There’s no crying in heavy-duty truck parts; change can bring actionable opportunity

Updated Sep 6, 2018

By Bill Wade, Wade & Partners

The future of the heavy-duty truck parts and service business, in all channels, is computer and data dependent. Because our industry has not (in the past) been anywhere near the leading edge of technology-assisted distribution, it is interesting to take stock of where we are.

The history of modern computing breaks down neatly into five eras:

  • The mainframe: 1947-1985;
  • Client-server-personal computers and their software: 1983-now;
  • The Internet: 1990-now;
  • Smartphones and cloud computing: 2000-now;
  • Waves of connected devices – Internet of Things (IoT) powered by artificial intelligence and 5G communications: Now!

IoT-enabled truck maintenance will be this fifth distinct and meaningful technology epoch for the truck parts and service market. This technology will provide the tech basis for concepts such as predictive maintenance.

But Wait! There’s More!

Event-driven applications accept incoming streams of information from devices, people, and enterprise systems, continuously analyze that information, and then enable effective actions in real time.

In one vision of this idea (specifically with IoT devices), data comes in from the physical world via various sensors and actions are taken to change the physical state via various forms of output and actuators, basically diagnosing and fixing using system resets. Many event-driven applications incorporate the principles of edge computing and distributed systems.

In Other News …

As most of our readers know, Big Bad Amazon is coming for you. I’m kidding. But as of Labor Day, several Wall Streeters are calling for another 30-plus percent jump in Amazon stock.

In a June study by the National Association of Wholesaler-Distributors (NAW):

  • 80 percent of corporate buyers use Amazon for research or purchase;
  • 40 percent of distributors sell Amazon today;
  • About the same percentage of manufacturers sell on Amazon;
  • Of those that don’t presently, 53 percent say they will in 2019;
  • 30 percent of Amazon sales result from online prompts (‘you may also be interested in…’)

We can’t ignore the steady stream of new stories about Amazon’s growth or bully tactics, as Bezos’s behemoth continues to march into more and more industries:

  • Amazon aims to deliver inside homes or cars. Amazon is in negotiations with smart license-plate maker Phrame on a deal that would allow online purchases to be delivered to customers’ car trunks.
  • The e-commerce giant also is reportedly working on a smart doorbell that would allow one-time access for delivery drivers to drop off purchases inside the customer’s home.

Let’s Use Superior Service to Stay Out of the Death Star’s Sights

Amazon made major waves with its $13.7 billion acquisition of Whole Foods, a move that wiped out some $22 billion in market cap among Whole Food’s competitors within 24 hours of the announcement.

Amazon is acquiring online pharmacy PillPack. It threatens to remove one of the few distinguishing factors pharmacy chains have relied on to fend off Amazon, the sale of prescription drugs. The value of the deal was reported to be $1 billion, but the announcement cost drug store and medical wholesaler investors around $19 billion in stock losses that day, while Amazon gained about $5.2 billion in value.

Conveniently, old enterprises have been granted victim status with no opportunity to fight back against Big Bad Amazon. This whining has no place in the distribution of heavy-duty parts. This line of thinking excuses an industry’s inaction and the longer it continues, the longer it will take for meaningful competition to modern monopolies like Amazon to appear.

Change Brings Opportunity

When platforms like Amazon enter an industry, incumbents need to respond by building their own platforms. Platform businesses have a strong winner-take-all dynamic, so incumbents need to make sure they have a platform in the race. Even if Walmart’s Jet.com ends up as No. 2 to Amazon in the consumer e-commerce market, Walmart’s management will have created immense value for Walmart and its shareholders.

Acquiring platforms isn’t the only option. If incumbents act quickly enough, they can build their own for a lot cheaper … a perfect future project for groups.

This Just In…

UPS rolls out on-demand U.S. fulfillment network geared towards B2B e-commerce

UPS announced today it has rolled out a new technology company and digital platform focused on matching available warehouse space and fulfillment services geared towards merchants shipping online orders to their customers quickly.

What are a couple of industries that still have the opportunity to fight backBusiness-to-business (B2B) distribution and trucking.

Amazon is rapidly entering B2B distribution with its Amazon Business marketplace, but it’s not too late for incumbents to respond. B2B distribution is early-on enough that building a platform marketplace from scratch could still work.

Freight trucking has competition from Amazon and Uber Freight along with many startups like Convoy. Building from scratch would be an uphill battle with little room for mistakes. Still, it’s early enough that a platform acquisition could be had for a cheaper price than spending billions.

Amazon’s success is by no means inevitable. Its growth is driven by its innovative platform business model and willingness to take risks. Most incumbent legacy channels that Amazon has faced weren’t up to the task.

However, innovative distributors and service providers looking to fight back against their tech disruptors should take heart. The playbook for how to respond is out there, and we have the resources and industry knowledge that can enable us to win. Short, intermediate and long term.

Now this isn’t to say beating Amazon would be easy. From our experience working with large established distributors, CEO’s who are trying to convince their teams to embrace disruptive business models often feel a bit like they’re trying to steer the Titanic away from an iceberg.

It’s A Daunting Task, Yet It Can Be Done

In other industries, incumbents are also starting to wake up. Hotels have long been complaining about Airbnb, but almost none of them have figured out how to respond properly. Hotel brands building a few apps and digitizing a few parts of the hotel experience, along with restrictive local ordinances, won’t stop Airbnb from continuing to grow like weeds.

Hotel’s lack of real innovation is typical of incumbents faced with disruptive platforms coming into their industries. These incumbents often talk a lot about what’s usually called “digital transformation,” but these initiatives typically just amount to papering a few digital tools over their existing business models.

But some in the hotel industry are starting to realize this won’t be enough. At the end of July, Wyndham Hotels acquired Love Home Swap, an Airbnb competitor.

Like Walmart, Wyndham realized it needed a radically different response. These old school businesses need to figure out how to become platform businesses. This is digital transformation done right.

There Is a Shift of Channel Control to the Customer

Pricing remains at the center of it, but as a component of total installed cost. The resulting focus on trouble-free operation has been overwhelming the traditional ‘relationship’ between sales guy and purchasing influence. This disruptive shift is a threat to distributors and suppliers. What can distributors do to assure continued success?

  • Recognize there are some things gigantic companies can do that smaller businesses can’t. Don’t try to beat the giants at their own game and remember that even Amazon has not figured a way to provide vehicle service digitally.
  • Work more closely with suppliers. We’re all in the single business of keeping the ‘guy who throws the box away’ happy and productive!
  • Quit settling for mediocre profits. Pretax returns on assets of less than 7 percent, and pretax returns on investment under 15 percent, are below average in distribution industries and don’t bode well for your viability.
  • Use strategic pricing to elevate overall margins by 100-200 basis (1-2 percentage) points. Most heavy-duty parts and service distributors can achieve, and sustain, gains of this much or more.
  • Customer profitability analysis will help manage pricing and people productivity. Tools such as WayPoint can provide critical insight to the structure of your profitability. Are you really profiting from your customer mix … or is it your supplier and category selection that is the basis for future growth?

Last Checklist

Measure your “cost to serve.” You must segment your customers not only for pricing but also to know how to invest service costs in the right customers. The resulting operational plans should contain:

  • Clear objectives and desired outcomes;
  • Activities to be delivered (and by whom);
  • Expected quality standards;
  • Staffing and resource requirements;
  • Implementation timetables;
  • A firm process for monitoring progress.

Note: As I was finishing this article, Amazon exceeded a trillion-dollar market cap based on a 41x forward free cash flow multiple — the fifth company since the Dutch East Indies Company (1602-1800 worth $7.2 trillion) to be worth more than $1,000,000,000,000.

Bill Wade is a partner at Wade & Partners and a heavy-duty aftermarket veteran. He is the author of Aftermarket Innovations. He can be reached at bill.wade@wade-partners.com

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