Australians have long had a love affair with their cars, with events like the V8 Supercars and Formula One mainstays of the national calendar. This passion has translated onto the ASX, with a range of listed businesses who directly or indirectly serve the automotive industry.
A recent addition to the pack, Burson Group Ltd (ASX: BAP) looks to have a strategy in place to outperform its peers. Here are my top three reasons it is a good business.
Recession proof
Burson Group is a supplier of parts to thousands of independent mechanics and repair shops across the country. It also operates over 100 retail stores under the Autobarn, Autopro and ABS banners.
For most Australians, cars are not a discretionary item, but an essential part of life. Without them, getting to work, taking kids to school and dozens of other things become a daily struggle, rather than everyday routine.
But inevitably, cars need maintaining, replacement parts and repairing. That is why Burson operates in a sweet spot that is largely immune to economic cycles.
While people may delay buying a new car when times get tougher, performing routine repairs is non-discretionary. Burson supplies the tools and parts that get those jobs done, with a comprehensive catalogue of over 500,000 different car parts for the hundreds of makes and models on the road at any one time.
Power of scale
The buying power that scale brings with it is a powerful competitive advantage in any industry. It is no different with car parts. More stores and customers mean that Burson needs to keep more stock on hand. But the larger the order, the better the ability to negotiate more favourable terms with suppliers and car manufacturers. In simple terms, the effect is a little like the buying power that Costco warehouses offer: buy in bulk, get a discount.
As a result of these discounts, Burson can supply parts to its trade buyers and store network for cheaper prices than smaller competitors. The crucial point is that it can also do this without eroding its own margins and profitability, as a result of its scale.
A huge industry
According to market research, the total value of the parts to fix vehicles in the automotive industry in Australia is worth north of $12 billion. Of that, the segment of the market that supplies mechanics and repair shops is worth approximately $5 billion.
Burson is one of the dominant players in this space, and has shored up its position in the market by recently purchasing the automotive operations of Metcash Limited (ASX: MTS) for what many regard as a bargain price.
That acquisition has yet to contribute to a full year of earnings at Burson, so the next profit results will likely be much improved on the most recently reported numbers.
Burson Group operates in an attractive industry and has a strong market position, buying power and pricing power. All of these are features of a strong business that could generate market-beating returns over the long term.
