Keystone’s Brand Idea

In the world of auto parts, “generic” has become a dirty word.

That has made things tough for Keystone Automotive Industries Inc., the leader in so-called aftermarket vehicle collision parts. It sells non-brand-name bumpers, grilles, lights, wheels and paint to about half of the nation’s 53,000 auto body shops.

Over the last four years, the company’s fortunes -- and stock price -- have zigzagged as customers have reacted to a class-action lawsuit, which claims that State Farm Insurance Cos. directed repair shops to use allegedly substandard generic parts when handling policyholders’ collision claims.

So now, Pomona-based Keystone is focusing on its own brand of car parts in a bid to boost confidence in components made by companies other than the big automakers or their designated suppliers.

Keystone’s brand, Platinum Plus, comes in higher-quality packaging and with an extended warranty. But it’s priced as if it’s generic, or unbranded.

“We want to be able to say it’s a better product,” said Charles Hogarty, Keystone’s chief executive.

The goal is to make Platinum Plus parts as recognizable as, say, Monroe shock absorbers and Fram oil filters.

“We want to get the Keystone brand name to where it’s identified as the quality part in the body-part replacement business,” Hogarty said.

To do that, the company has aligned itself with AutoZone Inc. stores, where do-it-yourself car buffs soon will be able to buy directly from a Keystone catalog.

Platinum Plus product display cards are being scattered throughout AutoZone outlets and will include ordering instructions and descriptions of Keystone products, which until now have been largely unavailable to retail customers.

But Keystone executives say brand awareness -- not retail sales -- is the main point.

“Over time the AutoZone initiative will give consumers more familiarity with the product,” said John Palumbo, Keystone’s chief financial officer. “They will come to look at Platinum Plus as a low-cost alternative” to auto manufacturers’ own parts.

The company, which booked $440 million in fiscal 2003 sales, hopes that the new brand eventually will contribute close to 80% of revenue, with the remainder coming from its generic and recycled parts business.

Analysts seem to agree that having a branded line of products is the right avenue for Keystone.

“Platinum Plus puts many of the products under one umbrella and adds a trust factor for consumers or dealers,” said John Lawrence, an analyst with Morgan Keegan & Co.

Trust in aftermarket parts started to erode in 1999, when State Farm was hit with the national class-action lawsuit. An Illinois jury found that aftermarket parts were inherently substandard, and State Farm policyholders won $1 billion in damages, a decision the insurer has appealed.

After the suit was filed, State Farm -- which insures about 1 in 5 vehicles in the U.S. -- stopped using telling repair shops to use aftermarket parts, as did many other insurance companies that feared liability exposure.

Keystone, one of the few publicly traded auto-parts distributors in a fragmented industry, watched its stock plunge about 75% from the beginning of 1999 to October 2000. Annual revenue fell more than 5% in 2000.

Keystone’s push of Platinum Plus comes as the stigma of using aftermarket parts finally may be dissipating.

The nation’s auto insurers -- which pay for about 85% of all collision repair work -- are returning to aftermarkets, industry insiders say, for one simple reason: They’re cheap. These knockoffs typically cost 20% to 40% less than automakers’ parts.

“The future for aftermarket parts looks brighter than it has for some time,” said Ruthanne Williams, an analyst for RedChip Cos.

The upswing is evident in Keystone’s financials. Thursday, the company reported an 18% surge in fiscal first-quarter profit to $4.2 million, or 28 cents a share, from $3.5 million, or 23 cents, a year earlier. Sales increased 10.7% to $118.1 million from $106.7 million a year earlier.

On Friday, Keystone stock closed up 83 cents to $19.43 on Nasdaq.

In California, the aftermarket industry has been bolstered by recent Department of Insurance regulations that allow the use of its parts so long as they are comparable to the original automaker’s and their use is disclosed on repair invoices.

Nationally, meanwhile, efforts have been made to ensure the quality of aftermarket products through organizations such as the Certified Automotive Parts Assn. The group, funded by the insurance industry and fees collected from distributors and body shops, evaluates parts to determine whether they are “functionally equivalent” to those made by automakers.

“If you look at a mirror from Toyota and a mirror from one of our stores,” Keystone’s Palumbo said, “you can’t tell the difference.”