Navigating Inflation And The Supply Chain Through Auto-Parts Boom

Want to find one of the true sweet spots these days in America’s inflation-ridden economy? Try auto parts. Or, better yet, try importation and wholesale distribution of parts for old vehicles.

That’s the cozy intersection where CarParts.com stands these days. The newly expanded company has doubled revenues by scaling up and overhauling its supply chain to tap into one of the U.S. economy’s burgeoning sectors, and by mitigating inflationary pressures on its own costs while at the same time leveraging the new dynamics of its market with its customers.

“We sell premium-quality aftermarket auto parts directly to consumers, sourcing them from overseas and bringing them to our distribution centers in the U.S., with more than 100,000 individual SKUs at any one time,” CarParts.com COO and CFO David Meniane told Chief Executive. “We had $280 million in revenues three years ago and now we’re close to $600 million in revenues” after eight consecutive quarters of year-over-year growth.

Partially blame—or credit—the global microchip-manufacturing mess for CarParts.com’s good fortune. Automakers’ poor handling of their supply chains for chips amid covid created today’s paucity of new vehicles for retail sale, which in turn lit a fire under the used-car market.

The shortage of new vehicles also exploded demand for parts for previously owned vehicles. Add in a somewhat mysterious sharp rise in traffic accidents across the country during the pandemic, and now everyone from auto-insurance companies to driveway mechanics are scrambling for pieces to help put damaged old cars back together or keep them running in the first place.

“The number of accidents has gone up, and so have the miles driven,” Meniane said. “That means there’s a shortage of parts, so there’s more demand than supply out there. There’s not only cost inflation, but supply-demand inflation. So costs go up.” Indeed, motor-vehicle parts and equipment were 13% more expensive in January compared with a year earlier, according to data from the U.S. Bureau of Labor Statistics.

But also credit CarParts.com management for the tall cotton the company currently enjoys. The outfit is 25 years old and was known previously as U.S. Auto Parts Network. It went public in 2007 but was in financial distress after years of flat sales when a new management team took over in 2019, including Meniane, a veteran of retail execution in the consumer-packaged-goods business, and CEO Lev Peker, who had risen through the company.

“We went through a full transformation,” Meniane said. “We decided to lean in on the supply chain. We opened four distribution centers and invested heavily in technology and data and the supply chain.” Creation of a “dynamic pricing pool” built on artificial intelligence and machine learning, he explained, “allows us to react in real time as new data comes in.” To present a more user-friendly platform to the consumer, CarParts.com also consolidated its 17 different consumer-facing web sites into one.

CarParts.com also scaled up. “You need to scale in this business,” Meniane said. “That gives us the advantage when buying. We are buying two times as much as we did before, and with lead times being longer, we’re actually buying more than twice as much. That gives us the ability to absorb some inflation.”

At the other end of the supply chain, consumer resistance to higher prices for CarParts.com goods is light in part because there aren’t many reliable sources for the six- to 15-year-old parts that the company sells.

“It’ a very competitive market, but we’re lucky in that we sell a need-based product,” Meniane said. “Our customer isn’t someone looking to make their car [cool] with accessories. If you’re in a collision and need replacement parts, or your car is eight to 10 years old and you need new brakes, you need to get the car back on the road. It’s a structural advantage for us.”

The company’s stock price is way down from peak prices about a year ago, to about $10 a share from about $21. But some observers of CarParts.com believe investors’ comparative lack of interest now is more a reflection of the shares’ torrid uptick during the first year of the pandemic than of the company’s true long-term prospects.

“The stock price will come; we have no doubt,” Meniane said. “The most important thing to our executive team is building a strong customer-centric company with a clear vision.”