THE YEAR AHEAD: Repair shops to see more imports, CUVs in bays

LAS VEGAS —Independent vehicle repair shops will be seeing growing numbers of older vehicles, import brands and light trucks and CUV/SUVs pulling into their service bays in the coming years, according to market analysts.

IHS Markit and NPD Group Inc. analysts, during presentations at the 2018 Automotive Aftermarket Products Expo (AAPEX), both noted these trends in the vehicle parc can have a positive impact on the automotive aftermarket for those who adapt their operations and marketing strategies.

Mark Seng, IHS Markit's global aftermarket practice leader, automotive, noted a growing shift in purchases of new light trucks and CUVs at the expense of compact cars.

In 2017, light trucks/CUVs accounted for 65 percent of vehicles in operation (VIO) in the U.S.; in 2018 that share was expected to grow to 70 percent.

Overall new vehicle sales have leveled off since hitting record highs in 2015-16. About 17.2 million new vehicles were sold in 2017 and IHS predicted the total would slip 0.6 percent to 17.1 million in 2018.

About 34 percent of these new vehicles sales were compact and traditional CUVs, he said.

Meanwhile, sales of import brands of vehicles (by OEMs with headquarters outside the U.S.) are expected to continue outpacing the Detroit 3 vehicle brands, he said.

In 2018, imports were expected to account for 46 percent of new vehicle sales and by 2023 they are expected to account for nearly half of sales.

While sales of new vehicles are plateauing, vehicles on the road are continuing to age as consumers hang on to their older vehicles. The average age of vehicles in operation has risen to 11.7 years.

About 40 percent of the VIO are vehicles that are 12 years or older and about 26 percent are vehicles that are six to 11 years old.

That bodes well for independent repair shops for years to come as they are usually the ones that repair out-of-warranty vehicles, Mr. Seng said.

"On the consumer side, one of the biggest challenges we are facing as an industry is opposing forces," said Nathan Shipley, executive director and industry analyst for NPD's automotive aftermarket division.

"If you're a marketer, if you're a manufacturer, a retailer, you're still trying to market your products and services to the boomer generation that's on the way out, so to speak in terms of their peak driving years, if they retire. And you're also trying to market to a millennial generation that is coming into their peak driving years now. And so it's an opposing force.

"Another opposing force that we have as an industry is that manufacturers are looking at direct-to-consumer," he said. You have a brand that is strong enough, that can stand on its own without retail support and you're trying to find ways to go direct to consumer to circumvent the traditional channels of getting your products in the hands of the consumers. And we're seeing this in a lot of other industries, not as much in auto."

Mr. Shipley gave the example of MacNeil Automotive Products Ltd., which sells its WeatherTech vehicle floor mats directly to the consumer.

Private brands are grabbing a larger share of the market, he noted.

"A lot of retailers in a lot of categories are pushing their own brands of products out there, which to the consumer, do they know it's a private label or not? For all they know it's just another brand on the shelf," Mr. Shipley said, noting that Amazon.com Inc. has launched its own brand of motor oil.

2019 forecast

"Our forecast for 2019 is that we expect the market to be flat for 2019," said NPD's Mr. Shipley, noting that the miles-driven growth rate has slowed, prices have increased 4 to 5 percent and the consumer price index for new cars has stabilized.

"The economy is strong; the aftermarket is strong; we should feel good about our industry as a whole," he said.

"With that said, the core consumer is changing and how our consumer shops our industry and shops our categories are changing, so thinking about how your business looks down the road, especially five to 10 years from now, I think will be critical to your long-term success, especially as we watch other industries in the past go down this path of disruption."

He noted several influential trends in the market, including mobile car services, tire installation chains partnering with online retailers, growth of private label brands, expedited delivery and the Roll by Goodyear tire showroom concept in urban markets.

Driving trends

Vehicle miles traveled (VMT) is a major driver for the aftermarket business, according to IHS' Mr. Seng. During the Great Recession (2008-09), VMT flattened and declined for the first time since the 1970s.

Over the last three to four years the VMT has recovered and was expected to hit a record 3 trillion miles in 2018. But the growth rate has been slowing down — to about 0.4-percent in 2018 versus a 1.3-percent increase in 2017.

Among the biggest influences for VMT are gas prices and the unemployment rate, he said. In addition, the large baby boomer population is retiring and not driving as much while younger people are moving into walkable neighborhoods and reducing their VMT.

But the number of licensed drivers on the road is growing, according to Mr. Shipley.

"But you look at the miles-driven trend, it's the highest it's ever been, but the growth rate has slowed down fairly dramatically, which is a bit of a headwind for us," he said.

"Overall, as individuals, we're taking 10 percent fewer trips now than we did nine years ago, in 2009. There's more people on the road driving, but as individuals we're driving less. So your audience has grown quite a bit and who you're targeting is growing quite a bit," Mr. Shipley said.

The biggest reduction in trips are in areas of shopping and general errands, he noted. "We see a 10-percent drop in social and recreation. ... Social interaction with the iPhone and Android have contributed to that."

He noted that analysts believe VMT is going to change in two ways by 2040: in the type of car driving those miles (whether autonomous or traditional vehicle) and who owns the vehicle (whether an individual or a fleet).

VMT was growing at just under 2 percent a year ago, according to NPD data. Today it's trending at 0.5-percent growth. This follows several years where gas prices dropped and more people were going back to work, contributing to a healthy growth rate in miles driven, Mr. Shipley said.

"My belief as to the reason why this has slowed down in the last 18 months is we hit our new normal. We're not slowing down on our miles-driven behavior. We're just at our new level," Mr. Shipley said.

"So half a percent is where we think it's going to stay for the short term, barring anything crazy happening in the economy … ," he added, noting that the federal government had forecast that the average miles-driven growth rate is going to be about 1 percent every year for the next 20 years.

Gas price fluctuations don't seem to have an impact on consumer driving behavior, he noted.

"We're around $3 per gallon on average and we're not seeing behavior changes at retail. We're not really seeing behavior changes in the miles-driven environment and our thought behind this is that we have, as consumers, seen this before. This is not new," Mr. Shipley noted.

"Gasoline prices have been all over the map the last 10 years. They'll come back down. And we have a strong economy. Those two things coupled together is why we don't believe the current gasoline price environment is having an impact on miles driven," he said.

Vehicle mix

U.S. light vehicle sales are expected to level off after reaching a record 17.6 million in 2016 and then fell to 17.2 million in 2017. IHS predicted vehicle sales would hit 17.1 million in 2018.

There also is a growing shift in sales to SUVS and light trucks from sedans

Only 35 percent of the light vehicles sold in 2017 were the sedan body style while about 65 percent were light truck body styles, Mr. Seng said. In 2018, light trucks were expected to account for 70 percent of sales.

"It's driven by a big shift to crossovers, SUVs and small SUV-type body styles," Mr. Seng said, noting that consumers are attracted to larger vehicles with fuel-efficient four-cylinder engines.

About 56 percent of all light vehicles sold have four-cylinder engines, he said.

He assured those in the automotive aftermarket that they need not worry about recovery in new vehicle sales.

"I think any time we're adding new vehicles (into the market), that's just like our new business pipeline, if you will. Because all that new vehicle growth is driving VIO growth. Total fleet continues to increase as well," Mr. Seng said.

"We see the VIO, the total fleet that we are responsible for repairing, where we make all our money, is increasing by 8 percent over this forecast window (through 2023)."

While U.S. VIO growth is slower than the predicted global VIO growth rate of 13 percent, it is still a healthy rate for a mature market like the U.S., he said.

Four body styles represent 64 percent of all new U.S. vehicle registrations in 2017: compact CUV (23 percent), traditional compact cars (15 percent), full-size pickup trucks (14 percent) and traditional midsize (12 percent).

"What's interesting is those same four segments have represented about 64 percent for the last five or six years or so. However, within those four segments, we've seen a huge shift to that compact CUV," Mr. Seng said.

Compact CUVs have grown to 23 percent of new vehicle sales today from 15 percent in 2014. Add in mid-sized CUVs and the CUV segment accounts for 34 percent of all new light vehicles sales. Meanwhile, the share of full-sized pickup trucks has remained relatively unchanged.

"As consumers flocked back to the dealerships and drove those light vehicle sales to record levels, the decisions they're making about the types of vehicles they're buying is changing," Mr. Seng said. "And that is having an impact on our VIO fleet and the types of vehicles that are entering the repair bays in the near future.

"We see the trend continuing for the next three or four years and beginning to level out and end up at 75-76 percent will be light trucks over cars," he said, adding that this trend explains why OEMs are shifting production away from sedans.

From 2015-2025 there is going to be a 95-percent increase in the number of CUV body-style models available in the U.S., he predicted.

Domestic vs. import

The U.S. VIO over time will see a steady increase in import vehicle makes, according to IHS.

In 2002, imports accounted for 28 percent of VIO; today it stands at 46 percent; by 2023, it will be 49 percent of the vehicles in the U.S., according to IHS.

"What's happening is most of the vehicles being scrapped over this time period are domestic makes," Mr. Seng said.

"Domestic and Detroit 3 have the lion's share of the volume of the older vehicles, so they are getting scrapped out at a much faster rate. Imports are being purchased at a faster rate. ... So anybody who is focused on repairing import vehicles, you have a very good outlook for auto repair of those vehicles."

Vehicle age

Between 2018 and 2023, IHS predicts the number of vehicles that are new to 5 years old in the VIO will grow 2 percent, vehicles 6-11 years old will grow 27 percent and vehicles 12-15 years old will decrease 27 percent.

Meanwhile vehicles 16 years or older will grow 22 percent and will reach the same size as the newest (0-5 years) vehicles — "That's never happened before. So a big shift to these oldest vehicles ... and a great thing for the aftermarket," Mr. Seng said.

In 2018 there were about 69 million vehicles aged 16 years and older; by 2023 that number will hit 84 million, IHS predicts.

"The average age of the vehicle in the United States has been increasing ever since vehicles began rolling off the Henry Ford assembly line — better quality, better parts, better components, less rust — all that kind of stuff have made the vehicles last longer," Mr. Seng said.

Consumers are holding onto vehicles longer and financing vehicles for longer term, and this all accelerates the average age of the U.S. fleet, he said.

While older vehicles tend to be serviced at independent service shops, those shop owners need to be aware that repair opportunities change as the vehicle gets older, Mr. Seng said.

Repair shops may be dealing with the second or third owner of an older vehicle who may not want to spend as much on maintenance and repairs. So shops will have to develop "good-better-best" options for these owners.

"The aftermarket needs to look behind the trends and understand what that impact is in the relationship between the person that threw the box away, if you will, the person that is actually repairing the vehicle and that consumer.

"As the vehicle ages and that consumer changes, you need to make sure that your marketing to them correctly, that you have the right parts and strategy and everything else in order to take advantage of these new repair opportunities," Mr. Seng said.

He noted that vehicles 6 to 15 years old are defined as the aftermarket "sweet spot" where most of the repair opportunities occur.

Dollar vs. unit sales

For the first eight months of 2018, aftermarket dollar sales (chemicals, batteries, filters, wipers, etc.) were growing at a 4-percent rate, according to NPD.

"It's a healthy, healthy growth rate," Mr. Shipley said, but conversely unit sales fell 1 percent.

"The story for this industry for some time has been that dollar volume has always been outperforming unit volume. We're selling less stuff for more money. And when you look at the price side of the equation, prices in aggregate across those categories that we're tracking are up almost 5 percent this year," he said.

Among the top growth categories, maintenance products sales are increasing while accessories are decreasing.

On the price side, the majority of categories are seeing pricing activity of some sort, he said, including tires, wheels and accessories.

Sales of private-label products increased about 9 percent in 2018, double the growth rate across the industry as a whole, according to NPD. Units increased about 7 percent as distribution, while relatively small, is growing, Mr. Shipley said.

"We've seen an increase in (private label) distribution of 100 percent. So distribution of private label has doubled in the last two or three years. It was in chemical categories, … but we're starting to see this penetrate in a lot of categories that have other brands that have a very strong presence on the shelf," Mr. Shipley said.

E-commerce

While online sales are disrupting many retail industries, it seems to have minimal impact on the automotive aftermarket, according to NPD's Mr. Shipley.

For the automotive aftermarket, e-commerce has seen a 24-percent growth rate.

"A lot of that is volume shifting over to e-commerce," Mr. Shipley said. "It is not organic growth year-over-year. I expect that number to stay that way for awhile.

"Our expectation for automotive is that we'll be somewhere in the 25- to 30-percent range by six years from now. So we're going to see a slow but steady migration online ... barring any major disruption in our industry, … 15 percent today in the aftermarket, going to somewhere between 25 to 30 percent down the road."

He said there are many reasons why e-commerce won't overtake brick-and-mortar auto repair shops: the immediate need for parts, such as when a car breaks down on the side of the road; tactile importance (the need to see, touch and feel the part you're buying); size and fit constraints; delivery options; and ease of returns.

"There are a lot of challenges with e-commerce for our industry that I believe will keep it from growing to the 40 to 50 percent of our business," he said.