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AutoZone: Creating A Winner
On June 26, 2007, the executives of Memphis-based AutoZone celebrated the opening of the company’s 4,000th store in Houston, Texas. That achievement was the culmination of years of diligent effort initiated by private equity owners.
Between 1984 and 1996, private equity firm KKR helped to expand AutoZone from a small subsidiary of a food and drug wholesaler into the nation’s leading auto parts retailer. Fully a decade after KKR exited, the company is still flourishing, with millions of Americans in 48 states benefiting from the high quality parts and service that AutoZone provides at highly competitive prices.
The story began in 1979, when J.R. Hyde founded Auto Shack and made it part of Malone & Hyde, the wholesale grocery business that his grandfather created in 1907. By 1984, he believed M&H was undervalued and approached KKR about the prospect of a management-led buyout. Noting Hyde’s talent (he had spent seven years on Wal-Mart’s board), KKR agreed to invest $115 million in equity, alongside the $35 million that J.R. Hyde and other managers were providing, and helped to arrange roughly $550 million in debt for the $700 million acquisition.
New Products, More Locations
The primary business of M&H remained wholesale groceries, but Hyde wanted to concentrate on the auto parts company, noting that most competitors in that space were mom-and-pop operations, many of which were not well run. Realizing the potential of AutoShack, KKR and management quickly set out to add innovative new products and expand the number of locations. Their strategy was clear: They intended to “offer high quality, low-cost parts to the car or truck owner who has to repair his own vehicle out of economic necessity.”
In 1985, the company introduced Express Parts Service, a direct marketing program that offered customers the ability to have parts shipped to them. The following year, the company introduced the first quality control program in the industry and became the first to offer a lifetime warranty on virtually all parts sold. According to Hyde, the company “made a religion out of putting the customer first” and sought to create “a culture of excellence.” The company also invested in an electronic catalog for all of its stores, which helped managers better manage their inventory. The investment proved prescient, as the company more than doubled in size from about 160 stores in 10 states in mid-1984 to 339 stores in 15 states by the end of 1986.
Increasingly, it became clear that the auto division offered the best growth prospects for M&H. In 1987, KKR and the management team carved-out the auto division and sold the remainder of M&H. Doing so allowed them to spend all of their time and resources on finding new and better ways to serve customers.
Innovation From Within
During the next four years, KKR continued to invest in expansion efforts, improved systems and operations, and innovation from within. Recognizing and supporting the talent of its employees was instrumental to launching the ADuralast line of tools, a private line designed entirely by internal product managers. Renamed AutoZone, the company also invested in electronic management systems that helped to reduce wait times for customers and ease the accounting burden on local stores.
Seven years after going private, AutoZone returned to the public market. During its years as a private company, AutoZone’s revenue had grown seven fold to $818 million, up from $120 million when KKR acquired it in 1984. In spite of the apparent success, not all were confident that AutoZone would be able to continue to grow. Analyst Norman Fosback was wary, saying that AutoZone was “a vastly overpriced stock that’s worth only about half its present price. . . you’re betting on too many good things happening over too many years in an unknowable future. . . it’s a stupid bet.”
After AutoZone went public, KKR maintained a significant ownership stake in the company and did not slow down AutoZone’s expansion. Over the next five years, KKR continued to leverage economies of scale to increase the competitiveness of the business and lead AutoZone into new markets. The company entered the commercial auto parts market, lowering the cost of parts and diagnostic software provided to mechanics and technicians across the country. It also introduced multiple store designs, which enabled the company to provide low-cost, high-quality parts to small towns and rural areas in a cost-effective manner.
From 1,000 to 27,000 Employees, 160 to 1,400 Stores
KKR finally exited AutoZone in 1996. From a base of 1,000 employees and 160 stores when KKR took over, AutoZone had grown to be the third largest auto parts store in the country, with more than 1,400 stores and nearly 27,000 employees. More importantly, during its period of ownership, KKR had helped build a company that would carry its success into the future.
In the decade since KKR exited, AutoZone has become the largest auto parts chain in the country, with 53,000 employees and more U.S. locations in than Wal-Mart. It also has entered the heavy truck parts market and become a member of the Fortune 500. Revenues have soared from $818 million in 1991 to a projected $6.1 billion in 2007. This top-line growth and operational efficiency of AutoZone have helped to drive the stock price up at an annualized rate of 20 percent annually since going public. Apparently, Fosback got it wrong.