AutoZone CEO William Rhodes is all about the customer. Putting customers first and instilling brand loyalty has always been the company motto.
“We’re rededicating ourselves to live the pledge,” Rhodes said during the company’s fourth-quarter earnings conference call on Sept. 22, according to Seeking Alpha. “Our pledge starts with always putting customers first and, therefore, we’re always looking for ways to improve our model.”
Rhodes talked about significant opportunities for new store growth and improved productivity in the company’s existing stores.
“As our commercial business continues to grow and is intertwined with our retail business, we’ve continued to identify opportunities to optimize our inventory placement and distribution strategy in order to respond to the ever increasing challenge of parts proliferation in the industry,” he explained. “Over the past two years, we implemented new methodologies to improve our hard parts placement techniques in all stores. We’ve been testing more frequent deliveries to our stores and expanded parts availability in the mega hub stores. Additionally, we’ve developed a new store prototype that significantly expands the hard parts holding capacity in our stores.”
All new stores are now opening with this new prototype.
“These efforts have resulted in an increase in our store inventory levels,” Rhodes explained. “They’ve also added incremental costs, but sales have justified our investments and offered convincing proof that we’ve been on the right track. As our product assortment continues to improve, we feel it is essential to reinstill a passion to say ‘yes, we’ve got it’ to our customers’ needs. To this day, it surprises me how often we’ve had to say ‘sorry, we don’t have that available.’ Even with our new part additions too many customers leave our stores without their needs being met. In this spirit to help the customer, we continue to make significant systems enhancements and to capture data about our customer shopping patterns across all of our platforms.”
What’s more, Rhodes detailed the company’s inventory availability test.
“We’ve concluded our test and determined the framework of our new supply chain strategy,” he explained. “Over the past couple of years, we’ve been testing two specific new concepts, increase frequency of delivery to our stores, and significantly expanded parts assortments in select stores we call mega hubs. As both of these concepts are a material departure from our long standing successful strategy and both of them increase our fixed cost structure, we’ve been patient. We wanted to ensure that the results we initially achieve were accurate and sustainable.”
The first test involved multiple deliveries per week and focused on improving in-stock position in stores for regularly stocked SKUs.
“The plan was to replenish our stores from their respective distribution center more frequently,” Rhodes said. “On the last quarter’s call, we said a little over 900 of our 5,100 domestic stores were receiving either three or five times a week deliveries. This was up from the usual once a week delivery schedules we’ve historically run. With approximately 21,000 SKUs in an average AutoZone store, we tested with increasing the replenishment frequency of these SKUs meant. Although our inventory turns at a relatively low rate around 1.5 times per year, the vast majority of our SKUs have an on-hand quantity of one. Therefore, given the randomness of demand, there is potential for out-of-stock positions.”
There are clearly increased costs associated with delivering more frequently, Rhodes said.
“However, the sales lift achieved from our tests have supported increasing the delivery frequency in the majority of the chain to either three times per week or five times per week, depending on certain parameters,” he explained. “It is important to note that our current plan does not contemplate providing this level of service to all stores. It just isn’t currently economically viable everywhere.”
Over the next 12 months, Rhodes expects to roll out this increased frequency model to approximately an additional 1,000 stores.
“The second test that we’re rolling out is a mega hub store concept,” he explained. “We will open and/or expand another handful of mega hubs in 2016, increasing from our current count of five mega hubs. We are very excited about what the mega hubs can represent for us. We will open these locations over the back six months of our fiscal year. As a reminder, these super-sized AutoZone stores carry between 80,000 to 100,000 unique SKUs, approximately twice what a hub store carries today. While there are incremental costs to these rollouts, such as payroll and fuel to manage the extra deliveries to surrounding stores, we feel their cost deleverage is relatively modest. Our current assumption on this rollout is that we want to experience meaningful deleverage from this initiative in fiscal 2016. Currently, five mega hubs support approximately 750 surrounding stores, and once built out we would expect to have a network of mega hubs in the neighborhood of 25 to 40 total locations.”