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July/August 2002

NAGS Notes
HOWARD
hot topics
nags@mitchell.com

Beyond Benchmark 
by Catherine Howard

The phones have been very busy since the release of our May data (see "Auto Glass Companies Heal Thyselves" for related story). Some calls have been about very specific parts; others were concerned with broader topics like where pricing is going in this industry (besides down the drain or up into the stratosphere).

We are accustomed to receiving lots of calls. We were motivated to make this latest adjustment because of the numerous complaints we have received about the growing number of exception parts appearing on “net-priced” lists (addenda). Everyone dislikes these exceptions, but these have been unavoidable under our current method of pricing.

Things seemed to have gotten much worse in this regard over the past year, possibly because of the increased pricing pressures experienced by the distributors and manufacturers as a result of downward pressure from the retailers (coming from increased discounts on the O&As, no doubt; it all rolls downhill).

In the Beginning
The problem begins with our use of the manufacturers’ truckload pricing schedules. In the past, these product price lists were reasonably reliable indicators of what the market acquisition costs would be. That is why we used them for so many years as the starting point for the NAGS® List Price.™ They have become increasingly inconsistent of late because different levels of discounting (or not, in the case of net-priced parts) have been applied to different categories of parts that are not identified clearly. Trying to correctly interpret these discounting levels is becoming more and more problematic for us, leaving us with few choices in how to best deal with this issue.

“R” Parts
What adjustments we had tried to make to our pricing method for these parts were indicated with the “r” footnote to let the retailer know that cost considerations may still apply. Even with these attempts, the situation for the retailer has been difficult to manage. If the adjustments weren’t sufficient, the retailer would lose money on some parts whether they were “r” parts or not.

Because of the inconsistencies, wholesalers were forced to identify those parts that they could not sell using the standard discounting structures on separate lists and sold these at a higher cost to the retailer. The retailers had to be very careful in determining which parts were exceptions since these did not always match the “r” parts as indicated in our Calculators.

To resolve this situation and provide a consistent guide for the retailer that once again can be used with some level of confidence in trading partner agreements, we have made the decision to move away from the basis of the manufacturers’ published truckload prices and instead look to actual market acquisition costs. These costs are obtained from a number of different sources, both retail and wholesale.

Uniting the Numbers
We analyzed the data from all these sources in determining the best basis to use for establishing the NAGS Benchmark List Price. This includes researching minimum, maximum and average costs from all sources, evaluating reasonable profitability along the distribution channel, comparing the prevailing O&A pricing levels to the dealer list and modeling the overall impact through various scenarios.

We also realize that in order to keep the pricing realistic in the market, particularly in comparison to dealer levels, there needs to be two different levels of pricing available to the retailer on a consistent basis. Therefore, the “r” footnote now identifies a category of prices that were derived by using a different but consistent multiplier. The retailer should expect that its pricing level for these parts will be different from the standard discounting structure (but again, hopefully consistently so). It is our expectation that this should reduce significantly, or eliminate entirely, exception parts and those dreaded pricing addenda.

The new pricing should be more predictable for the retailers in meeting their pricing commitments. It will also provide an opportunity for the savvy retailer to negotiate lower discounts with customers on the “r” parts. If we’ve done our homework correctly, these are the parts that truly cost the retailer more and should be sold at a lower discount. Time will tell. This is step one.

The Big Change
“So what’s different this time as opposed to the revaluation effort in 1999?,” you might ask. Well, first, we have abandoned the myth that we could still tie the retail list price to the manufacturers’ published truckload pricing. This pricing has proven to be completely irrelevant to the actual acquisition costs experienced throughout the market. The manufacturers have a different purpose in mind when they produce their product price lists. Their purpose is to sell their products to high-volume customers. And that does not necessarily reflect pricing to the smaller retailer who buys from a local distributor. 

Second, the adoption of this new method, at least initially, creates no reduction of the basic level of pricing, so there should be little to no impact on trading-partner agreements at the retail level. This eventually has to change, however, because this industry has gotten itself into an upside-down position in the market. Glass shops must rely on higher prices for glass to supplement the losses experienced in the labor side of the equation.

Until this industry manages to separate the selling of a commodity such as glass from the value of the installation service, the price for the glass cannot be “realistic.” This is not going to happen because NAGS says so. The market must call for this and those forces weren’t ready to accept this concept at the time of the Revaluation in 1999.

The industry would die without the additional profit on the glass to cover all the other rising costs of running a business (like energy, rent, vehicle maintenance, wages and benefits for non-installing support personnel, insurance and other indirect costs).

This industry provides incredible service to its customers. When was the last time you called the brake or transmission shop to schedule a repair? Did they come to your home within 24 hours with the right parts and fix it on the spot? It is time to get paid for those services and to stop pretending it’s all in the glass. That’s step two. 

 



Catherine Howard is vice president and general manager of NAGS of San Diego.

 

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