I’m busy prepping for my presentation next week in Las Vegas at SEMA AAPEX titled “Competing with Consolidation: 5 ways to make more money and outmaneuver your biggest competitors in 2017”. How successful companies grow is on my mind at present. What is the best way to grow? How fast is too fast to grow? What happens if consolidation slows down, or picks up?
Note: Are you headed to SEMA? If so, I’d like to meet you. I’m organizing a very informal happy hour for friends of mine in the industry. It’s really just an excuse to meet around a bar in Vegas and see old friends and meet some new ones. It would be great for you to join us if you’re in town. Here are the details.
When I talk about how successful companies grow, it is always in the context of value creation. How does one make a business more valuable? How do you build a business that can attract additional investment and continue to provide an above average return on invested capital? How do you build a business that generates more cash in a stable predictable manner? For me, that is how I evaluate successful growth.
There are seemingly an infinite number of ways how successful companies grow. But having worked with and studied some of the best companies in the industry, there are 4 key ways that I’ve seen the best companies in the automotive aftermarket grow.
Organic growth refers to an increase in sales excluding the impact of acquisitions, new developments (greenfields), or re-developments (brownfields). In other words, organic growth refers to an increase in sales from an existing base of operations. For many business owners, this is the primary focus of growth. Increase customer retention. Improve marketing efforts. Land a new key account. Improve conversion rations.
A company that has done this very well in the automotive aftermarket is The Boyd Group, parent company of Gerber. Boyd has consistently focused on driving strong organic sales growth across it’s platform, averaging between 5% and 8% annual organic sales growth (excluding the impact of currency fluctuations) in the past few years.
Efficiencies and Cost Reductions
Another way to drive growth is through cost reductions and efficiencies. Whereas organic growth increases cash flow by increasing sales, efficiencies and cost reductions focus on increasing cash flow by reducing expenses and improving operational turnover.
A company in the automotive aftermarket that has grown significantly as a result of efficiencies and cost reductions is Uni-Select, the parent company of FinishMaster. In June of 2015 Uni-Select sold off its U.S. parts business to Carl Icahn. As a result of the sale of the parts business, total sales dropped by nearly 30% in the first six months of 2016 compared to the first six months of 2015. But in the same time period, by eliminating the costs associated with the parts business adjusted EBITDA actually increased by 2% and the value of the company has nearly doubled since the sale was initially announced in February of 2015.
Inorganic Growth: Acquisitions
Inorganic growth refers to an increase in sales as a result of expanding operations either by acquiring other businesses, or by expanding into new areas through the use of brownfield and greenfield projects. In a low organic growth environment, inorganic growth is often an attractive way to grow a company. Acquisitions allow a company to effectively buy growth and leverage the economies of scale that often arise as a result of acquisitions.
LKQ, one of the largest, and most successful company in the automotive aftermarket, has grown tremendously, almost exclusively as a result of a highly effective acquisitions based strategy. The company has completed over 220 acquisitions since the late 1990s. LKQ grew revenues from only $547 million in 2005 to $7.2 billion in 2015 and will likely report annual revenues in excess of $9 billion at the end of 2016. Over the same time period, the company’s equity value (market cap) has increased in price from $190 million at the end of 2005 to $10.5 billion at present.
Inorganic Growth: Brownfield and Greenfields
Brownfield and greenfield projects are re-development and new development of facilities. Essentially expansion opportunities, these developments allow a business to take advantage of new or emerging markets in which the business does not currently operate. Brownfields and greenfields require substantial planning and financing, often taking many months or even years to bring online. However, they can be an affordable way to grow a business, relative to acquisitions based growth.
Companies often partner with real estate investment companies, known as REITS, to pursue brownfield and greenfield developments. Caliber Collision has been expanding in Florida recently in this manner, while Service King recently announced a massive 70,000 SF greenfield in Milpitas, CA.
The Best of the Best
The best of the best companies actively pursue growth using all four strategies. Relying upon any single path to growth is risky. Instead, a focus on identifying multiple paths to growth helps develop a balanced and diversified company.
If you’re interested in growth, give me a call or get a hold of me using my contact page. I help clients navigate the industry and invest in growth in a measured and controlled way. It would be great to discuss your growth plans. All conversations are always confidential.
Until next week!