Success with house brands

"The OEM business sucks," said the owner of a very large U.S. parts supplier last week to me. "The aftersales market is booming. We did one third OEM and the rest aftersales. The way this is going, soon it will be all aftersales." I am writing this in San Francisco, after a week of meeting with business contacts in the U.S.A. All business contacts echoed more or less what the owner had said: OEM business is bad. Aftersales business is very good.

During my travels, I drove by many closed car dealerships. The bankruptcy of Chrysler and the likely bankruptcy of General Motors are front page news. People are worried about who will service their cars and honor their warranties. People complain about receiving bad refund checks from Chrysler, sent back by the bank for insufficient funds. At the same time, repair business is brisk, Many U.S. distributors for aftersales parts actually started hoarding parts in anticipation of market disruptions brought on by closures of Chrysler and soon General Motors plants, which will have a ripple-effect through the industry.

Times of crisis are times of opportunity. You are in the right place at the right time if you have changed from an OEM-centric parts manufacturer to a parts marketer who adapts quickly to changing market situations. In a previous column, we talked about the differences between a parts manufacturer and a parts marketer.

Let's review: As a pure manufacturer, you are a slave to the people who get rich with what you make. Or even worse, you can be a slave to auto manufacturers with evaporating sales and sinking fortunes. As a marketer, you can take a larger and larger share of the riches that are out there. But you need to get closer and closer to the customer. We talked about "The Four Ps" of Marketing:  Product, Price, Placement, Promotion.  We already covered Product and Price. We talked about the importance of data.

On my trip through the U.S.A., I remembered what I wrote before: "With the proper data and a spreadsheet, you can perform magic." I travelled light, my laptop was all I had. Parts lists were exchanged on USB sticks. No catalogs, no slick brochures. The flow of data is even more important in the parts business than the flow of money. No wonder, a single part is referred to in America as "a number."  As in "he made 3 million of sales with just 8 numbers."

I realized I had been in China for too long when, in one meeting, I said: "And by the way, if you have other products you are interested in, just tell …" They stopped me in mid sentence, and I felt stupid. How many times had I written: As a marketer, you must tell them what you have. Don't ask them what they need. Once you convinced them with what you have, they will tell you what they need.

But let's get on to the other two P's: Placement and Promotion.

For you as a parts marketer, placement "in the channel" - on the shelves of distributors, in their (mostly electronic) catalogues etc., is crucial. You can have the best and most price competitive product in the world, if it's not available for sale, it will not sell. Or as they say in America, "you've got to be in it to win it."

Once you are "in the channel," once you are on the shelves and in the catalogues, your product will sell. If it doesn't sell, the first two P's (Product and Price) were wrong, and you were lucky to get "in the channel" in the first place.

Placement often is the hardest part in the marketing mix. It's a little bit like war: You need to replace other competing product in the distributors' warehouses. The competition will not give up without a fight. Big distributors usually list only one or two large brands in each category, and the more categories a brand covers, the more popular it is with the distributor. If the distributor meets his sales targets with a brand, big year-end bonuses are paid. If the distributor buys your product, he might risk his bonus. If you are a single category manufacturer with no track record, your chances are slim to none to survive the war with the big brands.

One of the best ways to gain placement in the distribution channel is to become a supplier to the distributor's "house brand," or "private label" line. These "house brands" are increasingly popular. As buyers become more value conscious, more and more retailers switch to house brands. Wal-Mart is not only the world's largest retailer, their "Great Value" store brand became America's biggest food brand by both sales and volume. Nearly every grocery chain is pushing its house brand development. Autoparts distributors have picked up on the trend in a big way.

By supplying the house brand, you have instant name recognition - the name of the distributor. The distributor also tends to push his own brand more. But be careful: By putting their own name on the product, the distributor also runs the risk of a backlash if there are quality problems. Strict quality control is even more important when supplying house brands or private label lines than when supplying OEMs who usually have established firm quality control procedures.

One more thing to be mindful about: You are most likely not the only supplier to the house brand, even in a given category. Watchful and successful operators of house brands typically have two or more suppliers for a given category.

China is the only significant world market where new car sales are growing. The first 4 months were very impressive. The rest of the world is in turmoil. As a supplier for Chinese OEMs, you can leverage your development costs and capacities by supplying house brands all over the world. (India is also cautiously coming back with suppliers reporting higher capacity utilization due to domestic demand. Export is still way down.)

The house brand route can be a successful route for a manufacturer who doesn't make many categories of parts and who therefore could not compete with the big names for shelf space and distribution. Being a supplier to many different house brands can be even more advantageous. There usually is a lot of overlap, and the same product can be sold in many different boxes. Just be careful with exclusivity contracts.

Other than the house brand strategy, the only other successful strategy we see is for several manufacturers joining together and start their own big brand and distribution network, as outlined in a previous column.

There is an added plus to the house brand way: You can pretty much disregard the 4th P of the marketing mix: Promotion. You definitely don't need big advertising; the distributor will do it for you. Your promotion efforts will be limited to regular visits to your customers, presence at trade shows, and the recruiting of new house brand customers. Even that will be easy: The parts trade is a tightly knit community, and word spreads fast. Once you have a number of successful house brand customers, others will come to you pretty much on their own.

See Chinese version: http://auto.gasgoo.com/News/2009/05/12114547454770367843.shtml

About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.