CSK Auto Corporation

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CSK Auto Corporation

645 E. Missouri Avenue, Suite 400
Phoenix, Arizona 85012-1373
U.S.A.
Telephone: (602) 265-9200
Fax: (602) 631-7231
Web site: http://www.cskauto.com

Public Company
Incorporated: 1987 as Northern Automotive
Employees: 14,810
Sales: $1.23 billion (2000)
Stock Exchanges: New York
Ticker Symbol: CAO
NAIC: 441310 Automotive Parts and Accessories Stores

CSK Auto Corporation is a holding company for CSK Auto, Inc., a subsidiary that manages all of the corporation’s business from its headquarters in Phoenix, Arizona. CSK Auto is the largest retailer of automotive parts and accessories in the western United States, and the third largest in the nation. The company’s more than 1,100 stores in 19 states operate primarily under three brand names, the first initials of which form the CSK in its name: Checker Auto Parts with stores located in the Southwest, Rocky Mountains, and Northern Plains region; Schuck’s Auto Supply in the Pacific Northwest; and Kragen Auto Parts in California. Most of the focus of CSK Auto is on the do-it-yourself customer, accounting for approximately 85 percent of its business. The company hopes to increase its sales to auto repair professionals and fleet owners, a segment of the automotive aftermarket parts and accessories business that is considered to have a greater potential for growth. CSK Auto has also taken aggressive steps to use the Internet, combined with the delivery infrastructure it already has in place, as a way to sell even more of its products.

The Rise of Standardized Parts and the Introduction of the Model T in 1908

During the early days of the automobile there was no need for businesses specializing in spare parts. With the refinement of the internal combustion engine in the mid-1880s, inventors in Europe and the United States began to develop self-propelled vehicles. In Europe in the 1890s many familiar car makers, including Mercedes, Peugeot, Renault, and Fiat, were established. By 1898 in the United States there were more than 50 automobile companies. The first American car to sell in significant numbers was the Oldsmobile. Some 425 were purchased in 1901, a number that grew to 5,000 by 1904. This success prompted more than 240 additional companies to enter the U.S. market by 1908. These early cars—expensive to buy and expensive to maintain—were clearly intended for the wealthy. The vehicles and their parts were essentially the handmade work of craftsmen. Henry Ford revolutionized the auto industry by standardizing parts. His Model T, introduced in 1908, was the first car to be mass produced and therefore affordable to the middle class. By 1929 there were 26.7 million cars registered in the United States, and any number of businesses were established to maintain and service them.

One of the founding fathers of CSK Auto was Harry Schuck, who in 1917 opened a store in Seattle to sell motorcycle, bicycle, and automobile parts. Al Kragen got into the business in San Jose in 1947. Checker Auto Parts was not founded until 1968, when Valley Distributing Company in Phoenix converted a country-and-western dance hall into its first store. All three companies would add units until they became regional chains.

In 1987 brothers Jules and Eddie Trump, New York investors unrelated to Donald Trump, merged the Checker, Kragen, and Schuck’s auto parts chains, along with AutoWorks, to form what was then known as Northern Automotive. At its peak Northern operated 750 stores, although with limited success. It sold off AutoWorks, dropping to 569 total stores, and changed its name to CSK Auto. In the first half of the 1990s the company lost money three out of five years and was just marginally profitable the other two. CSK Auto did, however, make significant investments to upgrade its information management system and build a new distribution center in Phoenix. Like most auto parts retailers, CSK Auto felt that the do-it-yourself market was shrinking because many customers lacked the equipment and training to work on the newer computer-controlled cars, and thus felt the need to shift focus to the commercial trade.

In 1996 CSK Auto announced that it was going to make a public offering of its stock, with the intention of raising about $100 million to pay off debt. Given the company’s lackluster performance, investors showed little interest. The Trumps changed their plans and instead sold a 51 percent stake in the company to Investcorp, a London-based holding company that invested Persian Gulf oil money in European and American properties.

The automotive aftermarket parts and accessories business, traditionally highly fragmented with local stores competing with regional chains, entered a period of increased consolidation similar to what had happened in the banking, drugstore, and supermarket industries. For several years the $32 billion a year do-it-yourself market had been showing nominal growth, only one percent to two percent. In order to generate growth, chains were forced to expand, with the result that there was not enough customers to support the inflated supply of sellers, a situation that only fueled the need to get bigger. AutoZone was the most aggressive player. Even though it was growing internally by 300 stores a year, it also initiated an acquisition strategy. AutoZone in 1998 had well over 2,000 stores, with an estimated potential of 5,000, and was quickly becoming what amounted to the first true national auto parts chain.

Expanding by Acquisition: 1997

In order to maintain its position as one of the largest chains, CSK Auto had no choice but to be equally as aggressive as its chief rivals, AutoZone and Pep Boys. Late in 1997 CSK Auto paid $38 million to acquire 80 California stores from Trak Auto Corp., which opted to focus on its outlets located in the East and Midwest. Not only did the transaction bring the total number of stores in the CSK Auto chain to 685, it increased the company’s presence in the highly important Los Angeles market. CSK Auto was able to use its existing warehouses and distribution system to service the new stores, which would be switched to its Kragen brand name. One of the area’s major players, with 400 of its 556 stores located in California, Chief Auto Parts answered by announcing plans to pursue a public offering of its stock to finance its own expansion, then changed course and agreed to be purchased by AutoZone. The effect of these transactions was to reduce the number of auto parts chains in the Los Angeles market from five to just three.

Although CSK Auto operated under three brand names, the company had established a corporate identity and a focus. While retaining local brand recognition, every Checker, Schuck’s, or Kragen store was essentially the same. The target was the 22- to 45-year-old customer who worked on his own car. The ideal outlet was located in a blue-collar or working class area. It offered free testing of starters, alternators, and batteries, as well as free battery charges. An efficient computerized distribution system linked all the stores together, so if an item was not available at one location it could be delivered from another. Centralized depots that delivered to stores throughout the day also featured call windows, should customers prefer to save time by picking up an item themselves. A satellite communications network linked the stores to the Phoenix office, where purchasing was centralized. Through the online network, individual stores could also price items in order to be competitive with their local rivals. The company also initiated what it called CSK University, a continuing education program for its sales staff. Formal classes were conducted in 26 centers. In addition to customer service and management development skills, students were trained in basic automotive systems, as well as more advanced automotive knowledge, with the goal of better serving customers who had limited knowledge about the workings of the new computer-controlled cars.

Early in 1998 CSK Auto again attempted to go public with a stock offering in order to finance the opening of new stores, remodel existing ones, and to make further acquisitions. The offering successfully raised $172.5 million. When a month later the company reported its results for fiscal 1997, it was clear that CSK Auto was on an upward trajectory. Net sales increased 6.6 percent from the previous year, to $845.8 million. The $45.4 million operating income was a significant improvement over the $3.4 million loss reported in fiscal 1996. With the integration of the Auto Trak stores and the opening of new stores that brought the total number of units to 807, CSK Auto cracked the $1 billion mark in net sales in fiscal 1998. Operating profits jumped to $81.4 million.

CSK Auto began an accelerated effort to expand its operation. In June 1999 it purchased the 86 stores of Apsco Products Company that operated as Big Wheel or Rossi outlets. The $60 million deal added new markets in Minnesota, North Dakota, and Wisconsin, bringing the total number of CSK Auto stores to 914, now spread across 13 states. The company elected to retain the Big Wheel and Rossi names for these units. In August CSK Auto made an even larger purchase, paying $143.2 million to PACCAR Inc. for 192 stores that operated under the trade names of Grand Auto Supply and Al’s Auto Supply in the states of Washington, California, Idaho, Oregon, Nevada, and Alaska. The deal increased the CSK Auto chain to more than 1,100 stores.

Selling Online: 1999

In 1999 CSK Auto made an aggressive entry into the e-commerce world with the introduction of a wholly owned Internet subsidiary called CSKAUTO.COM Although there were online sites already selling auto parts, CSK Auto became the first of the traditional auto parts retailers to offer a full assortment of parts and accessories on the web. The site was integrated with CSK Auto’s order management and credit card authorization system to take advantage of the company’s existing electronic infrastructure. Parts for cars, vans, and trucks dating back to 1960 were available on the site.

Company Perspectives:

Our operating strategy is to offer our products at everyday low prices and at conveniently located and attractively designed stores, supported by highly trained, efficient and courteous service personnel.

In August 1999 CSK Auto bolstered its Internet initiative when it acquired Automotive Information Systems (AIS) for approximately $10 million. AIS, since its inception in 1987, had been building a database of repair information, appropriate for do-it-yourself customers as well as experienced mechanics. Fielding more than 250,000 inquiries a year for repair information from 15,000 repair shops, the 32 master technicians working for AIS compiled a comprehensive body of vehicle-specific information, including how to diagnose problems and make repairs. Just as important to CSK Auto was AIS’s role as the key content supplier to Microsoft’s highly popular CarPoint web site, which boasted three million unique visitors each month. AIS provided CarPoint visitors with recommended maintenance schedules for over 1,200 vehicles and repair cost estimates based on national averages. The next step for CSK Auto was to forge a direct relationship with CarPoint. In September 1999 it became the site’s exclusive auto parts web provider. Visitors to CarPoint looking for repair information would be directly linked to CSKAUTO.COM in order to easily purchase the necessary parts or accessories. In essence, this relationship was the ultimate in targeted advertising.

CSK Auto added to its online presence early in 2000 with the announcement that along with Advance Auto Parts and Sequoia Capital, a Silicon Valley venture-capital company, it was launching PartsAmerica.com. The new entity would feature a “bricks-to-clicks” strategy that would take advantage of the chains’ 2,700 stores to offer same-day parts delivery to both repair shops and consumers. Because Advance Auto and its 1,600 outlets operated out of the East and Midwest, and CSK’s 1,100 outlets were located in the West, the two chains were not direct competitors, even though both sold parts on the Internet. By combining forces via the web they would be able to create a network of stores that covered all 50 states. Moreover, because the chains already had 3,000 vehicles delivering to repair shops, an infrastructure was in place to serve consumers doing repair work at home.

In 2000 CSK Auto also continued to grow its traditional business. In May it acquired the assets of All-Car Distributors, Inc. for approximately $865,000 in cash and the assumption of approximately $3 million in debt. CSK Auto thus added 22 stores to the Checker Auto Parts roster: 21 units in Wisconsin and one in Michigan. The transaction helped CSK Auto to build its presence in the Wisconsin market without overlap. None of the AllCar stores had been in direct competition with Checker stores.

Results for fiscal 1999 reported in March 2000 showed that CSK Auto had increased its net sales from $1 billion to $1.23 billion, and operating profits jumped from $82.4 million to $119.6 million. Industry sales reached $10 billion, a significant milestone, but hardly explosive growth. The environment of the automotive aftermarket parts and accessories business remained one in which too many sellers were chasing too few buyers, and a major chain like CSK Auto had no choice but to continue to expand, either by clicks or by brick, or risk becoming the victim of a reckoning that was sure to one day visit the industry.

Principal Subsidiaries

CSK Auto, Inc.; Schuck’s Distribution Company; Kragen Auto Supply Company; TRK Socal, Inc.; CSKAUTO.COM

Principal Competitors

AutoZone, Inc.; The Pep Boys-Manny, Moe & Jack.

Key Dates:

1917:: Schuck’s Auto Supply is founded in Seattle, Washington.
1947:: Kragen Auto Parts is founded in San Jose, California.
1969:: Checker Auto Parts is founded in Phoenix, Arizona.
1987:: Jules and Eddie Trump combine Schuck’s, Kragen, and Checker chains to form CSK Auto, then known as Northern Automotive.
1998:: CSK Auto makes public offering of stock.
1999:: CSK Auto becomes first major auto parts retailer to sell products on the Internet.