Csk Auto Corporation Business Information, Profile, and History

Company Perspectives:

Our operating strategy is to offer our products at everyday low prices and at conveniently located and attractively designed stores, supported by highly trained, efficient and courteous service personnel.

History of Csk Auto Corporation

CSK Auto Corporation is a holding company for CSK Auto, Inc., a subsidiary that manages all of the corporation's business from its headquarters in Phoenix, Arizona. CSK Auto is the largest retailer of automotive parts and accessories in the western United States, and the third largest in the nation. The company's more than 1,100 stores in 19 states operate primarily under three brand names, the first initials of which form the CSK in its name: Checker Auto Parts in the Pacific Northwest; and Kragen Auto Parts in California. Most of the focus of CSK Auto is on the do-it-yourself customer, accounting for approximately 85 percent of its business. The company hopes to increase its sales to auto repair professionals and fleet owners, a segment of the automotive aftermarket parts and accessories business that is considered to have a greater potential for growth. CSK Auto has also taken aggressive steps to use the Internet, combined with the delivery infrastructure it already has in place, as a way to sell even more of its products.

The Rise of Standardized Parts and the Introduction of the Model T in 1908

During the early days of the automobile there was no need for businesses specializing in spare parts. With the refinement of the internal combustion engine in the mid-1880s, inventors in Europe and the United States began to develop self-propelled vehicles. In Europe in the 1890s many familiar car makers, including Mercedes, Peugeot, Renault, and Fiat, were established. By 1898 in the United States there were more than 50 automobile companies. The first American car to sell in significant numbers was the Oldsmobile. Some 425 were purchased in 1901, a number that grew to 5,000 by 1904. This success prompted more than 240 additional companies to enter the U.S. market by 1908. These early cars--expensive to buy and expensive to maintain--were clearly intended for the wealthy. The vehicles and their parts were essentially the handmade work of craftsmen. Henry Ford revolutionized the auto industry by standardizing parts. His Model T, introduced in 1908, was the first car to be mass produced and therefore affordable to the middle class. By 1929 there were 26.7 million cars registered in the United States, and any number of businesses were established to maintain and service them.

One of the founding fathers of CSK Auto was Harry Schuck, who in 1917 opened a store in Seattle to sell motorcycle, bicycle, and automobile parts. Al Kragen got into the business in San Jose in 1947. Checker Auto Parts was not founded until 1968, when Valley Distributing Company in Phoenix converted a country-and-western dance hall into its first store. All three companies would add units until they became regional chains.

In 1987 brothers Jules and Eddie Trump, New York investors unrelated to Donald Trump, merged the Checker, Kragen, and Schuck's auto parts chains, along with AutoWorks, to form what was then known as Northern Automotive. At its peak Northern operated 750 stores, although with limited success. It sold off AutoWorks, dropping to 569 total stores, and changed its name to CSK Auto. In the first half of the 1990s the company lost money three out of five years and was just marginally profitable the other two. CSK Auto did, however, make significant investments to upgrade its information management system and build a new distribution center in Phoenix. Like most auto parts retailers, CSK Auto felt that the do-it-yourself market was shrinking because many customers lacked the equipment and training to work on the newer computer-controlled cars, and thus felt the need to shift focus to the commercial trade.

In 1996 CSK Auto announced that it was going to make a public offering of its stock, with the intention of raising about $100 million to pay off debt. Given the company's lackluster performance, investors showed little interest. The Trumps changed their plans and instead sold a 51 percent stake in the company to Investcorp, a London-based holding company that invested Persian Gulf oil money in European and American properties.

The automotive aftermarket parts and accessories business, traditionally highly fragmented with local stores competing with regional chains, entered a period of increased consolidation similar to what had happened in the banking, drugstore, and supermarket industries. For several years the $32 billion a year do-it-yourself market had been showing nominal growth, only one percent to two percent. In order to generate growth, chains were forced to expand, with the result that there was not enough customers to support the inflated supply of sellers, a situation that only fueled the need to get bigger. AutoZone was the most aggressive player. Even though it was growing internally by 300 stores a year, it also initiated an acquisition strategy. AutoZone in 1998 had well over 2,000 stores, with an estimated potential of 5,000, and was quickly becoming what amounted to the first true national auto parts chain.

Expanding by Acquisition: 1997

In order to maintain its position as one of the largest chains, CSK Auto had no choice but to be equally as aggressive as its chief rivals, AutoZone and Pep Boys. Late in 1997 CSK Auto paid $38 million to acquire 80 California stores from Trak Auto Corp., which opted to focus on its outlets located in the East and Midwest. Not only did the transaction bring the total number of stores in the CSK Auto chain to 685, it increased the company's presence in the highly important Los Angeles market. CSK Auto was able to use its existing warehouses and distribution system to service the new stores, which would be switched to its Kragen brand name. One of the area's major players, with 400 of its 556 stores located in California, Chief Auto Parts answered by announcing plans to pursue a public offering of its stock to finance its own expansion, then changed course and agreed to be purchased by AutoZone. The effect of these transactions was to reduce the number of auto parts chains in the Los Angeles market from five to just three.

Although CSK Auto operated under three brand names, the company had established a corporate identity and a focus. While retaining local brand recognition, every Checker, Schuck's, or Kragen store was essentially the same. The target was the 22- to 45-year-old customer who worked on his own car. The ideal outlet was located in a blue-collar or working class area. It offered free testing of starters, alternators, and batteries, as well as free battery charges. An efficient computerized distribution system linked all the stores together, so if an item was not available at one location it could be delivered from another. Centralized depots that delivered to stores throughout the day also featured call windows, should customers prefer to save time by picking up an item themselves. A satellite communications network linked the stores to the Phoenix office, where purchasing was centralized. Through the online network, individual stores could also price items in order to be competitive with their local rivals. The company also initiated what it called CSK University, a continuing education program for its sales staff. Formal classes were conducted in 26 centers. In addition to customer service and management development skills, students were trained in basic automotive systems, as well as more advanced automotive knowledge, with the goal of better serving customers who had limited knowledge about the workings of the new computer-controlled cars.

Early in 1998 CSK Auto again attempted to go public with a stock offering in order to finance the opening of new stores, remodel existing ones, and to make further acquisitions. The offering successfully raised $172.5 million. When a month later the company reported its results for fiscal 1997, it was clear that CSK Auto was on an upward trajectory. Net sales increased 6.6 percent from the previous year, to $845.8 million. The $45.4 million operating income was a significant improvement over the $3.4 million loss reported in fiscal 1996. With the integration of the Auto Trak stores and the opening of new stores that brought the total number of units to 807, CSK Auto cracked the $1 billion mark in net sales in fiscal 1998. Operating profits jumped to $81.4 million.

CSK Auto began an accelerated effort to expand its operation. In June 1999 it purchased the 86 stores of Apsco Products Company that operated as Big Wheel or Rossi outlets. The $60 million deal added new markets in Minnesota, North Dakota, and Wisconsin, bringing the total number of CSK Auto stores to 914, now spread across 13 states. The company elected to retain the Big Wheel and Rossi names for these units. In August CSK Auto made an even larger purchase, paying $143.2 million to PACCAR Inc. for 192 stores that operated under the trade names of Grand Auto Supply and Al's Auto Supply in the states of Washington, California, Idaho, Oregon, Nevada, and Alaska. The deal increased the CSK Auto chain to more than 1,100 stores.

Selling Online: 1999

In 1999 CSK Auto made an aggressive entry into the e-commerce world with the introduction of a wholly owned Internet subsidiary called CSKAUTO.COM. Although there were online sites already selling auto parts, CSK Auto became the first of the traditional auto parts retailers to offer a full assortment of parts and accessories on the web. The site was integrated with CSK Auto's order management and credit card authorization system to take advantage of the company's existing electronic infrastructure. Parts for cars, vans, and trucks dating back to 1960 were available on the site.

In August 1999 CSK Auto bolstered its Internet initiative when it acquired Automotive Information Systems (AIS) for approximately $10 million. AIS, since its inception in 1987, had been building a database of repair information, appropriate for do-it-yourself customers as well as experienced mechanics. Fielding more than 250,000 inquiries a year for repair information from 15,000 repair shops, the 32 master technicians working for AIS compiled a comprehensive body of vehicle-specific information, including how to diagnose problems and make repairs. Just as important to CSK Auto was AIS's role as the key content supplier to Microsoft's highly popular CarPoint web site, which boasted three million unique visitors each month. AIS provided CarPoint visitors with recommended maintenance schedules for over 1,200 vehicles and repair cost estimates based on national averages. The next step for CSK Auto was to forge a direct relationship with CarPoint. In September 1999 it became the site's exclusive auto parts web provider. Visitors to CarPoint looking for repair information would be directly linked to CSKAUTO.COM in order to easily purchase the necessary parts or accessories. In essence, this relationship was the ultimate in targeted advertising.

CSK Auto added to its online presence early in 2000 with the announcement that along with Advance Auto Parts and Sequoia Capital, a Silicon Valley venture-capital company, it was launching PartsAmerica.com. The new entity would feature a 'bricks-to-clicks' strategy that would take advantage of the chains' 2,700 stores to offer same-day parts delivery to both repair shops and consumers. Because Advance Auto and its 1,600 outlets operated out of the East and Midwest, and CSK's 1,100 outlets were located in the West, the two chains were not direct competitors, even though both sold parts on the Internet. By combining forces via the web they would be able to create a network of stores that covered all 50 states. Moreover, because the chains already had 3,000 vehicles delivering to repair shops, an infrastructure was in place to serve consumers doing repair work at home.

In 2000 CSK Auto also continued to grow its traditional business. In May it acquired the assets of All-Car Distributors, Inc. for approximately $865,000 in cash and the assumption of approximately $3 million in debt. CSK Auto thus added 22 stores to the Checker Auto Parts roster: 21 units in Wisconsin and one in Michigan. The transaction helped CSK Auto to build its presence in the Wisconsin market without overlap. None of the AllCar stores had been in direct competition with Checker stores.

Results for fiscal 1999 reported in March 2000 showed that CSK Auto had increased its net sales from $1 billion to $1.23 billion, and operating profits jumped from $82.4 million to $119.6 million. Industry sales reached $10 billion, a significant milestone, but hardly explosive growth. The environment of the automotive aftermarket parts and accessories business remained one in which too many sellers were chasing too few buyers, and a major chain like CSK Auto had no choice but to continue to expand, either by clicks or by brick, or risk becoming the victim of a reckoning that was sure to one day visit the industry.

Principal Subsidiaries: CSK Auto, Inc.; Schuck's Distribution Company; Kragen Auto Supply Company; TRK Socal, Inc.; CSKAUTO.COM.

Principal Competitors: AutoZone, Inc.; The Pep Boys-Manny, Moe & Jack.

U.S. Chemical Production in the Wake of World War I

When World War I broke out in 1914, George Eastman watched the supply of essential materials arriving from European producers to his company, the Eastman Kodak Company, slow to a trickle. The ramifications were nearly disastrous. The company had grown dependent on European manufacturers for many of the raw materials required to sustain its operations, particularly photographic paper, optical glass, and gelatin, without which Eastman's photography empire would shrivel into insolvency. Also of great importance and in short supply during the war years were the numerous chemicals crucial to the photography company's production processes, including methanol, acetic acid, and acetone. As the war dragged on, Eastman's predicament grew increasingly severe, and film production at Eastman Kodak's manufacturing facilities in Rochester, New York, nearly ground to a halt.

Determined to ensure Kodak's future self-reliance, Eastman decided the most prudent solution was to develop an independent supply of chemicals. Accordingly, after the conclusion of the war, Eastman and other Kodak delegates began searching for a suitable location for a Kodak-owned and -operated chemical production facility. As Kodak employees were scouting the country, a resident of Kingsport, Tennessee, named J. Fred Johnson was conducting a nationwide search of his own, hoping to sell a half-built wood distillation plant to an interested party. Johnson, an employee of the Kingsport Improvement Company, was attempting to revitalize Kingsport's economy, which had thrived during the war but was limping along at the war's conclusion, bereft of the business generated by the manufacturing industries that had temporarily established operations in Kingsport for war-related work.

One company that had come to Kingsport during the war was the American Wood Reduction Company, which had contracted with the federal government to construct a wood distillation plant for making methanol and other related chemicals. Before the plant was finished, however, the war ended and American Wood Reduction cut its ties to Kingsport, leaving a lone watchman to stand guard over the partly constructed facility. After the retreat of American Wood Reduction, Johnson began his search for an industrial concern that could use the idle wood distillation plant.

By 1920 Kodak and Johnson had found each other, and a group of Kodak representatives led by Perley S. Wilcox, a future chairman of Kodak and an employee since 1898, arrived in Kingsport to examine the half-built wood distillation facility Johnson was eager to sell. Finding it to their liking, the Kodak group pushed for its acquisition, and later that year George Eastman authorized the purchase of the plant and surrounding acreage for $205,000. Wilcox was named director and general manager of the new company, becoming the first leader of Tennessee Eastman Corporation, a Kodak subsidiary.

Shortly after the construction of the wood distillation plant was finished, the solitary watchman who had guarded an architectural skeleton was replaced by more than 300 Tennessee Eastman employees, who were given the task of meeting Kodak's substantial chemical needs. Kodak's Rochester facilities required 40,000 gallons of methanol per month, in addition to other necessary chemicals such as acetic acid and acetone.

Tennessee Eastman delivered its first shipment of methanol to Rochester in July 1921. The company generated $35,000 in sales after its first year, but its total production fell short of Kodak's chemical needs for the next several years. In addition, the Kingsport plant was unprofitable and would remain so long after its production volume was raised to a sufficient level.

Product Diversification in the 1920s and 1930s

By the mid-1920s Tennessee Eastman was satisfying Rochester's monthly methanol needs, but weak profits continued to hound Tennessee Eastman for another decade. To improve profitability, the company began marketing the byproducts created from the Kingsport plant's distillation processes, including charcoal, tars, wood preservatives, and other process wastes. Charcoal powder and wood tar were combined to form a charcoal briquette that the company sold as cooking and household fuel, transforming the 300 railroad cars of charcoal dust the company produced each month into a money-making sideline business. Other byproducts from the Kingsport plant also were marketed, including coal tars and various derivatives of acetone (which were sold to sugar refineries), as well as lumber.

Process economy started Tennessee Eastman down the road toward profitability and provided a springboard for diversification into segments of the chemical industry exclusive of Kodak's needs. Sales in 1930 were $1.95 million, with acetic anhydride and lumber ranking as the company's two major products. During the 1930s, Tennessee Eastman began to make pivotal contributions to its parent company's Rochester facilities, beginning with its manufacture of cellulose acetate in 1930. Kodak had experimented with using cellulose acetate as a film base back in 1907, striving to replace flammable nitrocellulose with a nonflammable alternative. The company's innovation quickly became the industry standard.

Perhaps more important, Tennessee Eastman distinguished itself as a leader and pioneer in the chemical industry through its production of acetate yarn. An experimental acetate yarn plant had been constructed in 1928, and by 1931 the Kingsport-based facility had begun large-scale production, churning out 287,000 pounds of yarn that year alone. Within a decade, Tennessee Eastman's acetate yarn was recognized throughout the textile industry as the best quality yarn on the market, securing the company's economic stability for the next two decades and paving the way for the development of other mainstay products.

One year after large-scale production of acetate yarn had begun, Tennessee Eastman began producing Tenite cellulosic plastics, which were used for radio parts, toys, telephones, and automobile steering wheels. That year, 1932, also was the first year Tennessee Eastman's trade sales exceeded its sales to Kodak.

Reorganization: 1950-68

By 1940 Tennessee Eastman was recording nearly $30 million in annual sales, an exponential increase from the $1.95 million generated ten years earlier. The increase had been fueled primarily by the company's production of acetate yarn, which by this point was Tennessee Eastman's single major product, as it would be a decade later, when annual sales stood at $130 million. Kodak organized an additional chemical subsidiary in 1950, Texas Eastman Company, then formed Eastman Chemical Products, Inc., in 1953 to serve as the marketing arm for both Texas Eastman and Tennessee Eastman. Tennessee Eastman, meanwhile, had undergone a name change, switching its corporate title from Tennessee Eastman Corporation to Tennessee Eastman Company in 1951. Although the name change was minor, a significant development occurred contemporaneously that dramatically altered the company's future. During the early 1950s, Tennessee Eastman developed cellulose acetate filter tow, which was used in cigarette filters, giving the company a product that drove sales upward for the next half century and supplanted acetate yarn as its mainstay product.

With filter tow sales leading the way, Tennessee Eastman registered $244 million in annual sales in 1960, continuing to record exponential leaps in annual revenues decade by decade. In 1968 the Eastman Chemicals Division of Eastman Kodak Company was formed, bringing together the various chemical concerns within Kodak's corporate structure and unifying them as a division. When it was organized, the chemicals division included Tennessee Eastman, Texas Eastman Company, Carolina Eastman Company, Eastman Chemicals Products, Inc., and the following related marketing organizations: Holston Defense Corporation, Ectona Fibers Limited, Bay Mountain Construction Company, and Caddo Construction Company.

With this collection of companies banded together, annual sales generated by the division shot upward, swelling to $588 million in 1970, a revenue total derived in large part from the production of filter tow and polyester fibers. Late in the decade, the Eastman Chemicals Division introduced polyethylene terephthalate (PET) resin, used to make plastic containers. The addition of PET to the division's product line helped annual sales exceed $2 billion by the beginning of the 1980s.

In 1990 Kodak reorganized its chemicals division, renaming it Eastman Chemical Company. Annual sales by this point exceeded $3.5 billion, ranking the company among the largest chemical concerns in the world. With large market shares in PET and cellulosics, Eastman Chemical entered the 1990s as the jewel of the Kodak empire. Kodak, on the other hand, was not faring as well. As the decade progressed, debt began to mount, and Eastman Chemical was put in the awkward position of supplying cash to its debt-heavy parent, a reversal of roles for the former captive chemical supplier that complicated its corporate priorities and hobbled its investments in chemical operations.

As a result, Kodak spun off its chemical subsidiary to Kodak shareholders on the first day of 1994, creating the tenth largest chemical company in the country. As part of the spinoff, Eastman Chemical was saddled with $1.8 billion in long-term debt. By the end of its first year as an independent company, however, Eastman Chemical had whittled its debt down by $600 million, reducing its ratio of debt to total capital from 63 percent to 48 percent during a 12-month span. Sales also continued to grow into the mid-1990s, surpassing the $5 billion mark for the first time in 1995.

Globalization in the 1990s

Eastman Chemical moved toward its future as an independent chemical supplier supported by four core product groups: container plastics, specialty polyester packaging plastics, coatings materials for paints and solvents, and filter tow. Like other major chemical companies, Eastman realized that international expansion was the only way to maintain a competitive edge into the next century. Overall, the U.S. chemical industry saw significant growth in exports in the first half of the 1990s, from $43 billion in 1991 to $64.7 billion in 1996, and Eastman was no exception. In 1994 approximately one-third of Eastman's $4.3 billion in total sales came from international markets; by 1997 foreign sales exceeded $1.8 billion and accounted for 39 percent of the company's total sales. Much of the increase was the result of increased production capacity, both at home and abroad. In 1996 and 1997, Eastman opened new container plastics manufacturing operations in Mexico and Spain; in 1998 it began production at plants in Argentina and Malaysia, and at two new plants in The Netherlands. Also in 1997, Eastman Chemical Ltd., Singapore took steps toward establishing a niche in the burgeoning Chinese market, investing several hundred million dollars into new facilities in the Special Economic Zone of Shenzhen, China.

Eastman's expansion plans ultimately got ahead of economic reality, however, and by 1997 the company found itself burdened with significant production overcapacity. This reversal of fortune was in part the result of decreased demand for the company's specialty and performance products, particularly in the United States and China. Increased competition, brought on by globalization and the struggle over emerging marketplaces, also contributed to the excess capacity. The subsequent lower prices and decreased volume were accompanied by rising raw material costs, and Eastman suffered steadily decreasing earnings from 1996 to 1998.

The company responded to this sudden downturn with an aggressive restructuring plan. It implemented a drastic cost-reduction program, pledging to cut $500 million in expenses between 1997 and 2000, and in 1999 it reorganized itself into two business segments, polymers and chemicals. In addition, by the end of 2000 the company divested itself of the propylene glycol segment of its fine chemicals division, to focus its attention on potentially more lucrative adhesives, inks, and coatings markets. Toward this aim, in 2000 the company announced its intention to acquire the hydrocarbon resins and part of the rosins resins concerns of Hercules, Inc.

In the late 1990s Eastman also made strides toward establishing Internet capability. The commodity nature of chemicals made them a logical fit for e-commerce, since they were subject to fairly regular international standards, which made the selling process relatively straightforward. Eastman was determined to take advantage of the new technology, and in October 2000 it announced a plan to make its chemicals and polymers available through online business-to-business relationships with existing customers, as well as through its web site and a number of virtual marketplaces.

This reorganization, along with the shift to e-commerce, made some downsizing inevitable, and Eastman's workforce was reduced by almost 2,000 employees between 1996 and 1999. By 1999, however, Eastman saw a slight increase in business for the first time in four years, and in 2000 it was able to announce a plan to increase its PET manufacturing capacity by 110,000 metric tons a year. By the end of the third quarter of 2000 the company was on a pace to exceed $5 billion in sales for the first time since 1995, although continually rising fuel prices and the general slowdown of the world's economy made the future far from certain.

Principal Subsidiaries: ABCO Industries, Incorporated; Lawter International, Inc.; McWhorter Technologies, Inc.; Genencor International, Inc. (50%); Primester (50%); Jager, Fabrik Chemischer Rohstoffe GmbH & Co. (Germany); Eastman Chemical, Europe, Middle East and Africa, Ltd. (The Netherlands); Chemicke Zavody Sokolov (Czech Republic; 76%); Eastman Chemical Ltd. (Singapore).

Principal Divisions: Arkansas Eastman Division; Carolina Operations Division; Tennessee Eastman Division; Texas Eastman Division.

Principal Competitors: BASF Aktiengesellschaft; The Dow Chemical Company; Union Carbide Corporation.

Chronology

• Key Dates:

• 1917: Schuck's Auto Supply is founded in Seattle, Washington.
• 1947: Kragen Auto Parts is founded in San Jose, California.
• 1969: Checker Auto Parts is founded in Phoenix, Arizona.
• 1987: Jules and Eddie Trump combine Schuck's, Kragen, and Checker chains to form CSK Auto, then known as Northern Automotive.
• 1998: CSK Auto makes public offering of stock.
• 1999: CSK Auto becomes first major auto parts retailer to sell products on the Internet.