Aftersales challenges

Halfords is a household name in the UK, a retailer of car parts and accessories, as well as bicycles, e-scooters and related gear.  They also have a network of independent repairers which following a series of acquisitions is the largest single workshop network in the UK, and have grown a fleet of mobile service vans.  Their focus is on the consumer market, but they have also had some success in winning service business in the fleet market.  Unlike some of their peers in continental Europe, Halfords does not play in trade parts distribution.  The business has not been slow to embrace new ideas, and there is a long history of innovation.

They were in the news this week in the UK, as the CEO is stepping down after a seven year tenure, replaced as has been the case with Halfords in the past by an industry outsider.  The track record of the outgoing CEO has been impressive.  Revenue growth has been substantial, up by 50% in the last seven years to €2 billion, with almost all the growth being in service rather than retailing.  In addition to expanding the physical workshop network, they have a growing fleet of mobile units offering servicing and tyre replacement.  They have introduced a loyalty scheme that apparently has attracted 15% of the UK car parc.  The online presence is much stronger and the different parts of the business operate in a more seamless way together to provide customers with an omni-channel offer.  Profit margins however are modest – around 2% projected for the current year, and predicted by analysts to remain at that sort of level over the coming years, but this comes with a ‘buy’ recommendation on the stock.

Looking at their peers in other markets, profitability seems slightly higher than Halfords – typically around 5% - but this is still relatively low compared to the profitability of a franchised dealer aftersales department, or even a good owner operator standalone workshop.  Despite this, service chains and service franchise formats are growing, representing a significant part of the total independent aftermarket in Europe.

I have no inside knowledge of Halfords so I am commenting and using them as a case study as an informed outsider rather than on the basis of any privileged insight, but if a business can be doing so much that feels right, yet still only achieve a 2% return, it suggests to me that this reflects a structural constraint rather than an operational weakness.  Is it possible for a service chain to grow profits to a sustained level of say 10%, rather than 2% to 5% as seems to be the norm?

I start with customer behaviour.  ICDP research shows that retail customers select their repairers on the basis of convenience, trust and price, and tend to be loyal (because of trust) until something forces them to switch, such as an issue with their last service experience or a price or availability issue that forces them to look at alternatives to their previous repairer.  On the fleet side, behaviour varies by market, but in the UK where Halfords operates, fleets will use independent repairers for young cars from at least the volume brands.  Their decision criteria however remain similar – convenience for the driver and for the fleet manager (aggregated invoices, single payment), trust (the driver who is also their customer doesn’t have to make a return visit) and price (competitive, though not necessarily the lowest if the other factors outweigh this).

Convenience must score highly.  With an integrated business rather than a franchise operation, all the assets are under central control, and with the combination of the largest physical network and the mobile service vans, plus extended hours at many sites, it is difficult to see where the further opportunities are in that respect.  Online booking makes it easy to see availability, perhaps the next step will relate to over-the-air diagnostics and alerts, but this remains a controversial area for independents in terms of access to vehicle data, particularly for read/write, as covered by continuing ICDP coverage of this debate in Brussels.

Trust relates to first time fix, and confidence that the work that was done was required, was done properly and charged fairly.  This is an area where owner-operators often win out, as there is a much more direct connection between the customer and the technician (who might even be the business owner).  It is also an area where franchised dealers sometime benefit as there is a starting point that they are specialists in the brand, have ‘factory-trained’ technicians, and are therefore more trusted (albeit at a higher price) than generalists.  This is particularly evident with BEVs where loyalty to franchised networks is higher and longer into the vehicle life as they are more trusted.  For an all-makes chain, building this level of trust is hard, as the technicians have to be generalists, and the scale of the network with light supervision at each site, makes training and quality control more difficult.  Technology may offer some further opportunities in the future through looking at diagnostic results and customer reviews by site and by technician to identify opportunities for improvement.

Price is perhaps the greatest challenge.  Most chains focus on simpler operations – routine service and replacement of consumable items like brakes.  These are easily benchmarked, and not being price competitive will deter customers, almost regardless of convenience and trust.  It does therefore become a ‘race to the bottom’ as most customers will do online research for this type of work before committing to a service provider.  Achieving any sort of price premium will be crucially dependent on having a demonstrably higher level of trust than cheaper alternatives.  This is something that Bosch Car Service has achieved in a number of markets, partly because of the halo effect of the Bosch brand, but also because it is a franchise network of independents rather than a wholly owned chain, with each franchisee policing their own service delivery, as well as having to comply with the BCS standards.

Overall, within the constraints that a chain like Halfords faces, you end up concluding that a 2% margin combined with rapid growth and evolution of the offer is probably as good as it gets.  However, it is clearly not a road to riches for the investors, and will continue to present challenges to the management as they look for the next opportunities.