Annual Report 2006
Mekonomen Norge AS Rosenholmveien 25 Postboks 17 NO-1421 Trollåsen Phone +47-66 81 76 90 Fax + 47-66 99 11 51 www.mekonomen.no
Mekonomen Danmark A/S Wichmandsgade 12 DK-5000 Odense C Phone +45-66 13 67 00 Fax +45-66 14 76 71 www.mekonomen.dk
24 Denmark 26 Products
28 Mekonomen Service Centre 30 Stores
32 Employees
34 The Mekonomen share 36 Corporate Governance
Accounting
40 Five-year summary 42 Administration report 44 Annual accounts
53 Accounting principles and notes 70 Auditor’s report
71 Definitions
71 Information to shareholders 72 Board of Directors
73 Executive management 74 In Memoriam
75 Addresses
parts and accessories to workshops and car- owners through its nationwide network of stores and partner stores in Scandinavia. Efficient logis- tics are critical for Mekonomen’s success and a prerequisite for a high degree of service.
Position and key ratios 2006
Sweden Norway Denmark Scandinavia
Market share excluding tyres, % 12 12 11 12
Market position, no. 1 1 2 1
Total sales, SEK m 1,218 537 663 2,449*
Operating profit, SEK m 229.5 63.3 16.7 261.3
Operating margin, % 18.9 11.8 2.5 10.7
EBIT, SEK m 197.8 57.7 –6.2 220.1
No. of stores 115 40 38 193
– of which Group-owned 88 21 38 147
Employees, end of period 679 193 383 1,255
* Incl. eliminations, central items and other revenues.
0 600 1,200 1,800 2,400
0 70 140 210 280
SEK m SEK m
02 03 04 05 06
Sweden Norway Denmark
Operating profit
0 60 120 180 240
0 5 10 15 20
SEK m %
02 03 04 05 06
Cash flow from ongoing operations
Return on shareholders’
equity
Operating revenue and Operating Profit Cash flow and return on shareholders’ equity
Despite my relatively short tenure at Mekonomen, I have been impressed by the fantastic commitment to the company on the part of the staff and employees. Coming from outside, I have been able to appreciate the fact that the Mekonomen spirit is present and contributes to a positive work environment.
The future
Reviewing Mekonomen’s strategies will be an important task going forward. Mekonomen is no longer a small company and it is necessary to adopt strategies that apply to the company’s current size.
On a personal level, it has been a fantastic learning experi- ence to be a part of Mekonomen’s operations.
There are a significant number of challenges ahead, but it is with great confidence that I now hand over the baton to Håkan...
SEK 2,449.8 m. EBIT increased by 29.9 per cent to SEK 220.1 m, corresponding to an EBIT margin of 9.0 per cent. Adjusted for non-operating costs dur- ing the year, the EBIT margin was 10.7 per cent.
Mekonomen experienced a very strong showing last year, clearly demonstrating the strong business culture that exists within the company. I also want to take this opportunity to thank Owe Andersson for all his successful years as President of Mekonomen. Since coming aboard as Acting President at the Extraordinary General Meeting in August 2006, my pri- mary responsibilities have involved coordinating and structur- ing management efforts and concluding a number of projects to create a common foundation and stability within the Group in the face of future challenges.
Special focus was placed on a few select areas to ensure that there would be a common platform for all units moving forward in 2007.
One such area was to finalize the revision of contracts within the Mekonomen Service Centre concept. Streamlining the concept has involved operating fewer service centres with a higher level of quality. Today, as a result of that higher quality, we are receiving inquiries from entirely new players interested in becoming part of the concept.
Mekonomen has experienced relatively strong growth recently, although not all aspects of operations have kept pace with that expansion. It has been important to review routines in order to generate stability and a common base to advance to the next stage of development. Certain areas that were lagging behind have been revised, such as the need for consolidated administration and for control systems that are identical in various markets.
Roger Gerhman
Kungens Kurva, 14 February 2007
I am honoured and very excited to have taken over responsibility for such a successful company as Mekonomen. Mekonomen’s position remains strong, while the industry itself is undergoing change, a factor that will require us to develop further. I am currently getting to know our customers, my colleagues and the company from the bottom up. We will then set a course for how Mekonomen will capitalize on the opportunities that lie ahead during the coming years.
We are facing increasingly intense competition. The pace of change in product and concept development has accelerated in an increasingly global arena that is simultaneously becom- ing more local. We will be encountering more knowledgeable clients and customers, who will place even higher demands on us as a company.
I am convinced that Mekonomen, with its customer offer- ings, talented employees and strong ownership will be able to further improve its competitiveness and advance our positions.
I look forward to leading that journey.
Håkan Lundstedt
President and CEO
Kungens Kurva, 15 February 2007
Mekonomen’s business concept is based on the following:
Group-owned retail chain
Mekonomen’s chain of wholly owned stores and cooperating stores forms the Group’s sales channel. Its customers include brand-independent workshops, car-owners and brand-based workshops. Mekonomen must be perceived as an equivalent alternative to the branded-goods sector for spare-parts pur- chases. Part-ownership by the store manager has been a key part of Mekonomen’s concept right from the start.
Efficient logistics
Mekonomen aims to have the highest delivery standard in the market. The means to achieve this include ensuring an efficient flow of goods from manufacturers via the Group’s own wholesale business to stores and, finally, to the customer.
Stores are able to maintain complete inventories through overnight deliveries five times a week from the company’s own central warehouse.
High degree of service
Mekonomen aims to ensure a degree of service whereby the customer can obtain all high-frequency and most low-fre- quency spare parts directly from the store, whereas all other parts are delivered not later than the day after being ordered.
A high level of service also requires qualified employees to assist customers by providing informed advice. The aim is to provide a degree of service of not less than 97 per cent.
Full range
The range must be complete – that is, so that workshops can obtain spare parts for different car brands and year models from a single supplier. Mekonomen shall also offer high-quality products from leading manufacturers, which are often also the suppliers to the car industry. The range also includes a wide range of accessories, which is primarily aimed at car-owners.
Most of the products in the range are to be supplied by the company’s own wholesale business.
Growth goals
Mekonomen’s growth goal is to achieve an annual sales in- crease of 10 per cent. Expansion must not occur at the expense of financial stability.
Financial goals
Operating margin of not less than 8 per cent. Long-term equity/assets ratio must not fall below 40 per cent.
Dividend Policy
The intention of the Board of Directors is that Mekonomen will distribute a dividend of at least 50 per cent of profit after tax. When future dividends are established, consideration will be given to investment needs, but also to other factors that the Board of Mekonomen may find significant.
Strategy
Mekonomen must continuously exploit the advantages of being a fully integrated chain whose growth generates profit in both its wholesale and its retail operations. To achieve this goal, Mekonomen shall accomplish the following:
Continue to grow in the Swedish, Norwegian and Danish markets, and establish its concept in new geographic markets.
Increase the number of stores in the chain by establishing new stores and acquiring others.
The company has gained 58 new wholly-owned stores as new establishments or acquisitions since 2002.
Refine the Mekonomen Service Centre concept.
The Mekonomen Service Centre concept and its development are extremely important for Mekonomen’s market positioning.
In order to emphasise and quality-assure the Mekonomen Service Centre concept as a credible alternative in the Swedish market, Mekonomen replaced the earlier two-party agreements between the store and the service centre with new, three-party agreements between the service centre, the Mekonomen store
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Stores Of which group-owned
04 05 06
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Stores Of which group-owned
04 05 06
100 50 0 150 200 250
55 60 65 70 75 80 % 0.0
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02 03 04 05 06
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Numbers
02 03
Stores Of which group-owned
04 05 06
100 50 0 150 200 250
55 60 65 70 75 80 %
Incorporate new product groups that are part of the stores’
product range into the company’s wholesale business
In 2006, purchasing by the Swedish stores from the com- pany’s own wholesale business accounted for 81 per cent of the purchasing, compared with 81 per cent in 2005.
Further develop the Internet website to support and increase sales.
In 2001, Mekonomen published its own electronic spare-parts catalogue on its website. Using car registration numbers, the right spare parts can be found for 4.2 million cars in Sweden, 2.0 million cars in Norway and 1.9 million cars in Denmark.
In 2006, www.mekonomen.se had an average of over 350,000 visitors a month.
Further develop the cooperation concept.
Mekonomen cooperates with 80 of a total of 120 schools of auto- motive engineering in Sweden, which use the Mekonomen- developed computer software Mekotech 2000, free of charge.
Teachers from the schools with which Mekonomen has a substantial degree of cooperation are continuously trained at Mekonomen’s training premises in Strängnäs.
Develop new cooperation concepts in response to the new commercial structure of automotive retailing.
Mekonomen endeavours to develop new forms of cooperation with former brand-based workshops that are expected to become multiple-brand workshops in the future.
EBIT Margin
Equity/Assets Ratio
Stores
Sales growth amounted to 5.0 per cent in 2006.
In 2006, Mekonomen’s EBIT margin was 9.0 per cent.
Mekonomen’s equity/assets ratio at year-end was 58.0 per cent.
At year-end, Mekonomen had 193 stores, 76 per cent of which were Group-owned. Since 2002, the number of stores has increased by 59, of which the percentage owned by the company has increased by 12 percentage points.
the future. Longer service intervals and an expand- ing fleet of aging cars are giving rise to changes in profitability requirements. Structural changes and new legal requirements have established the frame- work – revised consumption patterns will provide the opportunities for new players.
Structural changes and EU regulations
The EU’s exemption regulation to anti-competition rules, which provide an entire industry a general exemption from open competition regulations, has been a highly limiting factor for structural change within the automotive industry.
The group exemption for vehicle distribution was created in the mid-1970s in an effort to protect consumer requirements in terms of qualified aftermarket services. Step-by-step, those rules have been eased and further relief is anticipated when current group exemptions expire in 2010. The latest step towards free competition was taken on 1 January 2003 when brand monopolies were eliminated. In its summer 2002 ruling, the EU Commission decided that select distribution contracts – where retailers and workshops must fulfil quality require- ments determined by the manufacturer in order to sell, service and repair new automobiles – is in the interest of consumers since it provides a means of securing qualified employees that can assist in technical and safety-related problems, thereby contributing to ongoing product quality and safety improve- ment. The attitude of lawmakers has changed over time, from protecting branded workshops to forcing vehicle manufacturers to share information with brand-independent workshops – all to ensure that consumers can purchase workshop services and spare parts at competitive prices.
Auto dealers and their workshops have traditionally been in a weak position relative to the automakers. The terms of dealer contracts have been almost single-handedly determined by manufacturers, who have been able to penalise “disobedient”
dealers. Dealers, in turn, have perceived contracts as harsh and have almost routinely opposed manufacturer requirements for investments. Over time, ownership concentration has increased on the dealer side, resulting in a stronger position.
A well-known example is Jönköping-based Holmgrens, which markets nine different brands and is therefore not at all de- pendent on individual manufacturers as a small dealer selling only one or two brands would be. There are numerous exam- ples such as Bilia, which previously sold Volvo and Renault, and has more recently taken on the sale of Ford and Land Rover as well as BMW, Honda, Hyundai, Kia, Mini and Nissan. Synergies are attractive on the workshop side, while links to a particular auto brand limit their ability to open up all-make workshops, as lower price levels risk undermining the profitability of branded workshops.
The link between auto manufacturers and who is responsible for service has loosened up considerably since the current EU regulations went into effect in 2003. The difference between brand-dependent and brand independent players has dimin- ished. Independent operators are now able to perform service on new automobiles with the new car warranties remaining in ef- fect, providing the service meets the auto manufacturer’s quality requirements. With the selectivity requirement, brand-inde- pendent workshops have the right to become authorized if they meet the auto manufacturer’s requirements. Branded workshops can acquire spare parts from suppliers other than those recom- mended by the manufacturer and, as long as the spare parts are of the same quality as the originals, they can be sold as original parts and utilized for service and repairs.
Branded shops have long been able to maintain or improve their profitability since they have enjoyed a natural loyalty from customers. In recent years, however, the first signs of increased competitiveness have arrived and branded workshops have started offering discounts on routine maintenance service.
Branded workshops have, for several decades, struggled with problems that have seemed difficult or impossible to resolve.
In Sweden, as in other countries, routine auto testing is con- ducted, where problems are planted in cars that are then hand- ed in for service at a brand workshop. Results are routinely weak, with the problems going undetected. The explanation is usually carelessness, which is due to the fact that mechanics have an incentive to be careless – their compensation system provides a bigger pay cheque to the mechanic that works quickly than to the one who is thorough. A quick mechanic can work three times faster than a slow one, which has a positive effect on the profitability of the auto dealer – as long as the sloppy work is not discovered. Little testing has been done to date on independent workshops, but it is likely that even they will be tested as they begin to take a larger share of the market. Against the backdrop of a certain general level of scepticism towards auto repair workshops, it is very important for independent companies that would like to capture market share to ensure the level of quality of the services they offer.
That scepticism is due to the nature of the service – servicing and repairing of automobiles is a tedious and undesirable task.
At the same time, that is a good reason to assume that there is significant potential for independent workshops. Modern consumers prefer to invest their money in other, “more enter- taining” consumption than expensive brand services, if the corresponding quality can be obtained at an independent auto repair shop. Brand workshops have improved their customer processes significantly in recent years, and customer expec- tations have risen, so quality will be a survival criterion for independent workshops.
Anders Parment
PhD in economics, strategy consultant and auto industry analyst
ket for vehicle accessories and spare parts is some
sek 40 billion, with spare parts representing sek 22 billion, bodywork and paint sek 10 billion and tyres and wheels sek 8 billion. Mekonomen estimates that the Norwegian and Danish markets combined are about the same size as the Swedish market.
Market players and product segments
The market can be divided into two main segments: the branded goods sector and the brand-independent sector.
The branded-goods sector
At present, most branded retailers consist of a showroom sell- ing new and used cars of their own brand, trade-in vehicles of various brands, and a workshop that conducts servicing and repairs of these cars. In addition, such players sell varying volumes of their own brands of spare parts to workshops and to some car-owners. When branded workshops repair traded- in cars of a different brand, they purchase spare parts from brand-independent companies. Generally, branded-goods sector pricing is higher than brand-independent spare parts stores and workshops.
The brand-independent sector comprises specialist retailers and discount stores. In Sweden, there are more than 400 specialist spare parts retailers. These stores, also called local retailers, account an estimated 90 per cent of the brand-inde- pendent market for workshops and car-owners. In Sweden, the four largest spare parts players are Mekonomen, the Meca Group, the KG Knutsson Group and APE Fordonskompo- nenter. All offer ranges covering most car brands, with their main customers being brand-independent workshops.
The markets in Norway and Denmark have a similar structure to that in Sweden. The largest spare-parts whole- salers in Norway in addition to Mekonomen are AS Sørensen
& Balchen, the Meca Group, Hellanor (owned by Hella) and Romnes/Automateriell. The four largest players in the Danish market are FTZ (wholly owned by Hella), Mekonomen, the Meca Group and Auto-G.
The discount retailer segment is dominated by a few com- panies: Biltema and Micro in Sweden, Torshov Bilrekvisita in Norway, and T. Hansen and Høyer in Denmark. Biltema sells not only auto parts but also a large range of leisure products and other items, making Biltema an indirect competitor in the brand-independent retail segment. Discount players mainly market directly to car-owners.
Spare parts and accessories Tyres and wheels Body parts and paint Sweden Norway Denmark
SEK
22
billionSEK
8
billionSEK
10
billion50
%25
%25
%Spare parts and accessories Tyres and wheels Body parts and paint Sweden Norway Denmark
SEK
22
billionSEK
8
billionSEK
10
billion50
%25
%25
%Spare parts market in Scandinavia
There are some 13,000 workshops in Scandinavia, of which 10,000 are brand-independent and, accordingly, 3,000 branded workshops. Workshops in Denmark and Norway are generally better equipped in terms of machinery, while in Sweden there are a larger number of closely-held companies. In Norway, specific environmental and disposal trade-licensing require- ments must be met in order to establish new workshop opera- tions. Sweden and Denmark do not have such start-up controls.
Vehicle stock continues to grow
At the end of 2006, the total size of vehicle stocks in Scandi- navia was approximately 8.3 million vehicles. Divided out ac- cording to market, Sweden accounted for 4.2 million, Norway for 2.1 million and Denmark for 2.0 million vehicles.
New car sales closely follow economic cycles and are rela- tively easy to forecast. The total number of newly registered cars in Scandinavia in 2006 was 548,205, an increase of 3.4 per cent. In Sweden, new car sales increased by 3.1 per cent and totalled 282,766. Norway had 109,164 new car registrations, a decline of 0.7 per cent. In Denmark, new car sales increased to 156,275, an increase of 5.0 per cent.
Sweden has one of the oldest vehicle stocks
Sweden and Norway have, partly due to annual car inspec- tions, some of the oldest vehicle stocks in Europe. In Sweden, 40.5 per cent of the vehicle stock was ten years old or older in 2006, compared with 37 percent in 1990. There is a similar pat- tern for Norway’s vehicle stock. In Denmark, over 37.7 per cent of cars were ten years old or older at the end of 2006.
450,000 375,000 300,000 225,000 150,000 75,000 0 4,500,000
3,750,000 3,000,000 2,250,000 1,500,000 750,000 0
450,000 375,000 300,000 225,000 150,000 75,000 0 4,500,000
3,750,000 3,000,000 2,250,000 1,500,000 750,000 0
450,000 375,000 300,000 225,000 150,000 75,000 0 4,500,000
3,750,000 3,000,000 2,250,000 1,500,000 750,000 0
Vehicle stock New car registrations
Sweden
Norway
Denmark
96 97 98 99 00 01 02 03 04 05 06
96 97 98 99 00 01 02 03 04 05 06
96 97 98 99 00 01 02 03 04 05 06
prehensive range of spare parts and accessories to workshops and car-owners through its nationwide network of wholly owned and co-operating stores.
Effective underlying logistics are crucial to Meko- nomen’s success and a prerequisite for maintaining high service levels.
Mekonomen is active in the free after-market, where brand- independent enterprises sell spare parts to brand-independent workshops, branded workshops, and car-owners who perform their own repairs. Smooth logistics and a complete, high-quality product line are crucial to Mekonomen’s success and a prerequi- site for being able to achieve and maintain a high level of service.
The customer should be able to receive all high-frequency and most low-frequency spare parts directly from the store, while other spare parts should be delivered no later than one day after ordering. Brand-independent workshops can now perform new car servicing while maintaining warranties and several branded workshops are expanding their operations to include more car makes, which offers greater opportunities for Mekonomen to deliver spare parts regardless of make.
Integrated spare parts chain
Mekonomen is an integrated spare parts chain with a central- ized warehouse that delivers to all of the Group’s stores. The Group has the market’s most advanced and effective logistics solution. The branded goods sector markets spare parts as originals in packages labelled with the logo of the respective car brand. Mekonomen sells identical products that are either original spare parts, or of a corresponding quality, under the car part manufacturer’s brand.
Spare parts sales differ from other retail markets because demand is dependent on maintenance, care, age and size of vehicle stocks, all of which affect demand for servicing
economic downturns, while demand on auto manufacturers increases during an economic upswing, thus it is apparent that Mekonomen operates in an acyclical sector that is relatively sensitive to economic trends.
Mekonomen has a single sales channel – its stores – which stock a comprehensive range of spare parts for cars of various brands and years. Stores receive overnight deliveries five days a week from Mekonomen’s central warehouse at Strängnäs, west of Stockholm. Spare parts are delivered, with a few exceptions, to stores prior to 7:00 a.m. the day after ordering.
Approximately 40 per cent of Mekonomen’s sales in Sweden and Norway are to consumers, with the remainder sold via distribution to workshops. In Denmark, almost all sales are directly to workshops.
Logistics save time and money for workshops Mekonomen’s most important customers are workshops. The fact that Mekonomen has a comprehensive range, a high serv- ice level and can deliver all spare parts immediately is the most important incentive for workshops. While workshops plan their purchases, in many instances, the spare parts required are not apparent prior to the vehicle arriving in the workshop.
Mechanics can therefore avoid costly delays by accessing the right spare parts quickly, increasing the number of billable hours and workshop profitability. The ability to handle the inflow of spare parts in an efficient manner is a key aspect of Mekonomen’s operations. To facilitate day-to-day operations and free up resources, Mekonomen also provides a proprietary PC support system, including catalogues, labour times and administrative systems for its workshop customers.
critical aspect of Mekonomen’s operations for guar- anteeing high delivery fulfilment. Logistics should feature the efficient flow of goods from producer to Mekonomen’s central warehouse, on to stores, and finally, to car-owners.
A single central warehouse
Since 2005, all Mekonomen stores have been served by a single central warehouse, with daily deliveries from Strängnäs.
Distributing spare parts from a central warehouse to all Meko- nomen’s stores in Sweden, Norway and Denmark enables Mekonomen to cost-effectively offer the stores a high level of service and delivery reliability.
A shared product range results in higher purchasing volumes, better purchase prices and higher productivity. The central warehouse at Strängnäs processes a daily total of about 24,000 order lines for delivery to stores, although volume can vary between 19,000 and 32,000 order lines. The group has a proprietary IT system for warehousing that enhances efficiency, and reduces the risk of picking errors. In order for Mekonomen to fulfil its goal of being perceived as a reliably supplier, every order must be delivered accurately and on-time.
All store orders are picked and dispatched on the day of order, freighted by truck overnight, usually arriving at stores before 7:00 a.m. The IT-based warehousing system uses hand-held bar code reader terminals to pick customer orders and receive goods and for ongoing real-time inventory, stock relocation and top-ups. The system enhances Mekonomen’s prospects of correctly and continuously filling the almost six million order lines processed annually at the central warehouse.
Mekonomen’s proprietary stock optimisation and forecasting system was further developed during the year, enabling the Group to offer the highest possible service level cost-effec- tively. The system embeds modules for simulation, forecasting, purchasing and stock optimization, which further simplifies and improves collaboration with suppliers. The improvement work that is continuously in progress creates not only perma- nent rationalisation gains but also guarantees that the system is able to manage ever-expanding order flow.
Stores 115 stores in Sweden 40 stores in Norway 38 stores in Denmark
Workshops
6,000 workshops in Sweden (of which 329 are Mekonomen
Service Centres) 3,000 workshops in Norway (of which 321 are Mekonomen
Service Centres) 4,000 workshops in Denmark (of which 114 are Mekonomen
Service Centres)
Goods from
stores Goods from
workshops
Payment system
For maximum delivery fullfilment at lowest possible stock value
Goods in Order filling Allocation to correct store
Packing 170 suppliers
Goods
Orders
Goods Orders Orders Goods
Car-owner
Continuous growth for Mekonomen’s products is placing increasing demands on all control systems and processes, which need to be continually improved and developed in order to fulfil their tasks. Mekonomen regularly conducts efforts to develop the organization and ensure that support systems stay well ahead so that they are able to handle ever-expanding volumes. “Partnership” is a key concept and reflects well the target image that Mekonomen has for its relationship with key suppliers. Continually working to implement more intelligent logistical solutions is a key success factor.
Quality focus
At the Strängnäs central warehouse, and throughout the organization, Mekonomen’s product function has been work- ing intensively on continuously enhancing and developing procedures and work methods.
Managing daily deliveries to the Norwegian market has required, in addition to a functional logistics organization, close collaboration with the Swedish and Norwegian customs authorities resulting from the need to cross an external EU border. For the past two years, Mekonomen and two other companies have been part of a pilot project together with the Swedish and Norwegian customs authorities. This collabora- tion and project will continue during 2007 and is expected to become a permanent solution.
End
customer Workshop
Store Central
warehouse
Supplier
81%
Contractual supplier
13% Other
supplier
6%
170 suppliers
Refers to Swedish retail operations.
Mekonomen is an integrated spare parts chain offer- ing a complete range of spare parts and accessories to automotive workshops and individual car-owners through its own nationwide workshop chain and co- operating stores in Scandinavia. Efficient logistics are critical to Mekonomen’s success and a prereq- uisite for a high rate of deliveries. Mekonomen’s market share in Sweden amounts to approximately 12 per cent of the market.
2006 2005
Net sales, SEK m 1,217.5 1,149.3
Operating profit, SEK m 229.5 203.6
Marginal operating profit, % 18.9 17.7
EBIT, SEK m 197.8 170.2
Number of employees 684 670
Number of stores 115 115
– of which wholly owned 88 88
Number of workshops 329 365
Stores and workshops
As of 31 December 2006, there were 115 stores in Sweden, of which 88 were Group-owned and 27 co-operating stores.
Mekonomen’s store structure is continuously reviewed to optimize sales channels towards end customers.
1999, with the number of affiliated stores growing robustly since the start. The implementation of a new cooperation agreement during 2005, which was fully implemented in 2006, has resulted in the number of affiliated service centres declining in recent years. The new cooperation agreement was implemented in order to emphasise and quality-assure the Mekonomen Service Centre concept as a credible alternative in the Swedish market. The new agreements impose greater demands on service centres in terms of quality, purchasing and environmental standards.
Logistics
Having a well-functioning, efficient logistics system that ensures a high delivery rate is one of the most important com- ponents and key to the success of operations. Mekonomen’s central warehouse in Strängnäs is the hub of this operation and supplies all the Group’s stores with goods. The central warehouse came on stream at year-end 1998, has floor-space of 30,000 square metres and stocks a total of 57,000 item numbers. Mekonomen’s logistics consist of the effective flow of goods from the manufacturer to the central warehouse, on to stores, and finally to our customers, car owners.
In those instances where stores do not have the spare part in stock, an order is sent to the central warehouse in Strängnäs.
All store orders are picked and dispatched on the day of order, freighted by truck overnight, usually arriving at stores before 7:00 a.m. the next morning.
Market description
Sweden comprises some 50 per cent of the Scandinavian spare parts market. The estimated value of the total Swedish car accessories and spare parts market is some sek 22 billion, with spare parts and accessories worth sek 9 billion, accessories sek 4 billion, bodywork and paint sek 4 billion and wheels and tyres sek 5 billion.
In Sweden, the branded workshops have built up a very strong market position compared with other European mar- kets. The reason for this has to do with the fact that the car market is dominated by two strong domestic car manufactur- ers, Volvo and Saab, that together account for 40 per cent of the vehicle stock.
50 % 22 % 28 %
Share of total revenues
The specialist retail sector is comprised of over 400 spare parts stores with sales to car-owners and workshops. Combined, they account for an estimated 90 per cent of the brand-inde- pendent market. Sweden’s four largest spare parts players are Mekonomen, the Meca Group, the KG Knutsson Group and APE Fordonskomponenter. All these players have ranges cov- ering most vehicle brands, and their largest customer segment is brand-independent workshops. There is a cluster of discount players mainly targeted at the consumer, with Biltema and Micro being Sweden’s largest discount chains.
There are over 6,000 vehicle workshops in Sweden, of which about 1,000 are branded workshops.
Trends and drivers
The workshop sector is undergoing structural change. The trend is for smaller workshops to close down as their proprietors retire. However, these workshops must be replaced because the need for repair and servicing remains. The increased complex- ity of new cars and environmental requirements entail larger investments and higher fixed costs, requiring more mechanics in the workshop in order to achieve profitability. Over the next few years, Mekonomen will continue to promote the creation of new, larger workshops.
The discount (DIY) market, traditionally a major presence in Sweden, is declining as new cars become more complex.
Market communications
The intensive marketing campaign for the relatively new tyres product group continued to achieve greater market impact during the year. Seven different campaigns were also pro- moted during the year to increase in-store traffic. Efforts to position Mekonomen Service Centre continued, with spon- sorship of the weather report on a commercial radio network.
Mekonomen also ran direct advertising mailings to the local market of each store. The brand is broadcast on TV through sports arena advertising.
Mekonomen’s catalogue, the market’s largest spare parts publication, contains 900,000 references to about 6,000 vehicle models. Mekonomen’s entire spare parts range, some 57,000 items, is uploaded to Mekonomen’s website,
ists to find the right spare part and price by entering their car’s registration number. Customers can then e-mail their orders to the nearest Mekonomen store for collection.
The Internet spare parts catalogue also covers other parts of Mekonomen’s range such as accessories, consumables, tools and tyres. Tyres and spare parts are subject to stringent require- ments of correct documentation. Using Mekonomen’s spare parts catalogue, car-owners and workshops can easily find the correct size, profile and approved type of tyre for a car. During mandatory car inspections, automotive inspection centres check that cars are equipped with the approved type of tyre.
MekoCard is a debit card launched in early 2004, enabling customers to divide payments into interest-free instalments over a period of up to six months. The card is an important marketing tool, enhancing customer loyalty towards stores and workshops.
Focus in 2007
Quality assurance relating to Mekonomen Service Centre will continue in 2007. Significant resources and energy will be placed on solidifying and strengthening offerings. This effort has made the Mekonomen Service Centre concept a much more credible alternative to branded workshops in the Swedish market.
Mekonomen entered the Norwegian market in 2000 and is now the leading spare parts chain with 12 per cent of the market. Mekonomen Norway offers a broad range of spare parts, accessories, tools, tyres and wheels for workshop clients and car owners, marketed via Group-owned and co-operating stores using the same store concept. The Mekonomen Service Centre concept has been the largest work- shop chain in the Norwegian market since 2003.
2006 2005
Net sales, SEK m 537.1 490.7
Operating profit, SEK m 63.3 55.2
Marginal operating profit, % 11.8 11.2
EBIT, SEK m 57.7 48.7
Average number of employees 185 169
Number of stores 40 39
– of which wholly owned 22 21
Number of workshops 321 310
Stores and workshops
One co-operating store was acquired during the year and as of 31 December 2006, there were a total of 40 stores, 21 Group- owned and 19 co-operating stores.
The Mekonomen Service Centre concept continued to experience good growth during the year. After several years of a strong inflow of new workshops into the concept, the focus
additional workshops. At year-end, the total number of work- shops was 321, an increase of five compared with 2005.
The conscious focus on sales to workshops has been an im- portant success factor in the Norwegian market. Mekonomen’s workshop co-ordinators, who operate as a link between work- shops and stores, have actively focused on servicing the work- shop market, assisting the strong growth in this segment.
Logistics
A well-functioning, efficient logistics system that guarantees a high rate of delivery is one of the most important param- eters and key to operational success in Norway, where large geographic distances place major demands on logistics. All of the Mekonomen stores, with the exception of those in the most northerly locations, receive daily deliveries from the central warehouse in Strängnäs. Due to the efficient logistics, the stores can stock a wide range, including low-frequency items, involving low tying-up of capital. The stores in Norway purchase over 65 per cent of their products from Mekonomen’s central warehouse in Strängnäs and an additional 16 per cent from Mekonomen’s contract suppliers.
In order to maintain daily deliveries to the Norwegian mar- ket, close collaboration between the Swedish and Norwegian customs authorities, in addition to a well-functioning logistical organization, is required since deliveries must pass an external EU border. For the past two years, Mekonomen has, along with two other companies, been part of a test project together with the Swedish and Norwegian customs authorities to further improve routines for companies with daily deliveries across the border.
Volumes delivered from the central warehouse at Strängnäs to Norwegian stores have increased by an average of 39 per cent a year since the Oslo wholesaling operation was closed down in 2002.
Contrasts with Sweden
Unlike in Sweden, the Norwegian authorities must approve all workshops before opening through a start-up inspection.
Large and small machines, ventilation, environmental stand- ards, and the recycling of hazardous waste are all regulated, while a technical manager with documented training must be present at every workshop. Branded and independent
50 % 22 % 28 %
Share of total revenues
Norwegian vehicle stock.
There is an average of three employees per workshop in Norway, while Swedish workshops average two employees.
Market description
Norway represents some 25 per cent of the Scandinavian spare parts market. The estimated value of the total Norwegian market for car accessories and spare parts is some sek 10 billion per year, with spare parts and accessories representing sek 5.5 billion, bodywork and paint sek 2.5 billion and tyres and wheels sek 2 billion. Approximately 60 per cent of Mekonomen’s total sales are to the workshop market, and some 40 per cent to consumers.
Changes in EU regulations have also had an impact on the Norwegian market. Mekonomen has noted growing interest from branded workshops in terms of affiliating to the Meko- nomen chain, and especially for sourcing spare parts from Mekonomen. Mekonomen’s focus on tyres and consumables for workshops has strengthened this interest.
Competition
Several players compete with Mekonomen in the Norwegian specialist retail market, with Sørensen and Balchen being the largest. This pairing operates the Bilexstra spare parts chain with 45 stores and the Quick Partner workshop concept with over 100 workshops. Meca, which is targeted exclusively at pro- fessionals, is the second-largest competitor. Hellanor, with its Automester concept, is Mekonomen’s third-largest competitor.
Branded workshops also present intense competition in Norway. Biltema and Torshov Bilrekvisita are the main discount chains in the consumer market, competing with Mekonomen Norway – both players market exclusively to consumers.
Trends and drivers
The trend in the Norwegian market is of an increasing number of independent wholesalers affiliating to the established chains continues, either through co-operation agreements or acquisi- tions. The same trend is apparent in the independent workshop market – workshops are seeking out chains to benefit from their marketing and technical know-how.
Market communication in Norway basically conforms to Sweden, with Mekonomen regularly advertising on TV at sporting events through signs in sports arenas. Car owners receive five to seven direct mail campaigns each year, which are combined with local advertising. Mekonomen also adver- tises nationwide in Norway’s largest daily newspaper Verdens Gang, publishes car supplements in the trade paper Motor- bransjen and participates at trade fairs.
Mekonomen actively targets motorists with its Service Centre concept through channels including daily press adver- tising and direct marketing. Mekonomen’s efforts to market its Service Centre concept as a chain regionally and locally in- tensified during the year and have enjoyed continued success.
Mekonomen customers have access to the Norwegian market’s best electronic spare-parts catalogue, which is connected to car registration numbers on the Internet. Workshops can or- der their items from the store by Internet and have the goods delivered the same day. Consumers can also order goods on the Internet, but they must pick them up at their nearest Meko- nomen store, where they can also obtain specialist advice.
Focus in 2007
For 2007, Mekonomen’s objective is to continue to grow and to remain the leading player in the Norwegian market. Efforts will continue to strengthen and increase loyalty towards the Mekonomen Service Centre concept. As part of this effort, a new CRM system is being introduced effective 1 January 2007, which will assist consultants in their work to direct sales processes, both towards existing and new customers, in a more targeted and efficient manner.
Mekonomen has been active in the Danish market since 2002 and, with its 11 per cent market share, is Denmark’s second-largest car-parts chain. Meko- nomen Denmark offers a wide range of spare parts, accessories, tyres and wheels. Its customers are exclusively workshops.
2006 2005
Net sales, SEK m 662.9 660.3
Operating profit, SEK m 16.7 –8.0
Marginal operating profit, % 2.5 –1.2
EBIT, SEK m –6.2 –26.3
Average number of employees 388 405
Number of stores 38 39
– of which wholly owned 38 39
Number of workshops 114 93
Stores and workshops
There are 38 stores in Denmark, all of them owned by the Group. The store in Vanløse closed and the stores in Nykøping and Odense were renovated during the year. In early 2007, the store in Århus will move into new facilities and a new store will open in the Copenhagen area. Since the closure of the central warehouse in Odense in autumn 2004, all stores in Denmark
Mekonomen’s electronic spare-parts catalogue was completed during the year and since January 2007, all stores, workshops affiliated with the Autoteknik concept (Mekonomen Service Centre) and other workshops use the catalogue.
Since Mekonomen Denmark started the Mekonomen Autoteknik concept in early 2004, there has been a steady increase in the number of affiliated workshops, which totalled 114 at year-end. Interest in affiliation with Mekonomen Autoteknik is extensive, and the number of affiliated work- shops will expand further during 2007. During the year, Mekonomen continued to conduct regional meetings with the workshops and held training sessions at schools of automotive engineering.
Logistics
All Danish stores receive overnight deliveries of spare parts from the central warehouse in Strängnäs. Three large suppliers to the central warehouse in Strängnäs have their own ware- houses in Denmark that directly supply the Danish stores.
Distances between stores and workshops are much shorter in Denmark than in Sweden and Norway, resulting in more inten- sive distribution and placing much higher logistical demands, since workshops have many suppliers from which to choose.
Workshops are less brand loyal and buy from the supplier that can deliver fastest when the need arises in the workshop.
Contrasts with Sweden
In Denmark, Mekonomen has traditionally focused exclu- sively on sales to the professional market.
Workshop density in Denmark is higher and competition more intense than in Sweden, resulting in shorter wait times and lower costs for car owners. Due to the intense competi- tion, workshops are more sales-focused than in Sweden and Norway, and they compete on their hourly rates. Compared with Sweden, workshops in Denmark are significantly larger and have access to more advanced equipment. The general level of education of the mechanics is high and they receive ongoing additional training to stay current with technical developments.
50 % 22 % 28 %
Share of total revenues
The Danish market represents some 25 per cent of the Scan- dinavian spare parts market. The estimated value of the total Danish accessories and spare parts market is approximately sek 10 billion annually, with spare parts and accessories repre- senting sek 5.5 billion, bodywork and paint sek 2.5 billion and tyres and wheels sek 2 billion.
Just as in Norway and Sweden, the Danish workshop mar- ket is divided between branded and independent workshops.
However, Danish specialist retailers do not market themselves to consumers, but rather focus exclusively on professional workshops.
Competition
The four largest players in the Danish market are Hella- owned FTZ, Mekonomen, the Meca Group and Auto-G.
After the change in EU regulations, brand retailers began to compete on spare parts, and lowered the price level. Previ- ously, brand retailers had the same prices nationwide, whereas now, prices are negotiable and vary regionally. Danish nationwide wholesalers compete on prices and discounts, as well as on distribution and training to a greater extent than in Sweden and Norway. The Danish market contains more workshop chains than the Swedish or Norwegian markets.
The Automester workshop chain, part of the FTZ Group, is Denmark’s largest. Apart from this chain, Mekonomen Autoteknik also competes with Autopartner, Din Bilpartner, Meca Car Service, Bosch Car Service, Drivers Test Center and another ten or so smaller players.
Competition from low-price retailers targeting consumers remains intense, with new sales channels, such as superstores and supermarkets, contributing to a further increase in com- petition. Companies such as T. Hansen og Høyer, Bildillen and Bilexperten remain active players in this market.
Trends and drivers
In recent years, the number of branded car retailers with associated workshops in Denmark has been cut in half, from some 1,600 to approximately 800 today, as a result of factors
former branded car dealers continue to operate as car dealers with brand-independent workshops. The Danish market harbours some 3,000 independent workshops. The trend in Denmark is also towards larger workshops, as in Sweden and Norway and for similar reasons. The number of workshops is declining but the number of mechanics is not.
Market communications
The Mekonomen brand is communicated in Denmark in a sim- ilar manner to Sweden and Norway, including on TV through advertising signs situated at sports arenas. A first attempt at TV commercials was made during the year in two regions, as well as implementation of direct mail campaigns in all regions.
Mekonomen Denmark also publishes its own magazine for distribution to workshop customers six times a year.
Focus in 2007
After the organizational changes made in recent years, Mekonomen Denmark will be focusing much of its attention during 2007 on developing the organization and its offerings.
This will occur partly through the help of an expansion of the product range for the more fragmented Danish market and an upgrade of the electronic catalogue to contain several product groups to create additional added value for customers. In order to increase customer loyalty, consultants, along with their local stores, will be working in a more goal-oriented manner towards both old and new clients.
