AKRON—New vehicle sales are slowly recovering from the recession and are expected to hit 15 million units in 2013. So does this mark the end of the auto aftermarket sales heyday?
“The reality remains that the vast majority of American consumers are going to drive the same car in 2013 that they drove in 2012,” said David Portalatin, an analyst for NPD Group Inc. “Those cars need a lot of the stuff that (aftermarket players) have to offer. That is not going to change next year, or the year after, or the year after that.”
The average age of cars on the road is reaching 11 years old, according to market research firm R.L. Polk & Co.
“The growth in this bubble of old vehicles is coming to an end,” Mr. Portalatin said, “so we're not expecting the size of the opportunity to continue getting bigger each year. But nevertheless, we have fundamentally changed for the long term the shape of the vehicle market in this country.
“Consumers today are still more committed than they have ever been in the past at continuing to value those older vehicles and hold on to them longer and longer.”
NPD predicts a modest improvement this year in the amount of miles driven, which is the most highly correlated variable to sales of automotive products, Mr. Portalatin said. Average retail price per unit sold also impacts volume sales and NPD has seen prices escalate. NPD also expects consumer confidence to continue to rise. NPD forecast 2012 aftermarket dollar volume to increase 5 percent over 2011 and predicts about 4-percent growth in 2013.
According to an NPD survey, more people said the slow economy is affecting them personally and “that is one of the hurdles to a more robust recovery in consumer spending. More people are telling us that they are worried about their personal situation more today than they did even in the past,” he said.
The North American light vehicle aftermarket is projected to rise 3.2 percent annually to $85.5 billion by 2016, according to Freedonia Group Inc. These gains will be fueled by growth in the number and age of the light vehicles in operation. There is a growing number of vehicles in what Freedonia called the “prime aftermarket service age”—five to 10 years for many components.
The growth also will be supported by improved regional economies, lower unemployment rates and an increase in the average miles driven per vehicle.
However, Freedonia said continuing improvements in vehicle component durability will prevent after-market demand from rising more rapidly. Monitoring of vehicle systems by advanced onboard electronics that alert drivers to any maintenance issues will reduce the need to make major repairs, “although these losses will be offset somewhat by the ensuing maintenance work and sales of minor repair parts,” Freedonia said.
IHS Global Insight predicts spending on vehicles and parts will grow by only 2.7 percent in 2013 as more new light vehicles are added to the fleet and the need for consumers to stretch the life of older units subsides. “The bottom line for auto parts and repair franchises is slower sales growth in the near term,” according to IHS.
Freedonia predicts electronic products (controls, modules, and sensors) will be the fastest growing aftermarket product segment this year, followed by exterior and structural products (the vast majority of which consists of replacement tires). Gains will be bolstered by increased demand for higher priced items such as performance tires, according to Freedonia.
Meanwhile, new light vehicle sales are expected to hit 14.3 million units in 2012, a 13-percent increase over 2011, and 15 million units in 2013. However, don't expect sales to return to pre-recession levels of 17 million units. Polk claims there was a lot of “false demand” then when credit was more obtainable, making it easy to buy additional vehicles for the family.
“Those days are kind of gone, at least for a little while,” said Mark Seng, Polk's vice president of aftermarket and commercial vehicles. “Until the economy recovers, wages are back up and the job situation looks a lot better, we don't see us as getting back to these levels in our forecast window.”
Based on NPD's 2013 Aftermarket Consumer Outlook Survey, the number of respondents planning to purchase a new vehicle was on par with 2012 results. However, 37 percent of respondents said they would abandon plans to purchase a new vehicle if economic conditions worsen.
Mid-sized cars and CUVs are driving the recovery in new vehicle sales, Mr. Seng said, which portends what the aftermarket repairers will see in their service bays in years to come.
Polk also noted that there will be an increasing number of vehicles built from a single platform. The 10 largest platforms will comprise 24 percent of global production in 2012 and 28 percent by 2023.
“By understanding the globalization and how OEMs are using these global platforms, the aftermarket has a real opportunity to reduce tooling costs, improve inventory efficiency. It's all about understanding what parts might be on vehicles around the world,” Mr. Seng said.
He also noted that OEMs have been pursuing aftermarket profits aggressively to offset low new vehicle sales.
“They have become very aggressive in the aftermarket and they are using technology as one means to do that. Obviously a lot of this technology was introduced around driver convenience and connectivity and things like that,” he said. “But there are other things that if we, as an independent aftermarket, aren't aware of and embrace, could put us in a bad position.”
He noted that telematics is making the window service sticker obsolete. “No longer is the consumer going to be conditioned to bring his vehicle in for service every 3,000 miles or every 5,000 miles or 10,000 miles.”
Many vehicle makers today are conditioning drivers to use the vehicle's oil service indicator light to prompt them to change the oil.
“With connected telematics, what is going to stop the (car) dealer from knowing when that light goes on and being able to send a message through the car's telematics and tell that driver, 'Hey, there's an oil change special. Bring it in on Friday and take advantage of the oil change special!'” he said.
“OEMs are using telematics to drive a wedge between the aftermarket and the car owner and consumer, so they can send the right message to the right car owner who needs the oil change at exactly the right time when he knows he could use one,” he said. “And what the aftermarket really needs to do is understand that and embrace it and, what I think, do what it does best—provide innovative solutions to these new vehicles, these next generation vehicles.”
He applauded aftermarket companies that develop aftermarket adaptations of telematics and connectivity, not allowing telematics to be only an OEM-install type of solution.
NPD redefined the “sweet spot” for vehicle repair age, as far as auto repairers are concerned, as eight years and older. “Consumers are continuing to spend on those vehicles and will for several more years to come,” Mr. Portalatin said.
“There are simply more vehicles on the road that will be typically repaired in any kind of aftermarket channel than anywhere else and in any other time in history,” said Polk's Mr. Seng. The average age of a vehicle on the road is 11.3 years, he said.
The quality of the vehicles, the difficulty in obtaining credit to buy a new vehicle and the fact that OEMs are coming out with longer new-car payment plans so that the owner keeps the vehicle longer are all drivers of this trend, he said.
But the trend is “really accelerating” because of the change in consumer behavior to extend the length of ownership, he said. The average age of new vehicle ownership is 71.6 months while the average age of new and used vehicle ownership combined is 58.2 months—that's a 24-month increase over the last 10 years, Mr. Seng said. Vehicles 11 years and older have increased by 19 million units while the number of vehicles new-to-3 years old has fallen by 18 million units.
Vehicle demographics are shifting to the benefit of the auto aftermarket, he said.
“Eighty-six percent of the vehicles on the road today are not under warranty and more times they will come back to the independent aftermarket to do repair in a dealer channel. So certainly it's a positive trend when you're looking at vehicle age for the independent aftermarket.”
NPD predicts there will be more robust DIY activity on the auto repair front, since DIYers generally drive older vehicles. According to its survey, 62 percent of respondents didn't plan on replacing their vehicles but intend to do a little bit more work themselves to keep the vehicle on the road.
Based on these responses, NPD forecasts a shift back in the direction of increased DIY and auto parts sales, Mr. Portalatin said. But while DIYers want to save money, they are willing to pay more for parts they believe will help their vehicles last longer, perform better and help extend the service interval.
“When we asked people about their expectations of having to do repairs in the coming year, in 2013, those who are certain that they have some repairs in their near future is the lowest we've ever recorded,” Mr. Portalatin said, noting that this is a result of higher new vehicle sales.
The number of vehicles under warranty is still lagging pre-recession levels, but the old-vehicle bubble that supported repair revenues the past few years is getting smaller, according to NPD. The core customer base for independent auto repair shops is still there, according to Mr. Portalatin, it's just not getting bigger.
New car sales will be a catalyst for a shift in the aftermarket service channel as 31 percent of consumers surveyed planned to visit a car dealership for service, up from 29 percent the previous year. NPD's survey showed a slight decline in the number of respondents who plan to take their vehicles to repair shops, tire stores and quick lube shops this year, compared with 2012.
“Millennials have the potential to be the biggest marketplace that you have ever had the opportunity to serve,” NPD's Mr. Portalatin told a seminar audience at last year's Automotive Aftermarket Parts Expo in Las Vegas.
Millennials, the generation of 80 million consumers aged 16-35, have a potential for being the next biggest market for the aftermarket business, he said. But the challenge with this generation is that they do not drive as much as older generations and they are suffering an unemployment rate that is higher than older generations. This has created a new frugality among the younger generation that businesses must be aware of.
“These young people are beginning to recognize that a 15-year-old car, if it runs well, is a perfectly good car and they value it. They're not necessarily looking to replace it. They are willing to spend a little money on it.
“If that attitude were to persist for the next 30 to 40 years, what kind of opportunity would that mean for our industry?” he asked.
Millennials are value-driven, they don't have a lot of money but they are willing to spend a little bit more if they perceive there is a greater value coming back in terms of longevity or performance, Mr. Portalatin added.
He said about half the Millennial generation looks on the internet for auto maintenance information.
“If you want to reach them, if you want to create loyalty, if you want to add value perception to their purchase experience, that's where you need to be to engage them,” he said.