Monro Muffler Puts Focus On Trust
By James Covert
NEW YORK -- In an industry whose reputation for honesty ranks somewhere below
that of lawyers and palm readers, Monro Muffler Brake Inc. has taken on a
daunting task.
The Rochester, N.Y., auto-repair chain says that for the past several years
its strategy has been to persuade new customers to trust its mechanics.
"How do you build up trust?" asks President and Chief Executive Rob Gross,
posing what he sees as a central question for his company as it looks to expand
its chain, which numbers 561 repair shops and 18 dealer locations, across the
Eastern U.S.
Among his answers: "Let's not try and sell them something every time they walk
in the door," and "Don't focus on the size of the invoice -- if you do that,
you're telling your people to oversell."
For the past four years, the company's repair shops have been luring cars into
their service bays with the cheapest oil change in town. While the company's
current rate of $19.99 is significantly up from the $13.99 it was charging in
1999, it is still $2 below the nearest competition, Mr. Gross says. Two years
ago, the company began offering low-price "scheduled maintenance" services to
keep vehicles in compliance with warranties and state inspections.
The programs haven't been wildly profitable in themselves, and they did meet
some resistance from mechanics in the early stages, concedes Mr. Gross, who
initiated them after taking the helm of the company in January 1999.
"Technicians don't want to do oil changes," he says. "What if a brake job
comes in and the customer doesn't want to wait?"
But the cut-rate services do bring in fresh customers. With a strong
conviction that the trust of a new client is a bigger win for a repair shop than
a big invoice, Mr. Gross responded to questions by rewarding his shop managers
with bonuses for increased customer traffic, rather than the size of their
invoices.
Last month, skeptics were faced with hard evidence that the strategy was
starting to pay off -- the customers who were getting oil changes two and three
years ago now appear to be coming in for bigger purchases.
"We're lower priced on oil changes, but we're not lower priced on everything,"
Mr. Gross adds. "Once you build up trust with the customer, price becomes less
important in the equation."
For the fiscal fourth quarter ended March 29, the company posted net income of
$2.4 million, or 26 cents a share, compared with $1.9 million, or 21 cents a
share, a year earlier. Sales rose 21% to $61.4 million, driven by a 7.3% jump in
sales at stores open at least a year.
The same-store sales were fueled by double-digit gains across several product
and service categories, including a 33% increase in scheduled-maintenance
services, a 28% gain in commercial services and a 26% increase in tire sales.
Averaging about $480,000 a year in revenue, Monro Muffler Brake's 561 repair
shops are operating at only half capacity, Mr. Gross says. That statistic will
continue to improve as the company introduces services during the next few
years, including air-conditioning maintenance and installation next year.
Bulls on the shares add that the company stands to benefit from favorable
trends in the industry. There are more vehicles on the road than ever, and they
have increased both in terms of age and miles driven. Many of those cars,
including sport-utility vehicles, have bigger, more expensive parts, and the
electronics under the hood don't lend themselves to do-it-yourself projects.
But if some argue that such factors are baked into the stock already, there
are other, significant growth avenues that will likely be explored in the coming
years. Monro Muffler Brake has pursued an acquisition spree that has nearly
doubled its size in less than five years. In addition to its Monro Brake and
Service shops, the company operates 160 Speedy Auto Service shops, which were
acquired in 1998. The company's store base also includes smaller chains under
the names Kimmel Tires-Auto Service, and Tread Quarters Discount Tires.
The 1998 acquisition of Speedy Auto Service was the company's first and
largest, completed before Mr. Gross took the helm. That deal didn't go smoothly,
and earnings that year were halved. Since then, the company has become handy in
buying and integrating smaller chains, Mr. Gross says, noting that the
acquisition of the Kimmel chain last year immediately added to earnings.
As the company sits on a hefty mound of cash and contemplates future targets,
it will make sure they are in markets contiguous with its own, selling for the
right price, and adding to earnings quickly, Mr. Gross says.
"We will pay down debt if that's the best use of our capital, but I don't
think that will be the case," Mr. Gross says. "Could we double in size?
Absolutely."
As it expands its store base, Monro Muffler Brake continues to achieve
efficiencies, including cuts in corporate overhead per store, and increased
buying clout with suppliers. That is making it a tougher competitor for
franchises like Midas Inc. and Meineke, Mr. Gross says.
The company is partly investing its savings in its employees, offering some of
the best pay and benefits packages in the industry. Stock-option plans for store
managers vest over a four-year period, with a view to keeping them at their
posts for the long term.
"Our customers like to see the same manager in the store when they come back
because they trust them," Mr. Gross says. "If they see `John' behind the counter
and they saw him last year, they'll keep coming to see him next year."