Amazon Buying An After-Market Auto Parts Company Is 'Unlikely'

A New York Post article reported on Amazon.com, Inc. AMZN's plans to enter the DIY after-market auto parts space. Contrary to speculations in the article, Amazon is unlikely to acquire a regional parts distributor, BTIG’s Alan Rifkin said in a report.

DIY Versus DIFM

The aftermarket auto parts industry “is insulated, but not immune, from online competition,” Rifkin mentioned. While the DIY segment of the aftermarket auto parts market was estimated at ~$50 billion, the do-it-for-me (DIFM) segment was twice as large, at ~$97 billion and growing faster.

DIFM Tougher To Penetrate

“We believe the DIFM market will be much more difficult for Amazon to penetrate as the auto parts retailers have built out robust distribution networks that can rapidly deliver almost any SKU [stock keeping unit], often in less than an hour,” Rifkin pointed out.

M&A Unlikely

AutoZone, Inc. AZO (Rated Buy, PT: $900) has the maximum exposure to DIY, with 81 percent of its domestic sales from this segment. O'Reilly Automotive Inc ORLY (Rated Buy, PT: $310) was next at 58 percent sales, followed by Advance Auto Parts, Inc. AAP (Rated Sell, PT: $120) at 43 percent.

“However, the majority of AZO’s growth is coming from its DIFM platform. We estimate over the past two quarters almost two-thirds of AZO’s comp growth has come from its DIFM business despite DIFM accounting for just 19 percent of sales,” the analyst commented. He added that auto parts is a low inventory turn business, which is not aligned with Amazon’s business model.

Amazon could seek a nationwide distribution network to enable it to offer uniform service and availability to customers who were spread across the country. Rifkin further pointed out that even after spending $1 billion on acquisition or organic investment, Amazon would not be able to create a distribution network “that could match those of the leading auto parts retailers, which fill out their distribution capabilities through hundreds of hub stores.”