O’Reilly Automotive Pricing Spineometer: 3 of 5 Vertebrae

O’Reilly Automotive, a North American auto parts retailer, had a positive Q1 2024. Revenue rose 7.2% to $4.0 billion and earnings before interest and taxes rose 5 % to $752 million over the same period last year.

A review of O’Reilly Automotive’s April 25 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

As a retailer that depends upon front-line salespeople to drive business, O’Reilly executives paid appropriate homage to their workers.  Over 90,000 people work at O’Reilly, of which 8,000 attended a recent in-person leadership meeting. Prepared remarks spoke of the “most important factors in our success are our people and out culture.”

O’Reilly segmented their market by DIY (Do It Yourself) and DIFM (Do It For Me) customers.  Purchases by the DIY segment were impacted by winter weather volatility.  Those by the DIFM segment were impacted by consumer cashflow.

Brad Beckham, CEO of O’Reilly, spoke to the issues of price versus market share, price versus volume, price and macroeconomics, and price structure management.

• Regarding price versus market share, in 2022 O’Reilly had a Professional Pricing Initiative aimed at reducing prices to capture market share in several product categories. Today, the focus is on building relationships and delivering value. Brad Beckham stated: Our teams have got out there and done all the other things that matter more than pricing, calling on customers, building relationships, the most efficient delivery service in the aftermarket, right part, right place, right time, the work our supply chain teams have done in the last couple of years have all made that pay off.”
• Regarding foot traffic, purchase quantities per store visit, and purchase price, he stated: “Increases in average ticket values and ticket counts were both contributors to comp(arable period over period) growth on both sides of our business with inflation at about 1%, in line with our full year expectations.”
• Regarding macroeconomics, he stated: “in situations of heightened economic pressures, we believe consumers will continue to prioritize investing to maintain their vehicles, particularly given the significant cost and monthly payment burden of a new or replacement vehicle. We believe the composition of our sales results support this view of the consumer in the current environment.”
• Regarding price structures, he indicated that O’Reilly was using a Good-Better-Best price structure and was observing a shift demand towards higher value: “We are not seeing notable evidence of trade down within our categories, rather we are seeing better and best level value spectrum products continue to perform well as consumers prioritize higher-quality products that carry extended warranties and in turn, provide long-term value to their investment in transportation.”

Brent Kirby, President at O’Reilly, talked about the ability of O’Reilly to manage input cost inflation.  “To the extent that we have seen modest inflation pressure in certain categories, we have been successful in passing those cost increases along in a continued rational pricing environment.”

These comments indicate that senior executives at O’Reilly have affirm grasp of the fundamentals of price management.

Given the scope of O’Reilly business, industry benchmarks would suggest 32 to 160 pricing professionals to be employed at O’Reilly.

1. With over 70,000 items (SKUs) at over 6,000 retail locations, pricing is an executional challenge.
2. We expect pricing professionals to be collated with the operations across the United States, Mexico, and Canada and price management to be driven down to the regional level.
3. We expect some professionals to be focused on competitive price intelligence, perhaps using screen scrapers.
4. With a Good-Better-Best versioning strategy, we expect some use of conjoint analysis to be used to define the price and benefits variation between the different value propositions. We would also expect to find pricing professionals engaged with product managers in pursuit of defining the next tier up of benefits to deliver to customers given that customers are currently trading up, not down, in the offering hierarchy.
5. Management remarks themselves revealed macroeconomic and microeconomic impacts to business performance. Some pricing professionals at O’Reilly should be focused on predicting economic impacts and planning business responses to these economic impacts.

Research into the investment by O’Reilly Automotive in pricing yielded underwhelming results.

1. The number of professionals identified to be primarily engaged in pricing was below expectations given the complexity of their business in terms of geography, store count, and item counts.
2. The responsibilities of pricing professionals tended to focus on pricing data, the professional contracting segment, and then jumped to the strategy level. Not identified was an entire cadre of professionals focused on individual item pricing, category pricing, competitive price dynamics, elasticity, and a host of other questions.  Perhaps these challenges are managed by product, category, or merchandising managers, yet it appears to be a missed opportunity.
3. Pricing professionals did span the range from analyst, manager, and director to vice president. Hence, the could have the authority to dive performance.

Given the importance and capability of pricing at O’Reilly Automotive as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of May 2024.

O’Reilly Automotive Pricing Spineometer: 3 out of 5 Vertebrae. O’Reilly executives acknowledge the importance of pricing and have some price management infrastructure, but the potential productive workload exceeds the number of pricing professionals.

ORLY (O’Reilly Automotive Inc.) fell from 1093 the day prior to their earnings call to 1006 one week later. FY 2023 revenue of $15.8 billion with a 20% operating margin and P/E ratio near 26.

For FY 2023, a 1% improvement in price would yield a 5% improvement in operating profits holding all else constant at O’Reilly Automotive.