Today, our AMN Executive interview series features Kevin Freeland,
who joined Federal-Mogul in May as the company’s co-CEO and CEO of the
Vehicle Components Segment, coming from Advance Auto Parts. Earlier this
month at AAPEX, Counterman Editor Mark Phillips sat down with Freeland
to discuss his extensive retail background, his thoughts on
Federal-Mogul’s position today in the aftermarket and opportunities and
challenges ahead in the global marketplace.
Before
joining Federal-Mogul in 2013, Freeland was COO of Advance Auto Parts, a
position he held after serving as executive vice president of
merchandising, information technology and supply chain from 2008-2009.
Previously, he was president of Optimal Advantage from 2004-2008.
Freeland served in senior leadership positions with Best Buy Co. for
eight years, beginning in 1995 as vice president of inventory management
and then as senior vice president of inventory management from 1997 to
2001. He later was president of Musicland Stores Corp. from 2001 until
2003. Prior to joining Best Buy, Freeland held various positions of
increasing responsibility for more than eight years with Payless Shoe
Source, including his final position as vice president of merchandise
distribution.
Freeland earned a bachelor’s degree in economics from the University of Florida, Gainesville, Fla.
You
have a great deal of experience in retail. Can you speak to what you
learned from that experience and tell us how you plan to apply that in
your new role?
My background is very different, I presume,
from CEOs of other aftermarket manufacturers. I spent a number of years
at Best Buy. When I arrived there, Best Buy was in a desperate
condition. The problem they had was that the vending community had
become incredibly powerful. Their vendors included Microsoft, IBM, Sony,
Panasonic and they were just massive in size relative to the
distribution channel. It was essential for Best Buy to do three things:
be extremely well connected with the end consumer, be the most effective
distributor for its vendors and lower its overall cost structure. Over
my last five years there, Best Buy was the No. 1 performing stock in the
S&P 500.
After that, I spent five years at a consulting
firm, which was essentially anchored on the relationship between the
channel partners: examples included PetSmart with its channel partners,
which included Procter & Gamble, Colgate, Mars, etc., and Dell with
its channel partners, which included Walmart, Staples, Sam’s Club, Best
Buy, etc. Through the eyes of Procter & Gamble, I was able to see
what was it was like for them as one of their distributors (Walmart)
grew to become the largest company on Earth. It was during the
engagement with Advance Auto when I realized the similarities between
these past experiences and the automotive aftermarket.
When I
arrived at Advance Auto in 2008, it was described as a “turnaround
situation.” The company needed to build new capabilities. One example is
that there was essentially no global sourcing function. By the time I
left, it had grown to be a material part of their business,
predominantly coming in from China. One key competitor had successfully
moved the ownership of inventory to the vendors, giving them a
significant competitive advantage. In response, Advance pursued a
similar strategy. Many changes were needed to enable a shift from a
predominantly DIY customer base to a more DIFM customer base. The
results of these and more changes resulted in a stock price that’s three
times what it was five years ago. It was a wonderful opportunity to see
the automotive aftermarket industry and to learn through it.
Today,
in the North American aftermarket, there is a consolidation of one
particular part of the supply chain with the announcement of the Advance
acquisition of CARQUEST. More than 50 percent of all aftermarket parts
are now going through the top four players. Those top four players have
built broad private label lines, which has resulted in a corresponding
shrinking of branded products.
In one sense, I’m new in this
role, and new on this side of the supply chain, but I have seen these
situations before and have seen successful ways to address them. Quite
frankly, one of the reasons I took on this role is that this disruptive
moment happening in the aftermarket industry today is giving
Federal-Mogul the opportunity to think in ways that it has not in years
past.
Federal-Mogul’s Vehicle Components Segment (VCS) is one
of the largest global suppliers of premium-branded auto parts. What
challenges does VCS face in today’s marketplace, both domestically and
globally?
Roughly two-thirds of our aftermarket business is
in North America, a little less than a third in Europe and a
single-digit percentage in the rest of the world. Asia manufactures more
vehicles than any other part of the world, and it’s the smallest part
of our business. You could describe this as a crisis of opportunity.
What we need to do is to grow disproportionately in the BRIC countries,
and most notably, within China, I think there’s a significant
opportunity for us.
Europe is currently our fastest-growing part
of the world. It’s not a fast-growing aftermarket industry in general,
but we’re gaining share there. We have good growth in both the Ferodo
brand and the MOOG brand, and we’re also growing disproportionately
there through acquisition and distribution agreements.
In North
America, there’s an increasing concentration at the distribution level
and an increased propensity to utilize private label programs,
predominately backed by manufacturing in best-cost countries. We’re
fortunate to have some of the best-known brands in the industry, and for
85 percent of the products we sell in North America, the person who
throws the box away is a professional installer.
I’ve reviewed
the brand imagery for each of our brands in the categories where we
compete, and we have an absolutely wonderful beginning point. But we
have to – every day continue to build our brands. We have all sorts of
activities under way to do that, both in traditional ways — we have a
traditional sales force that meets with countermen and the distributed
sales force, as well as directly with installers — and in new ways. We
developed a fleet of training vans that take our centralized technical
training center on the road to installers throughout the United States.
We use traditional methods, not the least of which is your publication,
but also new electronic methods. We have a website with a significant
amount of product content, and we’re partnered with our distributors to
utilize our product content on their websites. Our new Smart Choice
Mobile app enables shop owners and professional technicians to access
the latest parts information and applications for any passenger car or
light truck – and communicate vehicle inspection findings and a repair
estimate directly to the customer in real time. This makes a
technician’s job easier.
We also have to manage our distribution
quite thoughtfully. In a changing world, how should a supplier think
through their customer relationships? As the customers are changing, the
relationships are changing as well.
As private label programs
coming in from best-cost countries are growing, we have to keep an eye
on the price premiums that are commanded by our products. We still have
more plants in the U.S. than in Mexico, but there’s a shift to a cost
structure that allows us to be able to continue to put marquee, branded
products on the shelves of our distributors while narrowing the gap in
what our historic prices had been and the offers they’re receiving for
their private label programs.
As an executive with a deep
understanding of merchandising, marketing and procurement, can you speak
to Federal-Mogul’s positioning in the automotive aftermarket?
We
actually have a number of different types of relationships.
Three-quarters of our Vehicle Components business today is in the
aftermarket, and one-quarter is on the OE side, where we also supply
braking products, wipers and chassis components. We are also the
manufacturer behind many private label programs. The installer may not
know that, but the item that sits in a private label box may well be
ours. The bulk of our business is branded aftermarket products, but
clearly we’re more than that.
We recently announced that we
divested the Carter fuel business. Most of the products actually had
been migrated to private label and only a minority of our share of the
market was branded. The fuel delivery market is increasingly sourcing
complete systems, which further diminished our ability to compete
without significant investment to expand our portfolio. Considering our
relative niche position in the market, we decided that the business
would be better positioned inside another company that has a strategy to
invest in its growth. Divesting the fuel business was not a material
change to our volume or our profitability.
On the other hand, if
you look at Fel-Pro, it is the market share leader in its category.
Fel-Pro just celebrated its 95th anniversary. I was recently in our
Skokie (Illinois) plant, where Fel-Pro seals and gaskets are produced.
It’s an amazing testament of our people focusing on a particular problem
for an installer so intently to create something truly unique. It’s the
result of listening to the installer on instability issues and comeback
issues and creating a line that is genuinely for the repair channel and
superior to its OE counterpart.
Another good example is with
Wagner ThermoQuiet, where the innovation has come from our OE braking
pedigree. This product line addresses significant issues that the
channel had in terms of noise, vibration and related problems that the
installer had with the shim. So, we created brake pad with an integrated
shim. And now we have a low-copper pad within the line called OE21 that
also stems from a similar product that we developed for OEMs.
We will continue to provide private label programs, but our emphasis and our investment will be on our brands.
What are a few global issues looming on the horizon, or already here, that may cause Federal-Mogul to adjust course?
Globally,
there’s going to be a dramatic shift over the next 10 years or so. The
car parc in Asia is growing substantially, significantly increasing in
both the OE opportunity in Asia, and as those cars age, in the
aftermarket, especially in China. The aftermarket there is very
embryonic at this point and will change markedly over the next 10 years.
I
don’t know what will happen over the next 10 years in terms of the
industry’s manufacturing footprint. During the last 10 years, there’s
been an abundance of automotive aftermarket parts going into Asia but
some of the reasons for that have changed over time. For example, wage
rates in China have grown, their currency has appreciated, and shipping
rates are higher today than they were at the beginning of the recession.
In
terms of Western Europe, I’d say the climate is changing much more
slowly there. The concentration of the distribution channel is occurring
but from a much smaller base. For us, we see that as an opportunity to
gain share. MOOG’s share of that market is growing well.
Federal-Mogul
is a leader in low-copper, zero-copper friction. It’s obvious that many
companies will follow your lead. In what way is Federal-Mogul a steward
and/or trendsetter in the global automotive aftermarket?
This
is part of our advantage in having a balance between OE and the
aftermarket and, in this case, sharing knowledge between the engineers
who work on our OE products and those that develop products for the
aftermarket. Our low-copper and zero-copper formulations were driven by
the regulations that are changing the braking material requirements for
the OEs. We have strong relationships with many OE customers and many
braking contracts that we want to maintain and grow. These products are
better for the environment and they meet our customers’ needs. This is
just one example of bringing our comprehensive understanding of OE
product needs to our aftermarket products.
What are some
future growth opportunities, either in a particular product area or
marketplace globally, where Federal-Mogul may decide to turn its
attention to?
There are several classic ways a company like
us could grow. We could grow geographically, and we will. The regions
outside of North America will change the most, and there are multiple
reasons why. There’s a market share opportunity in Europe, and there’s
just natural growth in the rest of the world.
The second point
is, we see changes in the markets we already serve. In North America,
our customers are changing, and I don’t know, quite frankly, if we have
any customers that are standing still. It’s a very competitive market
and a very dynamic market. We certainly know who our target end consumer
was (the professional installer), and we have to constantly know at any
given moment what our customer base is in the future.
Finally,
if you look at the history of Federal-Mogul, it has grown product lines,
it has acquired product lines and it has divested product lines. As we
look at the products we have today, if we can offer a differentiated
product line that’s concentrated on the professional installer, and
through differentiation command a price premium and a significant share
of the market, then it is a core part of our portfolio. If there are
other businesses that we can enter and achieve that same success, we
will.
