LAS VEGAS — The automotive aftermarket has experienced a roller coaster ride over the last 20 years amid fluctuations in the economy, gasoline prices, vehicles miles driven and unemployment, but automotive parts suppliers and auto repair shops should expect more steady growth going forward, according to the Automotive Aftermarket Suppliers Association (AASA).
"We're going to see a correction in the growth, the year-over-year growth trend, but we think it's going to revert back to a normal level of growth," Philip Atkins, AASA director of strategic research and planning, told attendees at the recent Automotive Aftermarket Parts Expo (AAPEX) in Las Vegas.
"What we're going to see is that there's still enough power in the fundamental drivers of the marketplace that things are going to be pretty positive and we expect to see things revert to a normal mode of growth."
Normal growth is considered to be about 3 percent. He noted that in the past, there were some years where the aftermarket didn't have any growth, while other years, coming out of the recession, the industry experienced above-normal growth.
"So we've really become accustomed to some super normal growth....If we look at what's going to happen over the next few years, what we're seeing is that the year-over-year growth trend is expected to come back. We're forecasting it to come back to a normal rate of growth, just about 3 percent."
Mr. Atkins said there are several factors that impact sales growth in the automotive aftermarket, including:
• Vehicles in operation (VIO) — There are about 279 million cars on the road in the U.S. and growing, Mr. Atkins said, with the average light vehicle age reaching about 11.7 years old.
This translates into a lot of wear and tear on these vehicles with a lot of needed repairs going to the independent aftermarket repair shops, he said, and that helps the aftermarket.
• Vehicle miles driven — This is one of the most important market drivers for the aftermarket as U.S. vehicles clocked more than 3.2 trillion miles in 2016. And that rate is growing every year, he said, as low unemployment means more people are driving back and forth to work.
This factor also is causing wear and tear on vehicles, creating demand in the aftermarket.
"There's been good steady growth, for the most part, with the exception of a recession here or there, but it has doubled in size in the last 20 years," Mr. Atkins said.
• Aftermarket retailers — Five years ago retailers enjoyed about 5 percent year-over-year sales growth, sometimes even more than 8 percent, Mr. Atkins said. But this trend has changed substantially in recent years as same-store sales have been decreasing.
• Parts replacement rates — The frequency of buying parts in the aftermarket has been slowing down in a number of product categories, he noted. Some categories are increasing, but more and more categories have been decreasing in their frequency since 2006.
The VIO is expected to continue to grow but at a decelerated rate from a high level in 2015, Mr. Atkins predicted. In the past the average vehicle age skyrocketed, he said, which produced a lot of supernormal growth in the aftermarket. While vehicles on the road are still getting older, it won't have as much impact on aftermarket growth beyond the predicted 3 percent.
Meanwhile, unemployment has fallen dramatically since the Great Recession to about 4 percent, which perpetuated a large boost in miles driven and automotive aftermarket sales. But unemployment doesn't have room to shrink much further going forward, so it is not going to have as much influence on pushing the aftermarket industry beyond the normal rate of growth, he said.
The same scenario holds for gasoline prices, Mr. Atkins said, since prices at the pump have fallen about as far as they are going to fall. Now it's helping the aftermarket maintain a 3-percent growth equilibrium.
By 2020 the AASA predicts the automotive aftermarket will add another $40 billion in annual sales of parts and labor for a total of $316 billion in the U.S.
"Interestingly, the bulk of the increase is going to come from the increasing cost of parts because we are able to command a higher price point because of their quality and the new technology that is in their content. It's really making up about 90 percent of the growth between now and 2020," Mr. Atkins said.
"What we've seen so far is that this has been a down year and it's caused some strong reaction out of Wall Street, understandably. But the fundamentals of the marketplace are still pretty solid.
"We're just not seeing them with the supernormal growth as we've seen in years past. That means our forecast is for the growth rate to return to normal, 3 percent, a very attractive growth rate," he said, adding, "We think this is a very attractive market. It's stable, throwing off 3 percent growth rate year over year. There are many manufacturing industries that would be jealous of that kind of growth rate…"
The so-called sweet spot for auto repairs — cars aged 6-11 years old — have shrunk in number for the last six or more years but the AASA sees this trend bottoming out next year and, going forward, ramping back up where there are more cars in the sweet spot category.
"That potentially means a lot more business for the aftermarket," Mr. Atkins said.
"One thing that is going to help the aftermarket is, one thing we're seeing is, an increasing cost of parts.
"Not because of just general inflation but because parts are coming with more value to command a high price. Why?
"Because of the technology that allows for light weighting or reducing friction or the new technology content that goes along with some of the new technology advances that we've heard about.
"So the parts being able to increase their price is going to help the aftermarket."
Mr. Atkins described some megatrends that could impact the automotive aftermarket to varying degrees over the next couple of decades. These include:
• e-tailing — So-called "pure-play e-tailers," such as Amazon and eBay, are adding about $1 billion a year in automotive parts sales, which is expected to reach $15 billion by 2020 in aftermarket sales, so this is "not a big part of that $316 billion," he predicted.
"Pure-play e-tailers are going to grab about 20 percent of (the parts market) and that's worth paying attention to. That's why you want to know what's going on in e-tailing."
Mr. Atkins noted the bulk of online parts customers are DIYers, so he questioned if pure-play e-tailers will have a larger impact on the aftermarket going forward.
"For them to have the impact, they're going to have to cross over from the DIY segment into the DIFM segment because that's where all the money is."
But for the most part, DIFM consumers haven't migrated to e-tailing.
"There is a business model in place that has been very successful.... I take my car to a repair shop. They diagnose it. They call CarQuest.
"They get a part back in an hour and I get my car back in two hours and everybody is happy. This has worked really, really well," he said.
However, repair shops and DIFM consumers may be more willing to buy parts online and save money at the expense of keeping the car in the shop an extra day.
"This could be the beginnings of a bigger story for the online channel. Is online going to sweep away across all the categories? We don't think so," he said, noting that certain products will have a hard time finding success through online purchases.
"For the repair shops, as the online channel becomes more prevalent, the consumer gets wise and goes online.
"They've got a lot more information at their fingertips and they're going to find out about the pricing of parts. We've seen this in other industries.
"As that happens, pricing transparency takes place. And pricing transparency leads to the reduction in cost of parts. And that in turn will lead to an increase in labor rates, but this remains to be seen," he said, noting that shops will need to make a profit with labor since parts will be moving to market prices.
Meanwhile parts suppliers and manufacturers who want to optimize the e-tail channel will "have to stop selling products and start selling brands," Mr. Atkins said.
"Brands that have a strong, positive association in the consumer's mind are built on a value proposition that uniquely positions them against the competition.
"And a lot of the manufacturers aren't quite up to that level yet. But they need to learn this and be able to flow this information up to the channel partners so they can be more effective selling online but also in their face-to-face encounters with the buying public themselves."
• Automobile evolution — "What we're expecting now is the next big step in evolution to where the car becomes more of a software platform supported by electrical processes, supported by the mechanical processes.
"But essentially the next big step we're looking at is the car as a software platform. That's got the potential for really changing the value proposition as we understand it today," Mr. Atkins said.
"With this value proposition change, performance might mean how comfortable is the vehicle as a place of entertainment, as a place to talk with my fellow passengers or to view a movie or something like that. That's the kind of value proposition change that we're talking about.
"It could include a change in ownership. Some of us in really urban areas might not own that car. We might be dealing with a fleet owner on an as-needed basis. That in turn could affect the repair shops and who they're doing business with — they're doing business with a couple of fleet owners instead of hundreds of individual car owners.
"So there is a lot of change coming. Suppliers/manufacturers need to be ready for that. It could be a competitive opportunity for many. It could be a problem for some who are not so nimble or undercapitalized."
• Connected and autonomous vehicles — Cars of the future will transform from a product to a service as they become connected to the Internet of things, providing driverless transportation and shared ownership.
Shared mobility, where several people would share the use of an autonomous vehicle, would mean heavier wear and tear on parts and thus an increase in the frequency of parts replacement, according to Mr. Atkins.
Autonomous vehicles also would help increase overall vehicle miles driven as they can provide increased mobility to two segments — older people who had to give up their car keys and are unable to drive, and kids too young to drive.
KPMG predicts this could increase miles driven by about 3 trillion miles down the road, he said. "You can see how this megatrend has the ability help the aftermarket."
Meanwhile, vehicle telematics — the creation of data in moving vehicles and transmission of that data to a recipient — could be boon for vehicle/parts-wear forecasting, which also could be used by repair shops to determine what repairs will be needed when, according to Mr. Atkins.
"There's a lot of opportunity there. If the aftermarket wants to grow, the suppliers need to step in and take advantage of it. And it's not just the suppliers. We've got to have all the service professionals, the repair shops, able to understand the data that is going to come from telematics; able to understand how to make the repairs using the new technology. And convince the car owner that they got the smarts to make those repairs," Mr. Atkins said.
"Now is the time for a lot more cooperation and collaboration across all parties — the manufacturers, the retailers, the channel partners — because there is enough opportunity there for all of us to grow and all to benefit if we collaborate better."