Strategic Marketing and Finance Decision Analysis

Term Paper, 2005

42 Pages, Grade: 1.0


Table of Contents

I. Executive Summary

II. Assessment of the Environment, Corporate Competencies, Objectives, and Corporate Level Marketing Strategy

III. Current Segmentation, Competitive Positioning, and Marketing Mix

IV. Sales Forecast

V. Current Financial Situation

VI. Financial Assessment


I. Executive Summary

AutoZone Inc. (AZO) is a major player in the $83B US automotive aftermarket. The market segments are mainly Do-It-Yourself (DIY) and Do-It-For-Me (DIFM) and in recent years AZO has entered the Mexican automotive aftermarket. AZO expanded heavily over the last years by opening new stores and therefore AZO has had a five year profitable sales CAGR of 5.9%.

The goal of our team project was to conduct a comprehensive analysis of AZO including a large marketing review as well as an extensive financial analysis. The project also consists of a valuation of an average AZO store in order to determine a recommendation for AZO’s future strategy. The market analysis of all current and potential threats and opportunities gave us the needed understanding of the industry AZO is operating in. Based on that we made an assessment, aligned to AZO’s SWOT analysis, how AZO can gain the most benefits from the market through working on its current strengths and weaknesses. Thereby, we discussed parts of AZO’s strategy and operation processes that have to be modified in order to outperform the domestic and Mexican competition like in the past.

The financial analysis is the evidence that AZO is going into the right direction and also proofs that AZO has the capability for future growth. Based on past data and important environmental indicators, we made a regression and forecast model for sales on a per store basis. The conclusion for the overall project is that we highly recommend continuing the store expansion strategy by going along with the strengths and opportunities and by also working on and with the conducted weaknesses and threats.

II. Assessment of the Environment, Corporate Competencies, Objectives, and Corporate Level Marketing Strategy

a) Assessment of the Environment

The automotive aftermarket, which is the industry in which AZO operates, is affected by several external factors that present both opportunities and threats to the future of the company.

Economic Trends: Conditions of the economy are a significant driver of the automotive aftermarket industry. A general economic downturn in recent years has had an impact on the spending nature of the population. Car owners now try to increase their ROI by keeping their cars through the so-called “Cinderella era” – which is the time after the loan is paid off and the car still is in good shape so only modest repairs are required.1 The average age of a car is 8.4 years and consequently longer than its warranty.2 This helps explain why “Almost half of the U.S. households are engaged in do-it-yourself (DIY) repairs.”3

At the same time, the number of registered vehicles on the road has also increased. Eighty-eight percent of people aged 15 years and older are driving, which means that the car remains the predominant mode of transportation. This vehicle predominance is also true for long-distance travels (distance further than 50 miles). Nine out of ten distance travels are made by car, while only 7% of distance travels are by airplane. (The events of 9/11 might also have had a big impact on that behavior). Per day, approximately 26 miles are traveled per person.4 The increasing number of cars leads to reduced rates on new automobiles, which at the same time forces down the prices of used automobiles. Used automobiles contribute more heavily to the automotive aftermarket due to more frequent maintenance and repair needs.2 The automotive industry is growing, and in turn so is the automotive aftermarket and DIY-market.5 One might assume that the increasing prices of gasoline would have a major impact on the driving behavior of the customers, yet the total miles traveled have increased. A possible reason for this is the higher fuel efficiency of cars.5 A second reason is the higher number of total cars and an increasing number of people having a driver’s license. This development overcompensates the reduced average miles driven per single person, and leads to an overall increase of total miles.5 Consequently, the automotive aftermarket and in particular the sales development of a big player in this industry like AZO are not really affected by higher gas prices. This can also be seen in GRAPH 1 in Part IV.

Because of the predominance of older vehicles, more mechanical engines, and a less developed maintenance and distribution structure, the Mexican automotive aftermarket is growing especially rapidly and provides several per-vehicle aftermarket opportunities.6

Legal and Regulatory Trends: As a second driver, one can name car-related regulations like the Clean Air Act that influence the environment. Now, consumers need to have their cars tested to verify that they adhere to the laws and vehicle specifications necessary. If an individual’s car fails to meet requirements, more repairs are needed, which increases the market.2

Social Trends: Changes in the social aspects of the environment can have both positive and negative effects on the automotive aftermarket. The population as a whole has developed a brand thinking, in which they connect certain perceptions with certain brands. For many consumers, this type of thinking leads to the establishment of trust in a brand. After the home, a car is typically the most expensive product that is owned by the average customer. Therefore, he or she puts careful consideration into their automobile choice, and usually selects a well-positioned brand.7

A general trend towards longer working hours and increasing numbers of women in the workforce has shifted demand towards convenience and service. One-stop shops where customers can take care of several errands at once provide a very appealing alternative to visiting several locations for the same tasks. Superstores such as Wal-Mart – where customers can get everything they need at low prices, with good service and high convenience -- consequently present a significant threat to smaller, more specialized players in the industry.8

Demographic Trends: The demographic structure of the entire population is changing.9 One can see the effects of the baby boomer generations aging, as the proportion of people 55 years and older is growing considerably. Furthermore, the proportion of youth is also expanding. The key customer for the automotive aftermarket is between 16 and 44 years old. The overall size of these key demographics show little growth until 2010. Yet, the most valuable group (16-24) is growing, as well as the age group from 25-35 years.10

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Competitive Trends: Another external factor of importance is the increasing competition in the industry. Not only is the growth of one-stop superstores like Wal-Mart quite formidable, other current competitors are also growing and improving their services and product lines. This growth in competition can be seen by the opening of new competitor locations, oftentimes right next to each other.11 That strongly reminds one of the giant drugstore chains CVS, Walgreens, and RiteAid that always choose locations next to each other in order to alienate the competitor’s customers.

Technological Trends: Looking at technological developments of the environment, one will notice that car manufacturers have made tremendous advances which results in higher-quality parts for new vehicles. This implies that there are fewer car breakdowns and maintenance needs, which results in fewer customers for companies in the automotive aftermarket. And so in an indirect way, car manufacturers are also becoming competition in the market.12 However, the advances in technology also provide aftermarket opportunities for offering computer-based products and diagnostic services.1

b) Corporate Competencies of AutoZone, Inc.

With its resources and competencies, AutoZone, Inc. is able to pursue opportunities and simultaneously protect itself against the threats of the environment. AZO’s strengths and weaknesses will be analyzed relative to its main competitors – Advance AutoParts, Pep Boys, Genuine Parts, and Wal-Mart.


AZO shows a very strong financial performance. Their sales growth within the last 5 years shows a CAGR of 5.9% compared to -2.18% of Pep Boys and 3.29% of Genuine Parts. Only Advance Auto Parts shows a higher CAGR of 13.3%.11,14,16 Although liquidity is below competition, AZO’s profitability measured in Gross Profit Margin, Net Profit Margin, ROE, and ROA is way above the competition and the industry/market itself. A current ratio of more than 1.0 is acceptable.

Table 1: (Hoover’s competitive landscape)

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AZO operates 3,400 company-owned stores in 48 states of North America, plus 63 stores in Mexico. Compared to Pep Boys’ mere 595 stores in 36 states, AZO is viewed as much more geographically diverse and convenient, which is one of the key success factors in this market.11 While it is true that Genuine Parts has more than 5,800 stores, only 1,000 are company-owned while the rest are NAPA stores.14 Advance Auto Parts owns 2,539 stores in 43 states plus Puerto Rico.16

The organization’s supply chain management as well as the full-assortment inventory is another essential strength of the company. AutoZone’s hub and spoke system is “responsive to demand and ensures prompt delivery of products and stock replenishments”3 and the recent Pay-on-Scan initiative enables AZO to introduce product innovations.15

AZO is the leader in the DIY market where it enjoys a 13 % market share.


In contrast to the very effective and efficient supply chain in the North American segment, AZO has logistics problems in Mexico that have not been resolved thus far. With only two distribution facilities in Mexico, shortages are often experienced in this segment.3

The very strong dependence on the North American market may cause problems in the future, as the U.S. market accounts for 85% of all revenues. The Mexican market has the oldest cars, which provides many opportunities that AZO should capitalize on in the future.3 Genuine Parts has operations in North America, Canada, and Mexico.14

Another weakness of AZO is the weak market share in the DIFM market which only accounts for 1.5% (or $750 million) of revenues, although the industry segment’s size is $48 billion. This segment provides endless opportunities for the company; all of AZO’s competitors are actively operating in the repair and maintenance part.

An obscure weakness of AZO was a poor succession plan for management. The effects of this were clearly seen on March 14, 2005: After the surprising leave of CEO Steve Odland, AZO’s share price fell rapidly by $12.55 to $85.75. 17

Table 2: SWOT Analysis of AutoZone

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AZO’s goals for the future are not based on reaching fixed target margins. Instead, AZO wants to try to focus on initiatives that exceed their 15% after-tax internal rate of return. In addition to that, AZO wants to greatly increase market share in the commercial sector, in which they are currently #3. AZO plans to become the first call for professional technicians everywhere. For their DIY-segment, the firm plans to continue their growth of market share. In Mexico, AZO aims to increase market share and achieve further growth in response to the unbounded opportunities the market presents. Overall, AZO plans to open approximately 200 new stores in fiscal 2005. For their current stores, they want to create the most exciting “Zone” for vehicle solutions and maintain their position on the cutting edge of the industry.

Analysis of the corporate objectives

Based on the environmental and internal analysis, AZO’s objectives show a great fit. They are trying to take advantage of their strengths and overcome their weaknesses while making use of environmental trends. Being the leader in the DIY market, they must stabilize this position against the existing and upcoming competition. Through active marketing, new products, and a higher market share, they will be able to sustain the current leadership.

AZO is also trying to increase market share in the commercial sector, as it presents a lot of growth opportunities for the company. At this time, AZO is not maximizing its potential in regards to serving this sector; they hope to change this in the near future. The three biggest players in that segment currently account for only 17% of the market share, which means there is a lot of growing room for AZO.

Mexico also presents a strong opportunity, as the Mexican population owns most of the old cars and the local competition is not well enough suited to compete against AZO. Yet, AZO must first overcome significant logistics obstacles in order to achieve any future growth.

d) AutoZone’s corporate level marketing strategy15

Based on AZO’s analysis thus far, one can clearly identify that they are pursuing a growth strategy. Their initiatives can be easily captured in a Product-Market-Growth Matrix:

Table 4: Product-Market-Growth-Matrix of AutoZone

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Penetration: In order to get their current customers to use their current products more, AZO makes use of the marketing mix variables. They started to refresh their stores by utilizing vibrant, eye-catching displays that help create an exciting Zone for the customers. Half of their employees are now ASE-certified (Automotive Service Excellence) specialists that go “the extra mile” to provide better customer service and higher levels of convenience. This improved customer service includes customer education about opportunities to maintain vehicles, improve safety, reduce breakdowns, increase fuel efficiency and reduce risk of larger, more expensive repairs later. Moreover, AutoZone increased advertising in TV and radio and started a NASCAR sponsorship. The positioning of brands is a very important consideration for the purchase decision of customers, therefore it is very important to increase brand awareness – and that can be best done through advertising. AZO also continues to open new stores in order to better distribute their products to the customers.


Excerpt out of 42 pages


Strategic Marketing and Finance Decision Analysis
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Strategic, Marketing, Finance, Decision, Analysis
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Simon Berger (Author), 2005, Strategic Marketing and Finance Decision Analysis, Munich, GRIN Verlag,


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