Pep Boys Takes a Page Out of McDonald’s Playbook

The Pep Boys-Manny, Moe & Jack  (NYSE: PBY  ) , the nationwide auto body shop and parts retailer, reported its fourth-quarter and full-year results on Monday, April 14, 2014. The company faces stiff competition on multiple fronts from the likes of Monro Muffler Brake (NASDAQ: MNRO  ) , AutoZone  (NYSE: AZO  ) , and the Sears Automotive division of Sears Holdings (NASDAQ: SHLD  ) . This competition, coupled with the fact that last year's fourth quarter had an extra week of sales, led the company to report disappointing results for the full year and the quarter. The company has been through a lot over the years, given that it was started in 1921, but if it is to survive it must manage to compete in an increasingly difficult auto-repair market. In order to do so, it has made a bold move.

Customer lounge makeover
In order to draw in customer traffic, Pep Boys has decided to give itself a makeover which will start with its customer lounges. These lounges will be new and flashy, and they will offer increased comfort to customers while they wait for Pep Boys to repair their automobiles. The company has planned this move down to the last detail, and it includes everything from stainless steel bar stools to tiled back-splashes.

This move, designed to attract customers by providing more comfortable spaces in which to wait, should remind investors of the moves that McDonald's (NYSE: MCD  )  has made over the last few years to give its restaurants a facelift. Once an unbeatable restaurant brand, McDonald's has seen its business threatened by not only other fast food chains, but by quickly growing fast-casual brands like Chipotle Mexican Grill and Panera Bread. It is for this reason that McDonald's, in 2011, began remodeling its stores to make them look more modern.

The project, which has resulted in most McDonald's stores looking more and more like Starbucks or Panera Bread stores, has cost billions of dollars and it involves revamping almost all of the company's 14,000 U.S.-based restaurants by the year 2015. Unfortunately, the project's results have not been stellar and it seems like, at best, it has kept McDonald's from losing customers. Unfortunately, the project hasn't helped McDonald's gain many customers.

Company

FY 2011 Total Revenue

FY 2012 Total Revenue

FY 2013 Total Revenue

McDonald's

$27 Billion

$27.57 Billion

$28.1 Billion

The Pep Boys

$1.99 Billion

$2.06 Billion

$2.09 Billion

As the Foolish investor can see each of these companies is suffering from a growth problem. McDonald's has managed to only grow its total revenue by 4% over the least three years (including new restaurant openings) while Pep Boys has only managed to grow its total revenue by 5%, also including new store openings. Meanwhile, the U.S. economy continued to grow and expand.

This leads the reader to realize that the average store for both companies is likely losing business and unfortunately, that is the case. In McDonald's 2013 fiscal year, its U.S. stores experienced a comparable sales decline of 0.2% and a comparable guest count decline of 1.6%. This came after the company spent billions of dollars on a long-term project to upgrade its locations. Pep Boys, in its 2013 fiscal year, experienced a 1.3% decline in same-store sales for the year.

Foolish Takeaway
The automotive repair industry is extremely competitive, just like the fast food restaurant industry. There is no shortage of regular promotions designed to steal customers away from given auto repair brands. Because of this Pep Boys has had not one year, but rather several years, of difficult business results. Its store upgrades will likely stem the tide for now, but as we have seen with McDonald's such a move is unlikely to stop the tide from moving away from Pep Boys. 

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  • Report this Comment On April 24, 2014, at 7:10 PM, IrishJim wrote:

    Pep Boys is doing what Sears did in the late 1990's when it owned NTB. Sears opened a lot of NTBs and remodeled most of the existing stores and put comfortable waiting rooms in the stores with TVs, coffee and food.

    The theory that their target customer was a woman with a family and a job who would want a nice place to wait for the car to be repaired.

    If you want to see whether Pep Boys strategy will work, then you should study NTB's performance from say 1998 until 2004.

    Pep Boys is generally facing competitors who do exactly what they do - Firestone, Midas, Sears, NTB. Margins are already slim. They are looking for a way to set themselves apart. Price and quality of service are the 2 most important reasons for picking an car repair place with convenience the third reason.

    A pleasant place to wait could influence some customers, but I would make that the 4th criteria at best.

    McDonald's is facing much different competition. They seem to be doing well versus direct competitors like Burger King and Wendy's, but the fast casual places like Chipotle and Panera and newer burger places like 5 Guys are another matter. If people want different food, that will be a problem for them.

    McDonald's has done a great job with breakfast and McCafe in giving people reasons to eat there besides burgers. There challenge is to keep coming up with innovations that will bring in new customers without losing their core or making the business too difficult to execute for the employees and franchisees.

    It really has nothing to do with remodeling their stores.

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