What is Express Auto Parts (EAP)?

Case Study 

Express Auto Parts (EAP) divides its target market into three regions: North, Central, and South. The total market has increased by double-digit growth rates in recent years (2014 – 10.6 percent; 2015 – 11.3 percent). The regional markets differ with respect to their growth rates, competitive intensity, consumer preferences, pricing tolerance, distribution structure, and so on. The Southern region is the most attractive in terms of growth rates and volume of business, but it is also the most competitive. At the end of 2015, the firm will have a small market share equal to 2.2 percent. EAP’s most immediate market is the Central market, which has no entrenched competition and has shown moderate growth in the last few years (equal to about 9 percent). EAP has steadily grown its market share in this region to 9.8 percent due to its close relationship with local repair shops and service stations. The Northern region is the least attractive, as it displays the lowest growth rates and market size. At the same time, the market is fragmented, the distribution chain is cluttered with a great deal of “middlemen,” and no clear market leader has emerged. With a 12.2 percent market share, EAP is considered to be one of the top three distributors in this region. 

The firm’s major efforts are placed on Southern California. EAP aims to grow its market share in the South and become a well-recognized distributor by developing partnership agreements with a number of repair shops. The firm begins to develop its service network of independent repair shops (called “Q-service”), which focus on repairing German vehicles. The Q-service is the firm’s network of affiliated workshops. An independent manager owns each outlet, but they adhere to common branding, operational guidelines, and sales and service procedures; they also participate in joint advertising and promotional activities, both locally and regionally. EAP develops this network in order to secure a captive customer base after observing this development in the German market. 

The pro-forma income statement for EAP is presented in Table 1. EAP is expected to increase its profitability at all levels of the pro-forma income statement, both in terms of profit growth (in value terms) and margins. The net profit margin is anticipated to grow from $2.8 million in 2015 to $13.6 million in 2020.

Table 1 The pro-forma income statement for EAP for the period between 2016 and 2020 and historical financial data (2012–15)

The firm is now approached by local venture capitalists who are impressed with EAP’s revenue growth and profitability. The venture capitalists believe that EAP can take its tested business model beyond California and apply it to other regions of the United States where German-made vehicles are popular. The geographic 2 expansion is to include Florida, New York, and the Boston area. The venture capitalists are persuaded that a more aggressive expansion scheme is possible for EAP to execute (compared with the entrepreneurs’ initial plan, which included only California). The revised expansion plan envisages significant investment into distribution centres ($13 million), staff (new hires, training, and development), marketing (competition is more intense and entrenched), and other expansion costs.

 EAP produced a new pro-forma income statement based on the suggested expansion plan (see Table 2 for details). Compared with the “base case” scenario, EAP would be expected to reach revenues of $234.9 million and a net profit of $23.1 million by 2020 (this is well above EAP’s original forecast). In the early years of expansion, EAP is expected to generate losses at the net-profit level equal to $0.1 million in 2016 and $1.2 million in 2017 (losses are higher at the EBIT and EBITDA levels). EAP would not be able to execute this program by relying on its own financial resources; it needs about $20 million in new capital to affect its expansion plan. Given the size of the cash requirement, there is now a clear case for the involvement of external financiers such as venture capitalists or debt providers.

Table 2 The new pro-forma income statement for EAP for the period between 2016 and 2020

Tasks • Evaluate the new pro-forma income statement for EAP (Table 2) and discuss why the financial forecast for the expansion plan would be appealing to the local venture capitalists. 

• Would the new pro-forma income statement for EAP (Table 2) also be appealing to debt providers, e.g. banks, given the financiers’ appetite for risk?