Chief Auto Parts opens another chapter in its 40-year history with the announcement that a group of Chief executives along with investment entities managed by Trust Company of the West will acquire all of Chief's outstanding shares, a transaction designed to significantly reduce Chief's outstanding debt.

David H. Eisenberg, Chief's chairman, CEO, and president, describes the recent financial history of the 500-store chain, which began with a single unit in Norwalk, CA, in 1955: "After a leveraged buy-out from Southland Corporation in 1988, Shearson Lehman Brothers, Inc., was the equity partner and General Electric Corporation was the lender. Over the horizon of time, GE gradually gained control of the company. When I came aboard in 1992, not only was GE virtually the owner of the company but also our only lender. Their mindset was that of a lender -- they were not interested in growth, only in getting their money back."

"While this was going on," he continues, "the company began to stabilize itself and to perform better each and every month. When we did so well in 1993 compared to 1992, GE realized the Chief could be a very fine company to put on the market. And so Trust Company of the West and Chief found a very amicable relationship with one another. As the financial buyer, TCW decided the best way for Chief to grow was to de-leverage the company and have no debt, except for a revolver. We can take all that interest we have been paying to GE and use it to fuel growth of the company into the 21st century -- updating our existing stores as well as opening new ones. They will leave management in place and we will move the company forward with our plans and our vision."

David H. Eisenberg, Chairman, CEO, and President, Chief Auto Parts With plans to open as many as 50 to 70 stores per year, Chief is experimenting with larger sizes -- 6,000- to 7,000-square-foot units, compared to their current 3,400-square-foot average.

Those plans include adding as many a 50 to 70 stores per year. The company, based in Dallas, currently operates units in Texas, California, Nevada, Tennessee, Arizona, and Arkansas, and expects to expand within these existing markets. Eisenberg calls his strategy for finding new locations "critical mass." He explains, "We are an aggressive type of merchant, so we bank on advertising and in-store promotion quite a bit." By grouping stores in contiguous markets, he continues, "We can count on efficiencies in advertising and distribution vehicles. Also, district managers can cover more stores. The economics of that make a lot of sense to us."

The actual size of the stores will also expand. Chief stores currently average 3,400 square feet with 10,000 to 11,000 SKUs and sales per square foot of about $240. Noting that "we do anticipate a need for a larger box," Eisenberg says, "A 5,000- to 6,000-square-foot format seems to be the conventional size used to carry the proper amount of SKUs, between 15,000 and 20,000, which can service about 70 percent of the wants of any customer." He adds, "Once you go beyond that point, you hit strong diminishing returns in terms of inventory investment."

Expanding Selection

Chief has recently opened some units in the 6,000- to 7,000-square foot range, and Eisenberg reports that they are satisfied with the results. The additional footage is being used to showcase an expanded selection of hard parts, as well as additional "out-front" merchandise. While the company will continue to experiment with these larger units, there will still be a place for their smaller prototype. "We know how to make money in a 3,000-square-foot store," says Eisenberg. "This gives us a unique ability to get into neighborhoods where our competitors can't or don't wish to because it doesn't fit their strategic plan. They'll overlook a nice little market niche that we can slide right into. We want to keep that flexibility."

Chief's competitive niche is to offer itself as a "do-it-yourself maintenance specialist," focusing on auto parts as opposed to "do-it-for-me" service and larger engine repairs.

Chief Auto Parts classifies itself as a "do-it-yourself maintenance specialist," focusing on auto parts - brakes, clutches, radiators, tune-ups, etc. - as opposed to larger engine repairs. This particular niche, Eisenberg believes, gives them an edge over many forms of competition. "Fortunately for us, mass merchandisers would rather sell clothing and other merchandise where you get higher margins. They are moving more into the do-it-for-me end of the business, which challenges The Pep Boys and Sears stores more than the conventional DIY units like ourselves, Hi-Lo, and AutoZone."

As for competition from these conventional units, Eisenberg responds, "Research tells us that people like to shop at Chief Auto Parts. We're in their neighborhoods, and they like our service, our pricing strategy, and our advertising. The advertising seems to encourage our value image and our private brands support this image. Also, we strive hard for quality, and most of our hard parts have a lifetime guarantee."

In terms of pricing, he describes the company as "competitive but a little on the higher edge of the envelope. We may be a little higher, for example, if you need new bolts for your license plates once every four years. That's where we make our margin. But we are extremely competitive on the impressionable, higher velocity items. With motor oil and other high-volume commodity items, we're right within a point or two of everyone else."

Culture Shock

The rate of inventory turns was an unexpected challenge for Eisenberg, who spent much of his career in the drugstore industry. Aside from those quick-turning commodity items, the auto parts industry has a much slower rate of turns. "I had quite a culture shock when I first came here," he notes. "If you have sluggish turns you have to make a higher margin for balance using the earn-and-turn methodology. That's why it's so difficult for me to envision these large automotive superstores being successful. Those extra 10,000 SKUs turn once a year and you're trying to sell them at a 25 percent margin. Therefore, the earn-and-turn doesn't seem to click."

Auto parts retailing, Eisenberg believes, "offers more of a challenge on the human resource end of the business. Our employees have to have more product knowledge than they do in the drugstore industry, where there are a lot more `clerks.' Here, even a cashier or the person answering our phones has to have that knowledge. `Do you have it,' is the first question, because there are so many parts, and the business is so part specific."

Based on his own experience, Eisenberg believes that one area where auto parts can take a lesson from drugstores is in technology to enhance customer service. "Where I'm from, in the prescription business," says Eisenberg, "we would profile customers in our pharmacy to make sure we knew about their allergies, medical history, and so on. We want to do the same thing here -- get your car listed, know when your last oil change was, etc., so we can be proactive with our customers. It builds loyalty, what I call bonding, and that's what you want to do when customers have such a tremendous choice of where they can find the same product."

Smarter Technology

The key to this type of program is technology, another priority for Chief, Eisenberg admits, "Our systems need to be updated. We can fix that by getting the new, smart cash registers. That will also help engineer out a lot of the labor of the accounting functions that our store managers are doing now, which will in turn enable them to be on the floor servicing customers, and therefore building average transactions and sales."

Once the technology is installed to allow the chain to capture more detailed information, the company expects to create programs that "allow us to better serve our customers and better utilize inventories. We look forward to being not only market specific in terms of merchandising but also store specific. How do you grab data, amalgamate it into your own systems, and know that this neighborhood has more Chevrolets from 1980 to 1990 than the neighborhood down the street, so you can draw merchandise assumptions? Some companies who have had more discretionary income in our business are tracking customers nicely."

Recent changes in Chief's management are expected to improve its position with the vendor community. Eisenberg reports that despite a highly leveraged balance sheet, "we've had a great response from our vendors because of our wonderful payment record -- we always pay our bills on time, and that's more than some companies with better balance sheets have done."

When asked if he expects to expand the chain nationwide, Eisenberg replies, "In our three-year strategic plan, the simple answer is no, not anytime in the midterm future. We want to be the best, not necessarily the biggest -- the best in performance, the best in treating our employees fairly and giving them opportunities to grow, and the best in servicing customers. And whether that's regional or local, it doesn't make any difference, as long as we're the best."

Looking ahead at auto parts retailing, Eisenberg says, "A consolidation will probably occur in a few years, but at this moment, the traditional outlets and small independents are the vulnerable ones, as they were in all the other industries 10 or 15 years ago. So the evolution will soon become a revolution, and I think in this industry that will happen in the next five years or so. That's why I am excited about our new opportunities. I think Chief has a brilliant future ahead of it and I am proud to be here."

Stephen J. Alexander is an aftermarket consultant, speaker and author for the Automotive Aftermarket. To learn more about other in-store merchandising and marketing issues, contact Stephen Alexander, Automotive In-Store Marketing at 239-395-9203 or e-mail him at salexander@autoinstore.com.