Pep Boys Business Development Plan

Running head: PEP BOYS FINAL BUSINESS DEVELOPMENT PLAN 1

Pep Boys Final Business Development Plan

Daniel St.Germain

MBA 515

February 28, 2016

Robert Thompson

PEP BOYS FINAL BUSINESS DEVELOPMENT PLAN 2

Pep Boys Final Business Development Plan IntroductionThis is the finalized business development plan for Pep Boys. It is broken down into

three categories: market domain, competitive readiness, and opportunities and trends. The

market domain section contains an analysis of the history of the domain, notable business

failures throughout its history, and a discussion of the impact said historical failures may have

upon innovation within the current business environment. The competitive readiness section

contains the SWOT and PEST analysis for Pep Boys. Lastly, the opportunities and trends

section details the various intrapreneurial and entrepreneurial opportunities available to Pep Boys

based upon the results of the analysis performed in the second section.

I. Market Domain

Automotive Aftermarket Introduction

The automotive aftermarket is a market domain within the greater transportation industry.

It includes all organizations responsible for the sale of aftermarket parts, repair of automobiles,

or any combination of the afore-mentioned. I’ve compiled an overview of said domain in this

essay. This includes a look at the factors responsible for the creation of this domain, reasons for

major business successes and failures (inhibiting and enabling factors) throughout its history, and

potential opportunities for growth and development based upon current conditions (economic,

social, environmental, legal, etc.).

Early History of the Automotive Industry

The automobile made landfall over 100 years ago in Europe and was created by Karl

Friedrich Benz and Gottlieb Daimler. “The two men, who had never met previously, filed their

patents on the same day-January 29, 1886” (History.com Staff, 2012). And while the creation of

the automobile was one of the most significant inventions of the 19th century, it was far from one

of the most significant events within the history of the automotive industry.


Initially, automobiles were thought to be a novel toy for the affluent. Furthermore, the

predominant mode of transportation during the era was the railroad. This all changed because of

the vision of one man, Henry Ford: thus the first major milestone in the history of the automotive

industry was the Model T. In fact, the creation of the Model T could be considered the creation

of the automotive industry. “By the time Model T production ceased in May 1927, more than 15

million had been built, a single-model record until 1972…The model T was more than just a car,

it was a social phenomenon. It changed the lives of millions of people” (Vance, 2015). Henry

and the Ford Motor Company created a mass-consumable automobile, however, they didn’t

create a custom vehicle, personal to the owner; and here, I venture, is where the automotive

aftermarket was born. This lack of creativity was also the subsequent downfall of the Ford

Motor Company and the rise of competition within the automotive industry. “It was Ford’s

stubborn refusal to match General Motor’s development of a diversified product line that

accounted for Ford’s declining fortunes” (O'Brien, 2016). In addition to the Model T, there were

several other integral movements that occurred during this period which led to the creation of the

automotive aftermarket.

Early History of the Automotive Aftermarket

Markets do not operate independently, rather, they act upon the world, and so too, the

world acts upon them. This was the case with the Model T. So many new motorists entering the

world during the early part of the 20th century created a need. The first was the availability for

replacement parts to keep cars running; enter the auto parts store. The second need was for

skilled laborers, to build and also to repair vehicles; enter the mechanic. The Model T, while

elegant with respect to the sheer volume of its production, was poorly made compared to today’s

standards. The engine burned copious amounts of oil and the tires didn’t last more than a


thousand miles: this vehicle needed parts, desperately. “The ‘Tin Lizzie’, as people

affectionately called the ‘T’, was everywhere by 1915 and it was the car parts salesman’s dream.

From the Ford factory it came as little more than a bare bones vehicle” (Marchman, 2004). Enter

Western Auto, the first aftermarket auto parts seller, created by George Pepperdine in 1909

(Advance Stores Company, Inc., 2015). Pep boys followed 12 years later.

Mechanics, on the other hand, had been there since the beginning. “Wealthier car

owners employed chauffeur-mechanics as servants who would drive and maintain their vehicles”

(International Association of Machinists and Aerospace Workers, 2010). However, the auto

mechanic trade was legitimized when it was adopted by the International Association of

Machinists in 1916 (International Association of Machinists and Aerospace Workers, 2010).

Another pivotal influence that occurred during this time in response to the growing use of

the automobile was governmental legislation. As was mentioned previously, during the latter

part of the 19th and beginning of the 20th century, America was predominantly a system of

railroads. The infrastructure necessary for automobile travel was shoddy, at best. In order to

improve the status quo and make way for the burgeoning automotive industry, the government

implemented the Federal Road Act of 1916. “The Federal Road Act of 1916 began the federal

government’s effort to transform muddy road into a network of interconnected paved highways”

(Johnson, 2011). This created the infrastructure necessary to grow the automotive industry into

an indispensable part of the national economy.

Last, before moving onto the next topic, we must return to Mr. Ford. While mass-

production and efficiency created millions of automobiles and did so cheaply, affording one

outright was completely out of reach for most Americans. This problem was solved by the

introduction of automotive financing. In addition to rolling millions of Model T’s off the


assembly line, Henry Ford also created an installment purchase plan (an early type of financing,

however, the owner didn’t get the car till it was paid for) so that those without enough cash to

purchase the vehicle, could still get a Model T by making payments of $5 weekly (Collins,

2007).

In summary, by 1916 there were millions of automobiles on the road thanks to the mass

production of Ford’s Model T. Such unprecedented growth in the use of automobiles created a

need for infrastructure (Federal Road Act of 1916), financing eligible buyers (Ford’s Weekly

Purchase Plan), replacement auto parts (Western Auto), and skilled repair men (Auto Mechanics

accepted into International Machinists Union). The combination of the afore-said factors then,

created the Automotive Aftermarket which was a well formed market domain by the time Pep

Boys entered the fray in 1921. The next section will cover two of the most noteworthy

businesses in this domain, since it formed nearly a century ago, and the contributing factors that

led to their success and subsequent demise.

Businesses in the Automotive Aftermarket-Success and Failure

As was mentioned before, Western Auto was one of the first aftermarket auto parts

sellers in America, rather, the world. The company started up in 1909 as a mail order (dominant

form of commerce at the time) parts company. In the catalog one could purchase everything

from tires to oil to spark plugs. Sales grew slowly and steadily and by 1913 the first retail store

opened. A second store followed in 1915. This was followed by the creation of Western Auto’s

private brand items. Private brands items generated a greater profit margin. In addition,

Pepperdine developed a unique marketing strategy during the peak of the Model T’s sales

history. Pepperdine rebranded one of his mail order catalogs as specifically for Ford owner’s

and dubbed Western Auto the “Supply Headquarters for the Ford” (Marchman, 2004). These


tactics helped to capture an even greater share of the market, however, due to ill health he was

forced to move west to California. He sold the controlling interest in his first two stores and

opened up a separate Western Auto in California.

The next major historical moment was the First World War. The world war brought

about enormous uncertainty and rising prices, however, Pepperdine capitalized upon this time to

aggressively market his product by hiring on commissioned salesmen. This led to the growth of

stores up and down the West coast along with a peppering of them throughout the American

Heartland. In a decade of operation, through aggressive marketing and a low price strategy,

Western Auto had captured an enormous percentage of the newly formed automotive

aftermarket.

The stock market crash of 1929 and subsequent Great Depression that followed crippled

much of the nation and the automotive industry was certainly not immune from the

ramifications. Add to this the fact that the Model T had been put to rest 4 years prior and the

current automobiles being built were complete cars and superior in every way to the Model T.

Replacement parts lost demand, however, Pepperdine navigated this tough time via

diversification: “George Pepperdine’s operation, had seen this coming and was expanding its

product line into sporting goods, radios, and aviation supplies” (Marchman, 2004). Western

Auto managed to navigate through one of the most difficult economic times of recorded history

and ultimately, captured an even greater market share. The next step was the associate store.

Following the Great Depression, Western Auto grew even further through the

development of associate stores. This, in effect, was the equivalent of a modern day franchise,

minus the strict legalities governing such arrangements today. The associate store was

independently owned, however, it was responsible to sell a certain amount of Western Auto


products. The amount of Western Auto stores in the United States mushroomed due to the

associate store program and this continued on through the Second World War and beyond. In

fact, the business model (associate stores, main chain, aftermarket auto parts, and a diversified

product offering including the iconic Wester Flyer bicycle) developed during this time served

Western Auto well to the tune of enormous growth and profits over the next 30 years. However,

Western Auto’s success didn’t last forever.

By the late 1960’s Western Auto had begun selling everything from tires to furniture,

however, the winds of change were blowing. Large retailers entered the market (K-Mart) and

began whittling away at Western Auto’s market share, little by little. Moving into the 1970’s

this problem was exacerbated by the steady decline in associate stores. The company relied

heavily on the process that led to their success 25 years earlier and refused to adapt to the

changing economic, social, and governmental landscape of the times. Add to this the oil crisis of

the 1970’s which dramatically increased the price of gasoline, leading to people driving less and

subsequently needing less automotive repair parts, and Western Auto had begun an inevitable

downward spiral. By the mid 1980’s Western Auto was sold out to Sears and the dream that

began nearly three quarters of a century earlier died. The cause of death can be attributed to

none other than a lack of innovation and adaptation to current market trends.

Pep Boys

After the First World War, four Navy friends pooled $800 and decided to open an auto

parts store on the east coast, specifically Philadelphia (Pep Boys, 2015). They were successful

during their first years for the same reasons as was mentioned for Western Auto, primarily the

Model T. During the Great Depression, they expanded west to California and pursued the same

strategy of product diversification as Western Auto before them. Unlike Western Auto however,


“The Company did not cut back or lay off personnel, run up debt” (Pep Boys, 2015).

Furthermore, during the California expansion, Pep boy’s implemented one of their boldest

strategic moves, effectively separating them from the herd of aftermarket parts suppliers,

opening their first repair shop. Pep boys was now playing on two ball fields. And while growth

during the 1930’s was limited in comparison to Western Auto, The end of World War II and

return of the troops home drove consumer demand for automobiles, parts, and services through

the roof.

It was at this juncture that Pep boys took an entirely different approach to Western Auto.

While Western Auto had great success with the associate store program, Pep boys went public.

The IPO infused capital into the company and its first major expansion was underway. Within

20 years there were over 124 stores with both parts and service departments. Although modest

in comparison to Western Auto, progress was steady and consistent.

As was mentioned earlier, the 70’s brought great change and one of the key changes it

brought was the beginning of the demise of Western Auto. The decay of the once great auto

parts supplier was apparent within the market domain and Pep boys took advantage of this at the

beginning of the 80’s. “To raise capital, Pep Boys split its stock 3-for-1 and moved to the New

York Stock Exchange…This concept boosted Pep Boys to more than 700 stores, almost 3,600

service bays and more than $2 billion in annual sales” (Pep Boys, 2015), grabbing up as much of

Western Auto’s hemorrhaging market share as was possible. The expansion of Pep boys

continued on through the 90’s and even expanded into the markets in Puerto Rico, however,

much like Western Auto before, refusal to adapt to change led to their ultimate demise.

The dawn of the new millennium brought vast changes because of the development of the

internet. Changes in technology began accelerating at break neck speeds resulting in


technologically superior automobiles. Automobiles have become so complex over the last 20

years that the do it yourself market has shrunk considerably and also of note, knowledgeable

technicians able to work on cars the do it yourselfers won’t, has also. In addition to the

aforesaid, many of the Pep boys locations opened over 30 years ago haven’t seen so much as a

paint brush, let alone any type of rebranding efforts. Furthermore, increased competition by

newcomers to the domain, Auto Zone, and a resurgence of Advance Auto Parts after the

acquisition of none other than Western Auto began eating away at Pep Boy’s market share. And

lastly, dealerships have come on the scene as legitimate competitors in the aftermarket domain.

“Pep Boys is fighting back with a ‘holistic’ rebranding, changing not only its marketing and

advertising strategy, but revamping store interiors and exteriors, implementing new customer-

service training programs and recalibrating its internal culture. Even its signature Manny, Moe

and Jack caricature logo has been redesigned” (Bulik, 2014). Certainly a better show of force in

the end than Western Auto, however, it came too little too late. As of the writing of this article

Pep Boys has been sold to Ichan enterprises for $18 a share, a roughly $1 billion dollar deal. The

fate of the Iconic Manny, Moe, & Jack is now in the hands of one of the most notorious Venture

Capitalists of the last 30 years, Carl Ichan. The cause of death: failing to analyze opportunities

and threats in the market place early enough to implement change successfully.

Opportunities for Growth in the Current Market

First and foremost, the greatest opportunity in the current domain is that of the potential

market share that could be gained during the process of selling Pep Boys. Employee’s wont trust

their new employer and customers won’t trust the business as both wait for the dust from the sale

to settle. This presents an unprecedented opportunity for the company willing to take the risk to


expand. Two companies already poised for this are AutoZone, one of the largest parts retailers

in the country and Bridgestone, one of the largest automotive service providers in this country.

Second, as mentioned above, the rapid pace of technological advance in the last 20 years

has been staggering. Already, hybrid electric and fully electric vehicles are filling the highways.

The advanced tech propelling the automobiles requires a new, more knowledgeable technician.

This requires companies to begin investing as much money as possible toward the training and

development of new human resources. I mentioned briefly before, dealerships are becoming a

major competitor in the automotive aftermarket, and it bears repeating again, because their

training, benefits, and retention are already far ahead of the majority of their aftermarket

competitors. This is because they build the cars: so naturally, their OEM parts are the best for

the vehicle and they know how best to train technicians to repair them. In addition, selling

automobiles further diversifies dealerships giving them a hand over fist advantage over strictly

aftermarket competitors.

Third, stricter government regulations regarding the burning of fossil fuels will continue

to drive technological advance within the industry further complicating the construction and

operation of motor vehicles pointing back toward the second point: education and retention of

quality human resources.

Finally, the last opportunity for growth with this domain comes from the natural

breakdown of automobiles. Many of the new cars on the roads today, superior as they are, will

still begin breaking down in the next three to five years. The company that retains

knowledgeable staff today and captures Pep boy’s readily available market share will be able to

move into the next decade successful and ultimately, profitable beyond measure.

Summary


The automotive aftermarket’s development can be credited to two men: Henry Ford and

George Pepperdine. Henry Ford created the Model T, a stripped down automobile that was

affordable to the masses and George Pepperdine created the aftermarket parts to personalize it.

The two oldest companies in this domain, Western Auto and Pep Boys both achieved great

success respectively, but took different paths to get there. Western Auto was successful through

unique marketing, diversification strategies, and developing associate stores. Pep boys was

successful by growing slowly, going public and grabbing market share from a dying Western

Auto. Western Auto failed by relying on past strategy to be successful in current markets and

Pep Boys failed by missing opportunities, threats, and making changes too late.

Currently there are three opportunities for growth with this domain. The first is through

taking over Pep boy’s available market share through expansion. The second is through hiring

and retaining knowledgeable human resources to work on increasingly complex vehicles. The

third is by being prepared as the first wave of modern vehicles begin to break down; grabbing as

much of the hybrid and all-electric market as is possible.

II. Competitive Readiness

SWOT Analysis Introduction

The following contains a SWOT analysis of Pep Boys. I’ve included four examples of

each SWOT category in relationship to current market conditions and future potential. Second,

following the analysis, I’ll recommend strengths to capitalize upon and weaknesses to avoid, in

order of importance. And third, the conclusion will include a personal evaluation of Pep Boys

preparation, or lack thereof, to compete in the market today and in the future.

Strengths


The most important strength that Pep Boys currently has is brand recognition. The Pep

Boys brand has been around longer than any other brand in the collective consciousness of the

automotive aftermarket. “Our research shows that Pep Boys is a well-recognized brand by two-

thirds of consumers, and customers recognize [it] as having knowledgeable staff, clean stores

and good prices” (Bulik, 2014). Brand recognition takes years to develop and enormous

amounts of capital investment to maintain. Pep Boys already has the brand and because it is

associated with expert service and good prices, this is the companies’ greatest asset.

The second strength within the company is the online presence it has developed over the

last decade. The company has taken advantage of the integration of the internet and smartphones

into everyday life and built a strong e-commerce presence to the tune of nearly 25% of yearly

revenues, and substantial growth year over year. Currently, the DIY (do it yourself) customer

can log onto pepboys.com via their computer or through the pep boys app on their smartphone

and purchase parts which can then be shipped directly to their door or to the closest Pep boys for

store pickup. In addition, the same tech can be used to cater to the DIFM (do it for me) as this

customer segment can use the same tech to set maintenance appointments, create vehicle repair

logs, and find the manufacturer recommended service intervals for their specific vehicles.

Third, the company has implemented their “Road Ahead” rebranding campaign and this

is an enormous asset. After the rapid expansion of Pep Boy’s in the 80’s to the 800 stores it

currently has, little has been done in the way of updating, improving, and or changing the brand

strategy. As such, most of the stores look old, run down, and are built to the specifications of a

long deceased customer base. Investing capital in the “Road Ahead” campaign is going to

completely renovate every store from top to bottom. The brand logo has been redesigned, the

store lay outs have been changed, and everything from paint to flooring will be replaced. The


effort has already been rolled out in many markets throughout the country to the tune of great

success and it can be assumed that a continuation of this program will bring more of the same.

Fourth, the company has a substantial commercial parts business. Many of our top

competitors in the aftermarket service sector are also our customers in the aftermarket parts

sector. This is critical, as while we may lose service market share to many of these organizations

(local auto repair shops, franchises, etc.), our ability to make up for that via selling these

competitors the parts they need to perform said services is paramount. “As of January 31, 2015,

approximately 80%, or 456, of our 569 Supercenters and Pep Express stores provided

commercial parts delivery” (Pep Boys, 2015).

Weaknesses

The first weakness apparent when analyzing the business is that of the outdated stores

and brand image. While the “Road Ahead” rebranding effort is making headway throughout

America, it has many more stores to reach before completion and many of the older stores have

been consistently losing their customer base within their respective markets. As of the second

quarter 2014, “results disappointed investors with lower than expected earnings and revenue of

$507 million. For the nine months ended Nov. 2, comparable store sales fell 1%” (Bulik, 2014).

This drop in sales has held despite rebranding efforts and is the precise reason the Board has

begun seeking alternative way of maximizing shareholder value, such as the proposed sale to

Ichan enterprises.

The second weakness is with respect to human resources retention. In order to be highly

competitive we have to continually strive to reduce costs in order to pass that on to our

customers, in both the retail and service aspects of the business. This translates into lower

capital with which to pay employees, resulting in lower caliber employees and higher employee


turnover. The current plan rolling out during the “Road Ahead” campaign includes retraining of

employees to focus more upon customers and less upon sales, in order to retain customers for

repeat business. Retraining employees is only effective if those employees stay on with the

company and grow within the organization, thus a new type of compensation and benefits

package should be implemented. “Retraining staff in line with the Road Ahead rebranding has

proved harder than anticipated, with staff turnover in some cases as high as 40 percent” (Davis,

2014).

The third weakness apparent is the cost versus benefits of rebranding the entire

organization. The cost of conversion to the Road Ahead format is over $500,000 per store.

Couple this number with the high turnover rate of employees, and rebranding one store is easily

a million dollar investment. There are over 800 locations in need of rebranding and many are

sitting on property worth more than the potential benefit from rebranding. “Some of the

locations that Pep Boys is looking at for closure are more valuable as real estate, so they likely

would be sold for the better return” (Davis, 2014). Pep Boys, a publicly traded company, has the

ultimate responsibility to maximize shareholder profits, and while the road ahead rebranding

effort may work well in the long run, it would do so at the cost of short term shareholder value.

Therefore, the rebranding effort itself is a weakness.

Fourth, while the rebranded stores do perform better than their older counterparts, the

company’s sales have remained flat for the last three years (rebranding efforts began in 2012).

The reason is as follows: merchandise sales have gone down and service sales have gone up as a

result of the market shift from DIY to DIFM. “Total merchandise sales decreased 0.9%, or $14.8

million…Service revenue increased 7.2%, or $32.8 million” (Pep Boys, 2015). This means that


the company is missing opportunities to capitalize upon the shift in consumer behavior which is

an enormous weakness.

Opportunities

The first opportunity piggy backs off of the last weakness mentioned. Currently, there is

a fundamental shift in consumer behavior with respect to the automotive aftermarket.

Automobiles are becoming increasingly complex, and as such, the consumer is less likely to

work on his or her own automobile. This has created a mass exodus from the DIY (do it

yourself) mentality to DIFM (do it for me) and creates an enormous opportunity for Pep Boys.

The opportunity then is to capture as much of the newly emerging DIFM market as is possible in

every available market segment. In addition, growing the commercial parts sales portion of the

company to other service competitors is also a potential opportunity.

The second opportunity is through increasing online presence. It was mentioned earlier

that the e-commerce segment of the company is doing well and growing every year. Developing

and growing this segment of the business to capture more of the e-market is an especially

promising opportunity. “As a whole, our digital business represented 6% of sales in the fourth

quarter of fiscal 2014 and grew by 43% on a year over year basis” (Pep Boys, 2015).

Third, developing more private label products is another opportunity. Currently, we

already produce a large number of private label products and the profit margin for these products

is substantially greater than their name brand alternatives. “All products sold by the Company

under various private label names were approximately 25% of our merchandise sales in fiscal

2014” (Pep Boys, 2015). Because the infrastructure for creating these products already exists,

expanding our product lines, in tires, for example, wouldn’t be a tremendous expense and could

dramatically increase profitability.


Fourth, as was mentioned above, rebranding many of our failing stores is potentially

more costly than beneficial in the short term. An opportunity that must be looked at is

permanently closing these stores, selling the properties, then reinvesting the capital into

rebranding efforts elsewhere. Rather than continuing to hemorrhage capital in markets that we

can no longer compete, we should take a hard look at retreating in those areas while redoubling

our efforts in others where we’re already experiencing success.

Threats

The first threat the organization faces is also the source of its’ competitive advantage.

Pep Boys is unique because it offers parts and services, while most of its competitors only offer

one or the other. When Pep Boys was at the peak of success in the mid-90, this feature helped to

differentiate and to further enhance the brand. Today, however, in the wake of a full-scale

rebranding and year after year of flat sales, this is a liability. The company faces strong

competition from both segments within the automotive aftermarket and is losing. Were the

company just a service provider or parts supplier, the rebranding effort could be going much

more smoothly and for far less expense, but with so many moving parts, it is becoming a

disaster.

Second, the high turnover rate (40% in many cases, see above) of employees is another

threat which makes the future success of the company precarious, at best. Knowledgeable and

friendly staff is a key component necessary in order for Pep Boys to successfully transition from

a sales driven organization to a customer centric (relationship driven) one. A relationship driven

company can only happen when the same employees are there, week after week and year after

year, creating those relationships. With such high turnover rates, this isn’t happening, and is a

huge liability.


The third threat is from the growth of dealership service centers. “Dealerships may, in

fact, be Pep Boys’ biggest competition as the company looks to boost profitability. According to

Mr. Bird, dealers derive 55% of revenue on new-car sales; 30% from used-car sales; and 13% on

parts and service. However, parts and service make up more than half of their total profits,

which helps explain why carmakers such as Ford and Chrysler are building standalone quick-

service centers” (Bulik, 2014). Dealerships have the luxury of developing a relationship with the

car owner from the moment of purchase, and if nurtured, can eliminate many aftermarket

competitors, including Pep Boys, from the equation simply by providing excellent customer

service at the right price point.

The fourth threat has to do with investor confidence. Over the past 5 years, despite

rebranding efforts and growth in e-commerce, company sales have remained flat, and as of this

year, declined. As a result, return on stock holder’s equity for the past year was -5% (Pep Boys,

2015). A negative return of such magnitude decreases investor confidence and decreased

investor confidence decreases stock value. In addition to a decrease in stock value, this will also

make raising capital through the markets for continued rebranding efforts difficult, even

impossible. This is probably what led the board to begin considering sale of the company.

Prioritized List-Strengths

Based upon the aforesaid analysis, the following strengths should be capitalized upon

moving forward. First, the company should determine the weakest stores in the organization

with respect to profitability. These stores should be closed immediately and liquidated in order

to funnel said profit toward rebranding stores with a greater chance of success. Because the

rebranding effort has created such a high turn-over rate, the newly displaced employees from

liquidated stores should be given the opportunity to relocate to stores being held open for


rebranding. This will reduce the turnover percentage and help to retain good employees. In

addition, the company should continue working to grow the e-commerce portion of the business

through creative marketing strategies and research and development aimed at making the

consumer experience user friendly and at the appropriate price point to remain competitive.

Lastly, the company should expand the private label offerings in order to grow the amount of

sales via private labels from 25% to 30%. Implementation of the above will make the company

leaner, more efficient, and profitable.

Prioritized List-Weaknesses

As was mentioned in strengths, the first and most important thing for the organization to

do is stop trying to compete in markets that have already been lost to better competitors.

Continuing to dump money into failing endeavors weakens the organization as a whole and

decreases investor confidence. It is better to lose market share in some markets and boost

organizational profitability than to retain market presence and continue to lose profits. Once the

liquidation of unsuccessful stores begins to bring in money to be used for rebranding, more of

that money needs to be used to create a competitive compensation package to retain and recruit

better employees. The success of the entire endeavor is based upon having the right employees

in the stores developing relationships with our target customers, thus, spending more money on

our human resources will help to mitigate the large-scale mutiny that has been taking place.

Third, because of the shift from DIY to DIFM, the focus of the parts sector within the company

needs to focus less upon retail business and more upon commercial. As more consumers begin

taking their vehicles to shops for repairs, the potential for becoming a larger commercial supplier

becomes far more important than a retail outlet selling air fresheners and speakers.


Summary

Based upon my findings, Pep Boys is a good brand with great potential, however, the

current state of the company gives much cause for concern. The rebranding effort implemented

to save the company from extinction is costing a substantial amount of money and the work force

needed to implement it isn’t there. Furthermore, competition from both sectors (parts and

service) has become increasingly stiff, making it difficult for the company to stay afloat. E-

commerce, rebranded stores, and private label products are the best examples of what the

company is successful in, however, investor confidence has dropped along with share prices for

the past five years straight. The best way for the company to move forward is to trim the fat by

liquidating unsuccessful stores, investing capital in human resource retention, growing e-

commerce, and increase private label offerings.

PEST Analysis Introduction

Pep Boys has sustained losses in America for the past five years and has also been

undergoing an enormous rebranding effort within the country in order to stem the flow of blood

and ultimately, regain its’ former profitability and market share. Since the efforts began, sales

have remained flat and investors have become distrustful of the entire operation. This has led to

the imminent sale of the company to Ichan Enterprises, brokered at the end of last year. While

the company has a long way to go with respect to improvements within the current market, there

may still be opportunities outside of the American markets, specifically, in Canada. This article

will look into the various external political, economic, social, and technological issues and events

currently happening within the Canadian market in order to create a prioritized list of the

aforesaid that Pep Boys, when ready, could capitalize upon in order to make successful entry into


Canada. In conclusion, based upon the previous SWOT and this PEST, I’ll estimate the

organization’s readiness toward that end.

Political

The first issue in the analysis, the political climate in the Canadian market is also the

primary reason this country has been chosen has a potential country in which to expand Pep

Boys’ operations. The best reason first, the country is run politically and legally in very much

the same manner as in America making the transition from this country to that far easier than

say, Brazil or Puerto Rico (the only other country that currently has a Pep Boys besides

America). Looking into the matter further, another attractive feature of the Canadian political

sphere, is the separation between the federal government and that of its’ provinces. “Canada

divides its governmental powers provincially and federally…Although the federal government

has jurisdiction to legislate…has to date expressed no interest in doing so, leaving the provincial

governments room to govern given their jurisdiction over contracts” (Shaw & Weinberg, 2012).

Such a laissez faire attitude from Canada’s federal government allows Pep Boys to freely

negotiate with each provincial municipality in order to negotiate the best location for initial

market entry. Furthermore, there will be less red tape and bureaucracy to cut through at this

lower level of governmental infrastructure, potentially leading to a rapid and inexpensive

introduction of the organization into the host country.

Another issue related to the political sphere of Canada is that of taxation. Taxation is an

important consideration with respect to any potential market entrance, domestic or otherwise,

and as such, is an important factor in this analysis. “The federal government governs income tax

under the Income Tax Act…Corporations in Canada pay a combined income tax rate of 20

percent to 31 percent, depending on the province. These corporate tax rates are currently lower


than in the United States and are projected to stay that way” (Shaw & Weinberg, 2012). Lower

income tax leaves greater organizational profit making a move to Canada seem all the more

promising.

Economic

As of 2014, the Canadian economy was growing slowly, still rebounding from the effects

of the recession of 2008. “For Canada, this will translate into another year of modest economic

growth of about 2.3%. This is not convincingly stronger than the 1.7% reached in both 2012 and

2013, and is not sufficient to make a significant dent in the rate of unemployment, which should

remain close to 7.0%” (Leitao, 2014). The large amount of unemployment within the country is

cause for concern as people without jobs drive less, and less driving means less of a need for

automotive repair and maintenance. One high note within the scope of this economic downturn,

however, is that of low interest rates. “The Bank of Canada will keep the policy rate at 1.00%

until at least the middle of 2015” (Leitao, 2014). The lower interest rates in Canada are meant to

encourage borrowing, as the lower rates mean less costs to borrow. This could be an opportunity

for Pep Boys to seek financing for this endeavor outside of using equity capital, as at this time,

raising capital through stocks may prove difficult, if not impossible: but financing through debt

equity at such low rates of interest could be the most logical and reasonable alternative.

Social

The move of industrial companies from the America’s to other third world countries has

been on for some time. “Manufacturing employment collapsed from a high of 19.5 million

workers in June 1979 to 11.5 workers in December 2009, a drop of 8 million workers over 30

years… Manufacturing plants have also declined sharply in the last decade, shrinking by more

than 51,000 plants, or 12.5 percent, between 1998 and 2008. These stable, middle-class jobs have


been the driving force of the U.S. economy for decades and theses losses have done considerable

damage to communities across the country” (Lach, 2012). While these statistics are speaking

specifically to the outsourcing of industrial jobs in America, because of the similarity between

this country and Canada, Canadians have also felt the string of this significant threat. The loss of

industrialization in an economy reduces the middle class, and that reduction reduces the amount

of capable workers available to perform jobs at companies like Pep Boys. Canada, unlike

America however, implemented the CARS program in 2003. This program was developed to

provide information to youth about the value of jobs in the industrial sector and provides

resources for said youth to obtain jobs. One of the biggest problems with outsourcing is the

reduction in qualified employees to do the work. This program was established to create a

sufficient work force to attract industrial companies back into the country. This is a potential

asset for Pep Boy’s as the program has been underway for over a decade and will have created

many knowledgeable, qualified employees. “CARS has now distributed approximately 18,000

kits to-date and has implemented a media strategy to promote industry careers and the resources

available…To help increase awareness of the resources and to encourage the promotion of our

industry careers” (Service Station & Garage Management, 2003).

Technological

“A growing number of the world’s leading automotive manufacturers have signed on to

support CarPlay, Apple’s solution for the automotive infotainment system” (Mattera, 2016). The

introduction of outsourced technology from Silicon Valley into the manufacturing of modern

vehicles is exciting for the consumer, but will present enormous challenges for businesses in the

automotive aftermarket. The reason being the automotive aftermarket has for years made money

in the parts sector by engineering replacement parts that meet or exceed OEM specifications: this


has also included aftermarket entertainment systems. The issue arises when the OEM no longer

produces, arguably, one of the most important components within the automobile; namely, the

entertainment system. The introduction of Apple’s CarPlay and Google’s Alphabet and wide

scale adoption creates a user friendly, user preferred entertainment technology that will be

heavily protected by copyright and patent infringement laws. Case and point: Google recently

lost a major lawsuit against Oracle due to its’ use of the Java platform in its operating system.

“The high court’s decision Monday left intact a prior ruling that certain kinds of programming

instructions are entitled to copyright protection…Google and some other industry groups argued

that treating the instructions as creative works protected by copyright could hurt the ability of

companies and programmers to take advantage of standard software functions and make different

programs work together” (Kendall & Ovide, 2015). For years the aftermarket has created unique

entertainment systems that were superior to the typical system developed by OEM and therein

was the Aftermarkets competitive advantage. But this new tech is superior to anything the

aftermarket has ever produced because it is being created by some of the most innovative and

powerful tech companies in the world. Furthermore the technology used to create it is also

heavily protected legally. This will create enormous barriers to entry for many aftermarket

companies’, Pep Boys included.

Prioritized List

After examining the current factors surrounding entry into Canada the following list is

the priority in which Pep Boys should pursue entry. First, because the cost of doing business is

less in Canada (lower taxes) and it sits along America’s northern border (Pep Boys can use

existing infrastructure to supply Canadian branches) the move should proceed immediately.

Furthermore, because Pep Boys can deal with the Provincial government rather than federal for


entry into the local markets, this will ease and expedite the process. One concern about entry

was the high rate of unemployment (7%), however, because of implementation of the CARS

program over 10 years ago, while there may be a reduction in overall need for parts and repair

services, there will be an abundance of skilled laborers necessary to run the businesses.

Furthermore, by creating more jobs with this move, the company will be helping to reduce the

unemployment rate and thus alleviating the major concern discovered during the aforesaid

analysis. Lastly, because of the technological advances developed by Apple and Google, Pep

Boys should consider shutting down its aftermarket entertainment division (high barriers to

entry) and use the capital saved to fund the aforesaid expansion, rather than any debt or equity

financing.

Summary

As was discovered during the SWOT analysis, Pep Boys has been struggling in the

American market for the better part of the last five years, and while it was recommended to shut

down unsuccessful stores in order to concentrate upon the more successful ones, no mention had

been made at that time to expansion beyond the American Market. After analyzing the aforesaid

factors with respect to the Canadian market, however, it appears that expanding into the

Canadian market could be a viable alternative to attempting to strengthen what was left of Pep

Boys American market share. Pep Boys is ready for this move, and unless they act quickly, it

may be their last chance.


III. Opportunities and Trends

Intrapreneurial Opportunities Introduction

After looking at Pep Boys via SWOT and PEST, respectively, a number of important

issues emerged. First, the companies rebranding efforts were too expensive to be sustainable and

many of their American stores would need to be closed in order to finance the continued efforts.

Second, there are great opportunities for Pep Boys to enter the Canadian market, however,

financing through equity and debt will prove difficult as investor confidence is low and

leveraging too much debt could prove disastrous for the company’s long term stability. This

article discusses the creation of an intrepreneurial division within the company that can operate

independently of the whole and capitalize upon the expansion of the Pep Boys brand into the

Canadian market in addition to a separate part of the division tasked with the responsibility of

developing a greater presence as a distributor of commercial parts. In conclusion, the article will

assess the viability of both endeavors with respect to current operational concerns discovered

during the aforesaid analysis.

SWOT Overview

Based upon the SWOT analysis it was determined that Pep Boys rebranding effort was a

completely unsustainable enterprise that was having marginal, at best, results with respect to

increasing market share. “Results disappointed investors with lower than expected earnings and

revenue of $507 million” (Bulik, 2014). What this means for the company is that financing

through the public markets via equity, is all but impossible, as skittish investors will not drop

money into a sinking ship. Furthermore, because of the overall performance of the company for

the last 5 years, financing through debt is also a poor prospect, as to leverage the company at this

time could prove disastrous if the company continues to perform in such a lackluster manner.


Despite poor overall performance the company still boasts a strong brand and has a surprisingly

agile supply chain throughout America. The supply chain forms the backbone of both

intrepreneurial endeavors which will be discussed in later paragraphs. There are clearly an

opportunities, however, with limited access to capital what is to be done about the lucrative

prospect of Canadian expansion and commercial parts distribution discovered during the PEST

and SWOT analysis? The next paragraph summarizes details from the PEST (St.Germain, Pep

Boys SWOT, 2016).

PEST Overview

Opening Pep Boys stores in Canada could provide a boost to the company’s flat

performance over the better part of the last decade and capture market share in a new territory.

The reasons for this are as follows: business tax is lower in Canada than in America, the

company can use current American infrastructure to supply the new businesses, and federal laws

in Canada allow for lower level government to make decisions about business licensing making

the expansion process far easier and cheaper (Leitao, C. 2014). In addition to the low cost of

introduction and operation, another benefit to expansion in Canada is a large population of

qualified employees that are currently in need of work. The country implemented the CARS

program over a decade ago in order to attract new employees to the automotive industry (Service

Station & Garage Management, 2003), however, currently unemployment is sitting at 7% (Shaw,

B., & Weinberg, L. 2012). As can be seen from the PEST analysis, expansion into Canada is a

promising opportunity for Pep Boys, to not only survive, but to recapture some of its’ former

glory: but the funding to get the job done is another matter entirely (St.Germain, Pep Boys

PEST, 2016).


Intrepreneurial Idea #1 Canadian Franchise

Canadian expansion is clearly a business opportunity, however, funding through equity is

currently not possible, and funding through debt would put the company in a precarious

situation. Is there a third alternative? Yes, the company can expand through franchising. By

creating a franchise division, the company can expand into the Canadian market with limited

capital expense and liability. Furthermore, the associated royalties collected from franchising

can then be used to help support the rebranding efforts back in America. While this is a broad

stroke discussing the benefits of Franchising, the next paragraph will discuss the specific benefits

and drawbacks associated with expansion through franchising.

Franchising

Rather than going headlong into a treatise on the benefits of franchising, I thought it

better to begin with the most glaring disadvantages first. The first drawback to franchising is

that the process will give the company less control in the new market. “You can’t tell

franchisees what to do the way you can with employees. Franchisees are independent

businesses” (Shane, 2013). Second, the community of franchisees will be weaker than that of

their corporately managed counterparts. This develops as a result of each being independent, and

ultimately, in business for themselves. Corporate managers are part of the whole, and while

competition with other corporate store exists and is healthy, does not directly affect the

manager’s livelihood. Third, innovation can stagnate within a franchise system. “If you come

up with a new idea, you have to negotiate with your franchisees to get them to accept the new

product or whatever innovation you want to introduce, instead of just putting the new idea in

place on your own” (Shane, 2013). The next paragraph will discuss the benefits of franchising.


The most important benefit first: franchising the company will cost the company very

little capital (enormous plus for Pep Boys based upon their current financial position) yet has the

potential to create an enormous expansion within the new market, and in so doing, an enormous

amount of profit. Second, while franchisees may be in business for themselves and this can lead

to conflict, because of their stance (independent business owner) most will work far harder to

grow the business than corporate management because of their stake in the business. Last, the

money generated via royalties and sales of company products can then be funneled back into the

core business in order to help fund the rebranding efforts back home, or to open corporate stores

within the host economy once a successful presence has been established.

Intrepreneurial Idea #2 Commercial Parts Hub

It was mentioned earlier that Pep Boys still possesses a dynamic and agile supply chain,

and as was mentioned above, this infrastructure will form the basis for supply to the Canadian

franchisees. But what about distribution in America? While there can be no doubt the company

has been losing ground in the aftermarket repair business, there is ample room and opportunity

for Pep Boys to make a resurgence as a dominant commercial parts vendor. Many of the

companies that have beaten Pep Boys as a repair facility still need someone to deliver their parts,

and to do so quickly. Currently the lion’s share of this business has gone to Auto Zone, Checker,

O’ Reilly, and Advanced Auto Parts as Pep Boys has focused far more upon supplying its’ own

organization with parts rather than competitors. This is backward thinking. Were the company

to close down unprofitable repair shops but leave the central hubs in place, the company could

focus upon becoming the best commercial vendor in those markets. Furthermore, this would

cost next to nothing, as the infrastructure is in place. A new marketing campaign aimed at

capturing repair facility business would be the greatest cost of implementation.


Summary

Based upon information obtained during the SWOT and PEST analysis, respectively, it

has been determined that Pep Boy’s is ready to implement a franchise program in Canada and to

expand its’ commercial parts vendor business in America. Furthermore, based upon the

company’s current financial situation, these are the most viable opportunities for expansion and

profitability. This is because of the afore-mentioned reasons (shareholder confidence and high

exposure to risk via debt finance). In order to begin the process, rather than creating new

positions to fill the intrepreneurial division, the company can simply create cross-vertical teams

from the current employee base. These employees would only get extra compensation based

upon the success of the project: a guaranteed way to infuse the entrepreneurial spirit into the

project and further reduce company risk. And in conclusion, if the process is successful, the

capital generated could then be used to finance the continued rebranding efforts at home or to

pursue a corporate expansion into the Canadian market.

Entrepreneurial Opportunities Introduction

This article is the fourth and final assessment of the Pep Boys organization. It contains a

list of entrepreneurial opportunities gathered from the previous SWOT and PEST analysis,

respectively. Following the list, I’ve chosen the most attractive opportunity to pursue and will

then go on to assess its’ viability. Afterward, there is a discussion of specific industry trends

currently affecting Pep Boy’s market domain followed by an explanation of the impact said

trends may have upon the opportunity and its’ ultimate sustainability.

Entrepreneurial Opportunities List

This paragraph contains a list of potential entrepreneurial opportunities that Pep Boys

could exploit in order to gain competitive advantage within the automotive aftermarket. The first


idea discovered during the course of the intrapreneurial assignment was that of expanding the

commercial parts delivery program. The company currently has a country wide infrastructure

available in order to maintain inventory and deliver parts to rival repair facilities rapidly: as a

matter of fact, the infrastructure easily rivals that of their largest parts competitor, AutoZone.

Rather than expanding under the Pep Boys brand, perhaps creating an alternative parts

Distribution Company that oversaw commercial parts delivery might fare better than one

operated beneath the banner of the parent organization. The second idea was to expand the

private label auto parts offering in order to increase profitability through the sales of private label

brands as opposed to third party components. Another idea, based upon prior research, is to

increase online presence, perhaps through creating a spinoff online auto parts retailer. While all

three opportunities are promising, one has the greatest potential for success as a separate entity:

expanding private label offerings to create private label brands.

Exide Batteries

Pep boys sells a large volume of private label products such as batteries, brake pads, oil,

etc. The sales of these products generates a far greater profit margin than selling products from

other manufacturers. “All products sold by the Company under various private label names were

approximately 25% of our merchandise sales in fiscal 2014” (Pep Boys, 2015). Increasing the

volume of private label products sold would increase profits substantially. However, if the

company were to cut out the manufacturer of said private label products and create them

internally, by say, owning the company creating said parts that self-same increase in profitability

would increase exponentially. As an example, currently Exide Technologies is the major

supplier for Pep Boys batteries. “Exide will provide private-labeled, Pep Boys Pro-Start

batteries for automotive, marine, lawn and garden, and heavy duty/commercial types. Exide has


supplied private-labeled Bosch premium batteries to Pep Boys since 2008” (Exide Technologies,

2012). As a rule, all Pep Boys private label brands are being produced in the above manner.

Manufacturers place bids to obtain contracts with the organization and the lowest bidder gets the

contract. However, if the company placing the lowest bid was owned in whole or in part by Pep

Boys, then the organization would be doubling profits: first by manufacturing parts sold to Pep

Boys, and second through Pep Boys sale of those parts to the public.

Start-Up or Acquisition

When deciding whether Pep Boys should fund a start-up aftermarket parts manufacturing

business or acquire one already in operation, one key factor must be pointed out. First and

foremost, the company has performed poorly for some time and as such, the high risks associated

with getting a start-up off the ground and successful are too great at this time to pursue. Finding

a manufacturer that has an established market presence and is already operational, on the other

hand, dramatically reduces the risk and would enable the company to move in and begin

processes immediately. Therefore, the smart bet, would be to find the right company, perhaps in

a similar position as Pep Boys (great potential but poor performance), and acquire the company

to begin development and production of all of Pep Boys private label products. The question

that logically follows is: then who?

Eaton Corporation

After searching through a relatively recent edition of Automotive News, it was

discovered that the best company to consider for acquisition was Eaton Corporation. As of the

writing of this periodical, it was listed at number ninety nine out of the one hundred best auto

parts manufactures. Currently the company produces “engine valves, valve actuation

components, fluid connectors & conveyance, superchargers, torque controls, engine &


transmissions controls, fuel emission & safety controls” (Crain Communications Inc., 2013).

The current parts production is in line with many of the private label parts Pep Boys would like

to begin producing, and the manufacturing set up will allow for quick expansion into other

components as well. Now while the company is second to last out of a hundred, that doesn’t

necessarily mean they are poised for acquisition. The company could be satisfied with current

market share and have no desire to grow any larger. This however, isn’t the case. The company

has plummeted over twenty four dollars per share over the last year and a half: from trading at a

high of $78.57 back in July of 2014 to $54.20 as of this past Friday (Google lnc., 2016). For the

same reasons Pep Boy’s has been forced to sell this year will most likely be the reason for Eaton

Corporation to consider the same proposition. The next paragraph discusses current trends

within the market domain along with the potential for sustainability of the above endeavor.

Trends & Sustainability

As was discussed during the SWOT and PEST analysis, the automotive aftermarket has

been experiencing a shift in consumer behavior from that of DIY (do it yourself) to DIFM (do it

for me). This is a result of cars becoming increasingly complex, primarily, but also due to other

factors such as an improving economy, leading to more disposable income per American

household (Bulik, 2014). This trend is expected to continue and because of it aftermarket part

retail sales are expected to continue declining. The decline in retail sales will lead toward greater

competition in order to capture an ever dwindling share of the market. Rather than fight in a

restrictive market, one in which Pep Boys is already losing, taking the fight toward commercial

sales is the better bet. While the consumer isn’t purchasing parts to repair vehicles himself, he is

most certainly still in need of automotive maintenance and repairs. That being so, there will be

an increase in commercial sales to aftermarket repair facilities, of which Pep Boys is one.


Focusing on holding current market share in this sector of the domain and expanding would be

the best course to capitalize upon the opportunity presented here. Furthermore, it is the best way

to sustain the operation over the long run. Lastly, because of ever increasing government

regulations regarding vehicles emissions, creating quality emissions aftermarket components is

an important product line to roll out and mass market: because the trend toward environmental

concern will only grow with each passing year due to the threat of global warming.

Summary

There were three opportunities presented within this article: commercial sales expansion,

internet sales expansion, and private label production. The first two are more suited to stay

within the confines of the parent organization, however, the third would be best suited as an

entrepreneurial endeavor. Because Pep Boys has done so poorly these last few years, funding

and producing a successful startup is too hazardous of a proposition. The wiser bet is to find a

well-established manufacturer in a similar predicament as Pep Boys: namely, Eaton Corporation.

The company has all the production capabilities necessary for Pep Boys chief goal: produce

private label products for sale to the parent corporation and to the aftermarket domain at large.

Lastly, the current shift from DIY to DIFM has reduced retail part sales and increased

commercial sales. The company should focus upon growing presence in the DIFM market and

also focus upon manufacturing high quality emissions parts due to growing government

regulations regard vehicle emissions.


Conclusion

There are two caveats derived from this report that bear repeating at its close. The first is

that the automotive aftermarket is more competitive than ever and that Pep Boys, if it hopes to

remain relevant, must make rapid changes to stay in the game. The first of which is to continue

rebranding stores that are successful, while closing others that are not. The revenue generated

from the closing of stores could be used in a few different ways: first, continue funding the

rebranding efforts; second, use the funds to expand into the Canadian markets via franchising; or

third, create a separate manufacturing business that would develop aftermarket components. The

second caveat: new innovations are shifting the entire landscape of the automotive industry

(electric automobiles, android auto, and self-driving automobiles to name a few) and to do

nothing, is a guarantee of failure. The time to act is now.


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Pep Boys Business Development Plan

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Transcript of Pep Boys Business Development Plan