Published on January 6, 2014

Opportunities exist despite sluggish aftermarket growth

Tire Business photo by Kathy McCarron
David Portalatin, executive director and industry analyst, automotive for NPD Inc., discussed his forecast for vehicle service during a seminar at the 2013 Automotive Aftermarket Parts Exposition in Las Vegas.

LAS VEGAS (Jan. 6, 2014) — Despite a rebound in new vehicle sales, tire dealerships and repair shops still have opportunities to increase sales in 2014 as the majority of consumers continue to drive older vehicles, according to NPD Group Inc.

However, the automotive aftermarket is expected to experience sluggish growth this year. Based on consumer surveys of their purchase intentions, NPD predicted that retail dollar sales in the automotive sector, including vehicle parts and maintenance, will increase about 2.3 percent in 2014, while unit sales will continue to be flat.

By year-end 2013, dollar sales were expected to increase about 2 percent with flat unit sales, according to David Portalatin, executive director and industry analyst, automotive for NPD, who discussed his forecast during a seminar at the 2013 Automotive Aftermarket Parts Exposition in Las Vegas.

Among the three major drivers of retail sales:

  • Unit sales are expected to be flat;
  • Miles driven is expected to decrease slightly; and
  • New and used vehicle sales are expected to increase.

However the majority of consumers surveyed said they intend to hold on to their aging vehicles, according to NPD, and survey results indicate that consumers are willing to spend money to keep their vehicles running.

The trend of consumers' keeping vehicles that are 11 or more years old "is not going away for quite awhile. People have revalued the older car," Mr. Portalatin said.

Quality products and services carry more weight in their purchase decisions than price alone, according to survey results. However, Mr. Portalatin noted that the aftermarket is chasing declining unit volume by discounting prices and putting "everything on sale all the time."

Opportunities for '14

Mr. Portalatin told attendees about three "consumer realities" culled from NPD surveys that offer opportunities for tire dealerships and repair shops to increase business in 2014:

  • Automotive spending is (still) a top consumer priority.

"It's not something that in most cases is discretionary. It's not something they can put off for very long. It's something that they have to do. And so you have an opportunity to engage consumers with products and services that are very important to them and products and services that actually create economic value for them by helping them to save money over the long haul," he said.

About 60 percent of the money consumers spend — other than on house payments and other obligations — goes toward two essentials: "We got to eat and we got to drive," he said. "Those two things are the dominant things driving what consumers spend."

However, recession-scarred consumers are still cutting back on overall spending.

"The reality today is even though there are areas of some economic recovery, the simple truth is that consumers continue to be in cutback mode," he said, noting, "Overall, about 34 percent are trying to spend less…consumers are really trying to cut back in most areas, but the areas where they are likely to say, 'I may actually need to invest a little more money,' are areas like vehicle repair or vehicle purchase, where it might be the most economic thing they can do to help the family budget by repairing that existing vehicle and keeping it on the road a little bit longer."

  • New car sales are increasing.

"I think there is a lot of concern, rightfully so, that all of the lift that all of you in this room had had over the aging vehicle trend and the decline in new car sales over the past five years may be coming to an end," he told attendees at the seminar. "What I want to share with you today is that new car sales and the revaluing of aging cars are creating some unique selling opportunities.

"It's not an either/or scenario. It's actually both. Some of you in this room are in categories like appearance and accessories-related categories that new car owners are a little more enthusiastic about. Believe it or not, new car owners are more enthusiastic about doing a lot of routine maintenance items. So new car sales can provide some lift in some categories.

"But just because we're going to sell some 16 million or so new cars does not mean that the opportunity with these older vehicles is leaving us. In fact there is still a tremendous amount of opportunity around old cars."

Tire Business photo by Kathy McCarron
David Portalatin, executive director and industry analyst, automotive for NPD Inc., discussed his forecast for vehicle service during a seminar at the 2013 Automotive Aftermarket Parts Exposition in Las Vegas.

According to NPD's survey, about 7 percent planned to purchase a new vehicle, another 7 percent said they might purchase a new vehicle, 5 percent plan to buy a used car and another 6 percent said they might buy a used car.

"The vast majority of everyone else is driving the same car for the coming year. And more and more today that car is 10 years old or older….Consumers have changed their attitude about older cars and it is still true in 2014. That's a new normal as well.

"Miles driven is at a new normal. The consumer attitude toward older cars is at a new normal. We have fundamentally, and for the long term, changed how we value older vehicles and consumers are willing to spend the money on those cars. They are willing to keep those cars. And that will continue to create opportunity for you in 2014."

He noted that the average age of vehicles on the road is 11-plus years, despite the influx of new vehicles in the market.

"That's not going away folks. I don't care if we do return to the prerecession level of new car sales. This isn't going away for quite awhile because people have revalued those older cars and they are going to spend money on them and there will continue to be opportunity for you in the coming year," Mr. Portalatin said.

"We're going to continue the growth that we see of the last few years with consumers that are investing in these older cars and keeping them going."

  • There will be growth in DIFM and less DIY and new car sales will continue to push the trend in that direction.

Mr. Portalatin noted that about 78 percent of new car owners are DIFM customers, while about half of owners of vehicles 10-plus years old will do some DIY activity.

According to the NPD survey, $645 is the average amount consumers plan to spend on repair and maintenance this year.

"We have a real opportunity around this older car segment.… I heard for years and years and years in this industry that the sweet spot was four to seven years old. Well, guess what? There aren't that many of those cars out there anymore because we weren't selling new cars that would be four to seven years old today.

"That mindset has changed and I think it's permanently changed. The thinking back then was once a car got to be 10 years old, people didn't spend on it anymore. That's just not true anymore. Consumers are spending on these cars.

"The average for a 10-year-and-older car is $751…. More than half are going to spend well over $500 or a $1,000. So the spending opportunity is there among older vehicles."

He admitted that owners of older cars are looking to replace a car sooner and will likely replace it in the next three years. But, he claimed, while newer vehicle owners are more likely to buy another new vehicle, owners of older cars are more likely to buy a used car—"another aftermarket-friendly car."

Owners of older vehicles are more likely to be economically constrained consumers.

"So as you think of your messaging, how you position your products toward these guys is anything that helps them save money, whether that's by keeping an older car on the road or by reducing its operating costs or by just helping them to be efficient in other areas of their life. That messaging is going to appeal to those vehicle owners," he said.

Decline in driving

He admitted NPD overestimated expected sales in the automotive aftermarket for 2013.

At year-end 2012, NPD predicted dollar volume would grow 3.8 percent in 2013, but the year may actually end with 2-percent growth over 2012.

Mr. Portalatin pointed to several reasons for the over estimation, in particular the third quarter, which consisted of three consecutive months of decline in both unit and dollar volume, a change in previous trends "which is largely unprecedented," he said.

Other factors that foiled expectations:

  • Miles driven September 2012 to September 2013 was not as strong as predicted—September 2012 sustained gas prices of $4 per gallon prompting consumers to park their cars more often;
  • Hurricane Sandy ravaged the Northeast in the last week of October 2012, so while miles driven grew in November across most of the country, it was down so much in the Northeast that it was a drag on the entire nation; and
  • early 2013 had unseasonably high gas prices, he said.

"Miles driven did recover as expected the rest of year but the damage was done—that's one of the reasons our forecast underperformed," he said.

"I don't think you're going to see a big rebound in miles driven over the next few years and here's why. First of all the peak of miles driven was pre-recession, November 2007. We've lost about 100 billion miles on an annual basis since that time. We are currently driving today at about 2004 levels….

"That's not likely to change because in spite of the fact that we're getting relief at the pump now, that's going to be temporary. We're going to continue to see $3-plus gas prices," Mr. Portalatin said.

"Another big factor is we need people to get back to work. In November 2007 we had 4.5 percent unemployment…. We need people to get back to work and get back into their cars and drive to work and until that happens, we're not going to close that gap," he said.

Contributing to the lower miles driven is that Baby Boomers are retiring from their daily jobs and thus, driving less.

"Those peak driving years are in decline. They are not being replaced by the 75 million or 80 million Millennials that are coming on board because those folks have a higher unemployment rate, they are deferring the start to driving in ways that previous generations did not, and they are more inclined to opt for alternatives, such as living in a more urban environment where they have different transportation options," he noted.

"The Millennials may never fully replace the mileage that the Boomers are going to vacate over the next decade or so. The lift from miles driven is probably not going to be there for a while."

Pricing quandary

For 2013, NPD expected the average price per unit sold to increase about 12 percent.

"The reality is we only grew about 4 percent. The reasons: there is not as much commodity inflation anymore. We're also promoting the heck out of everything we sell. Our team has identified nearly a thousand promotional events just in a handful of leading retailers," Mr. Portalatin said.

"The bottom line is everything is on sale all the time everywhere. And the question I have for this industry, the challenge I put out there, is: Are we chasing declining volume by discounting and eroding dollars unnecessarily? Are we leaving money on the table as an industry?"

Ironically, according to the NPD survey, lowest price is not a top consumer priority when it comes to automotive service.

"Automotive consumers, more than any other consumer category, are more likely to define value in terms other than just price," he said. "We're doing a lot of discounting. We're doing a lot of wheeling and dealing. And price is important to all consumers…but you have opportunities to create value in ways that some other industries really don't."

Reasonable prices are at the top of the list of what attracts consumers, but absolute lowest price is near the bottom, according to the survey. Consumers put more weight toward better gas mileage, quality materials, better engine performance, saving time and money, and environmental benefits when making a purchase decision in the automotive aftermarket.

In vehicle repair, according to the survey, quality outweighs price. Across categories of parts, maintenance and additives — quality carries a lot more weight than absolute lowest price, according to Mr. Portalatin.

Price is still important, he stressed, since once a consumer plans to spend money on a product because of its quality and value, he or she may still look to see who has it on sale.

"It's kind of the quandary we've created for ourselves by doing a lot of discounting. Price will always matter but you have an opportunity to really drive home the value of the quality side of the equation," he said.

"You have marketing opportunities that other markets don't have in terms of leveraging quality and other attributes as opposed to absolute lowest price."

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To reach this reporter: kmccarron@crain.com; 330-865-6127.

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