Put a Fork in FOX Factory's upfit Truck Division.

 

I do not own Fox Factory stock or have any financial position in it.

Owning the only online vehicle marketplace exclusively for lifted vehicles for sale, liftedvehicles.com. My only focus has been — and continues to be — expanding the number of lifted vehicles on the road, as each vehicle represents a potential future customer. I have a vested interest in assisting dealers not only in moving lifted vehicles off their lots, but also in expanding their lifted vehicle businesses.

Imagine going into the Shark Tank to seek investment to acquire an existing company. You tell them there's a truck upfit company with a bailment pool spanning multiple manufacturers. A bailment pool is when a manufacturer, such as Ford, ships new vehicles to your facility to be upfitted and sent to their dealers. The existing business does have customers —new franchise dealers who buy their upfit packages. The total addressable market for vehicles that could be sold as "new lifted" is over 3 million vehicles a year. The unknown is what percentage of those 3 million are fleet sales. Let's say half are, so the total addressable consumer retail market for vehicles that could be sold as "new lifted" is 1.5M vehicles, including all auto manufacturers' brands/models. The company that you want to acquire upfits about 2K out of the 1.5 million TAM. I covered the opportunity in a June 28, 2013, blog post, Huge Growth Opportunity for The New Lifted Truck Market! So, you now have the shark's attention on the business's growth potential. I'm going to skip the regular package price, the dealer cost, and the selling price, in the interest of keeping that hidden from the public.

You tell the sharks that the price to buy this existing business is only $330 million. You may or may not let them know that the company you're buying it from acquired the business less than two years ago: Kinderhook Acquisition and FOX Factory Acquisition. The estimated price Kinderhook paid for SCA Performance and the near-bankrupt Rocky Ridge Trucks was around $25 million. So, you have a grossly inflated price tag for this business you're pitching. The one disclosure that would immediately cause all the sharks to go out is that, at any time, any of the vehicle manufacturers with which you have a bailment pool can rescind your bailment pool per their agreement. Ford could wake up one day and decide to kick you out of the pool. Mr Wonderful, who is very focused on risk assessment of a business, would tell you, “It’s a stupid idea, it’s going to zero, take it behind the barn and shoot it.”.

Most upfitters are privately owned by families with bailment pools and are great businesses. I covered FOX Factory's investment issue in a blog post on May 17, 2023. FOX Factory Upffitter Business was a Lousy Investment. It comes down to leverage, and any company that has a bailment pool with a manufacturer has zero leverage. The manufacturer holds all the cards. In this case, you're dealing with their most profitable products, and they will cut off any perceived threat to their market share. All of them sell huge volumes of standalone stock products themselves.

FOX Factory's Missteps

FOX stumbled right out of the gate with their SCA group acquisition. Shortly after Kinderhook acquired SCA Performance, I spoke with Tom Tuttle from Kinderhook. After congratulating him on the acquisition, I told him I would fire all the McSweeneys, the former owners of SCA Performance. He asked why I said that. I told him because none of them know how to grow the business, as they've been doing the truck upfitting for over a decade and have no market penetration. At the time, they were only selling 1,500 truck packages a year across all manufacturers' brands. When the press release about FOX Factory's purchase of the SCA Group came out, I laughed at what Mike Denison said.

“We look forward to further accelerating our already significant presence in the growing specialty vehicle manufacturing market. We welcome the experienced SCA leadership team and believe they will play an integral part in our company’s growth going forward.”

In the release, FOX Factory announced that it also agreed to additional contingent, performance-based retention incentives of $13 million for key SCA management, payable over the next two years. That should have raised red flags for investors, because FOX Factory is admitting they have no one who could run the division and lack an understanding of the new truck-upfitting business. Why else would you offer such an ample incentive? They previously purchased 80% ownership of the Tuscany brand truck-upfit business and, after reading the deal struck, retaining the McSweeneys, they allowed the previous owner of Tuscany to keep the remaining 20% as an incentive to stay on. FOX Factory has since purchased the remaining 20% of Tuscany. As a side note, I did paid consulting regarding the new lifted truck market for a Boston-based consulting company that contacted me before the Tuscany purchase.

There's a recent example of another public company that invested in an arena where it had no idea what it was doing. That is Polaris' acquisition of TransAmerican Auto Parts in October 2016, Polaris Acquisition. Polaris paid $665M for TransAmerican Auto Parts, which owned 4WheelParts locations and a group of aftermarket brands. In June 2022. Polaris offloaded the business for $50M, Polaris Sale Announcement.

FOX Factory is eight years into the truck-upfit business and has yet to move the needle in the market. To really grow, you first must identify the pain points that need to be addressed to achieve organic growth and then develop a strategy to bring them to market. Their spike in upfitter revenue during the truck shortage was an anomaly. The number one pain point for new dealers is the turn time. All auto dealers rely on their floorplan credit line to purchase inventory for their lot. Depending on the dealer's floorplan credit company, a dealer has a fixed number of days to keep that unit on their floorplan credit line. When that unit has reached the maximum number of days, they have to use hard cash to buy the vehicle. This is why dealers are focused on their aged inventory: it translates into hard cash being spent on pending or current aged units. So, for a dealer to stock a FOX Factory upfitted truck, there's risk involved on the dealer side if the unit doesn't sell before their floorplan cutoff date. FOX Factory has incentivized dealers by offering to cover their floorplan costs to stock package vehicles. This reduces risk; however, if the truck doesn't sell, the dealer must buy it at the OEM invoice price plus the FOX Factory upfit invoice. New dealers' hands are tied when it comes to marketing their inventory, as their immediate marketing territory is defined on a map. They are not permitted to market their dealership outside their territory, and your competitor will have no problem calling the OEM to report you.

An example of dealer territory restrictions is two Ford dealers on either side of the Hudson River, one of which has a couple of new lifted trucks on its lot. They are not permitted to let potential buyers across the river know that they have a differentiating product on their lot compared to their competitor. The even bigger problem FOX Factory faces with its upfitter business is that consumers have no idea these products exist. Addressing consumer awareness will directly address your dealers' issues. FOX Factory's website, LiftedTrucksForSale.com, came about from an extensive conversation I had with Matt McSweeney shortly after FOX Factory acquired the SCA Group. The conversation was about FOX Factory listing their dealers' inventory on my site, and he said they could create their own listing site. I answered that they could; however, I cautioned him that there's way more involved than just putting up a website, and FOX Factory certainly has the resources to put behind a project. I told him that they had a much bigger issue that could arise, which could present a problem for them: because of the bailment pool with the OEMs, they are beholden to them. Again, they are dealing with the manufacturer's most profitable product, and any perceived threat or disruption to an OEM's market share will shut down your efforts. Ford F-Series truck revenue in 2023 was $41.5B, and that's just one manufacturer. Combined OEM truck revenue with Ford, GM, and RAM, and you're looking at close to $100B in revenue, with the products generating billions in profit for the manufacturer. FOX Factory may be a public company; however, with revenue of $1.3B, they're trying to play ball with goliaths that hold all the cards to FOX Factory's upfit business.

I told Matt that, given the leverage the OEMs have with the bailment pool, you have to go to an independent to push out to the consumer and cause market disruption. A while after my conversation, FOX Factory put up its site, which included a listing of its inventory on dealer lots. They unlinked the listing site from the Lifted Trucks For Sale site about a year ago. It was, however, still visible to those who knew the listing site's URL. There are two potential reasons the listing site was delinked: either an OEM complained, or they wanted to hide the amount of aged inventory. The last audit of their listing site showed that 40% of the inventory had been in dealers' inventory for 120+ days. 60-90 days is the target turn time window for new vehicles. Two weeks ago, I posted in a Facebook group that I knew FOX Factory upfitter reps and employees were part of, and I mentioned that their listing site was still accessible. The next day, the listing site disappeared. My move to have them completely remove the listing site is right out of Sun Tzu's The Art of War book. For those not familiar with the book, here's the strategy:

The concept of "removing an opponent from the field" in a business context, inspired by Sun Tzu's The Art of War, emphasizes achieving a dominant position where the competitor is rendered irrelevant, defeated, or absorbed, ideally without direct, costly confrontation.

The best product doesn't win, the best price doesn't win, the best known always wins.

The reason I chose the image for this article is that there's a move that could be made, and if executed, would be detrimental to FOX's Factory's upfit business. It's very relevant to what I just said about The Art War. There already exists a dominant company in the lifted truck space: the used dealer Lifted Trucks. The move they can make is to brand the lifted truck packages they install on their vehicles. Due to their dominant market position, as soon as they made this move, everyone else's branded truck packages immediately became irrelevant. I don't know if they are even aware of the massive leverage they have to solidify their position. As used dealers, they operate without restriction and can sell internationally. They have massively expanded their dealership footprint from Arizona to other states, and are just getting warmed up. My prediction is an all-out invasion of Florida with their stores. If there was any doubt about the market potential of lifted vehicles, they are proving the market, retailing approximately 8K lifted trucks a year. That number will grow to over 20K lifted vehicle units a year over the next couple of years. My confidence in Lifted Trucks' growth stems from the recent announcement of a new $150 million credit line.

Going back to the beginning of my article, my focus is on getting more lifted vehicles on the road to build my future customer base for my listing site and help dealers increase their lifted-vehicle business. It doesn't matter to me if you're selling new or used lifted vehicles.