Boys. In its Springfield, Mo., home market, 11 O'Reilly stores compete with five AutoZones, two Western Autos and one Pep Boys stores.

Nonetheless, O'Reilly is forging ahead with expansion: 30 stores this year for a year-end count of about 240, 30 more in '97 and as many as 40 in '98. That will use the last of the equity raised through a secondary stock offering last year and will mean O'Reilly must take on long-term expansion debt for the first time since going public in '93.

In '97, it plans to enter two new states, Iowa and Nebraska, and has bought real estates in Texas for expansion possibly in '98. It will enter two metro markets next year, Omaha, Neb., and Des Moines, Iowa, and open a third distribution center to support the states, possibly in Omaha.

O'Reilly expects to earn a net of $18 million on estimated 1996 sales of $250 million.

The O'Reilly story began in 1957, when Charles (Chubb) O'Reilly Sr., now chairman emeritus, founded the company with his father. His four offspring now hold the top executive positions: Charles Jr., chairman; David, ceo and co-president; Larry, coo and co-president; and Rosalie O'Reilly-Wooten, executive vice president in charge of insurance programs.

Together they hold five of the seven O'Reilly board seats and control 38% of the company stock. And one of the two nonfamily members holding board seats is the company lawyer.

Family control will extend "well into the next century," predicted Chubb O'Reilly. David and Larry are both young, Chubb pointed out, and Pat O'Reilly, David's son, now serves as vice president of distribution.

"I can't see that Pat would relinquish the top position," Chubb said. "Cross my fingers, I have 11 grandchildren who could come into the business."

O'Reilly Automotive has more recently adopted a policy that any family member coming into the business must prove himself or herself by successfully working outside the company. Pat fulfilled that requirement by working at Wal-Mart in distribution.

At age 80, Chubb O'Reilly lives six months of the year in Florida and keeps fit by running in 10K races. "I have four great kids," O'Reilly said. "I offer advice at board meetings and they listen." The four family executives have their disagreements, O'Reilly said, "but I have never seen them leave a meeting without agreeing and smiling."

The key to keeping the family peace, said ceo David, is a policy of never leaving a meeting until all family members have hammered out an agreement.

Although controlled by family members who make the ultimate decisions, O'Reilly operates under a senior management committee of 20, coo Larry said. Few decisions are made without input from the committee. Operating by committee, "we make fewer mistakes," he said.

The hallmarks of the O'Reilly management style are its customer- and team-member-driven strategy and its family orientation, said ceo David. "Operating a family-driven business is more of a challenge. You have to be sensitive to the needs of people."

As for the AutoZone move into the professional business, "That is a steeper hill to climb," David said, "and it has more barriers and more resistance than newcomers realize."

It requires better-trained salespeople and a large inventory so that have the "right part, right now," he said. And the chain must have the national branded parts that pros demand in order to hold their business, he added. Pros like national brands, David explained, "since comebacks are very expensive." Pros can't afford "schlock merchandise that might be a few dollars cheaper," he said.