Taking the long view

During our first aftermarket breakfast panel, we heard from senior executives representing the entire supply chain, from the supplier level (Standard Motor Products and CARDONE), to the retailers and distributors (AutoZone and Parts Depot), down to the professional technician (represented by Monro Muffler Brake).

Historically, branding has played a dominant role in the aftermarket, as one of the top technician concerns has been preventing customer comebacks. Several panelists noted, however, that during times of economic difficulty, consumers are likely to trade down in product line.

That being said, solid brand equity is still one of a supplier's greatest assets. The challenge in times like these is to find ways to monetize and capitalize on the trust that brand names have cultivated with technicians in order to drive incremental volume. Our distributor participants provided insight into the branding question, and Parts Depot indicated that brands are more important to newer vehicle owners or if the repair job in question requires a great deal of labor.

For CARDONE, brands remain very powerful. But if the part is not available, brand importance goes by the wayside.

Parts proliferation is making the aftermarket a capital-intensive business, not only for the parts themselves but also for the more sophisticated IT and supply chain management systems (which are key to mitigating the impact of higher parts carrying costs), and suppliers and warehouse distributors are bearing the brunt of the impact.

Electronic cataloging and more localized registration and parts matching should aid in the process (Parts Depot uses R.L. Polk & Co. data to track vehicle registrations by state and county to custom tailor its merchandising mix at the individual store level).

Better supply chain management can be effective, but another successful method involves the rationalization of product options for vehicle applications. In addition, increased vehicle complexity and parts proliferation have been beneficial to professional technicians, who are getting additional looks at repairs that were typically performed on the DIY side.

To some degree, higher parts quality and better new vehicle construction are leading to lower maintenance requirements and longer service intervals. AutoZone noted that although unit sales have decreased, the average transaction value has increased to offset the unit decline.

CARDONE sees significant impact from technological change as diagnostic equipment and systems improvement may have partially cut into total aftermarket unit sales. In the past, technicians may have cycled through three or four new parts in order to remedy a particular condition. Now, with enhanced diagnostic equipment, some decrease in aftermarket volumes is simply a function of techs getting better at diagnosing and correcting the problem the first time around.

The aftermarket is finally beginning to pay attention to the entire cost of the supply chain, rather than simply comparing the quoted price differential alone. CARDONE thinks that the aftermarket is going to be moving closer to JIT (just in time) inventory management and production, particularly given the proliferation in component parts, and believes that remanufacturing will be a key facet of the transition to JIT.

One way to combat the influx of new parts from abroad is for domestic suppliers to begin transitioning more of the manufacturing capacity to low-cost countries (LCCs).

The dealers are getting better with the service side of the equation, as profits from vehicle sales have declined. Rob Gross noted that dealers have been successful in grabbing market share, but dealerships are typically not located in areas that are easily accessible to the consumer, and many of the ways that dealers conduct their service business are simply not consumer friendly.

Telematics is, in CARDONE's view, another ploy of the OEM dealers' prevailing attitude to try to keep the independent market out. Parts Depot thinks that the aftermarket is resilient — at one point, disc brakes may have represented the same challenge to the industry as telematics represent today, but the aftermarket learned to adapt and remain competitive.

Editor's note: For exclusive video coverage of the BB&T Aftermarket Panel, visit www.search-autoparts.com/videos.

BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the Automotive Aftermarket industry. BB&T Capital Markets is a division of Scott & Stringfellow, Inc., NYSE/SIPC. Scott & Stringfellow is a registered broker/dealer subsidiary of BB&T Corporation, one of the nation's largest financial holding companies with $136.4 billion in assets.

Disclosures: BB&T Capital Markets makes a market in the securities of Monro Muffler Brake, Inc.; and O'Reilly Automotive Inc.

BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Advance Auto Parts, Inc.; AutoZone Inc.; Genuine Parts Company; Midas, Inc.; Monro Muffler Brake, Inc.; O'Reilly Automotive Inc.; Standard Motor Products, Inc.; and The Pep Boys—Manny, Moe & Jack in the next three months.

Advance Auto Parts, Inc.; Midas, Inc.; and Monroe Muffler Brake, Inc. are, or during the past 12 months were, clients of BB&T Capital Markets, which provided non-investment banking, securities-related services to, and received compensation from, the aforementioned companies for such services. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report knows the foregoing facts.

An affiliate of BB&T Capital Markets received compensation from Advance Auto Parts, Inc.; AutoZone, Inc.; Genuine Parts Company; Midas, Inc.; Monro Muffler Brake, Inc.; and O'Reilly Automotive Inc. for products or services other than investment banking services during the past 12 months. The analyst or employees of BB&T Capital Markets with the ability to influence the substance of this report know or have reason to know the foregoing facts.