Since the onset of the recession and the collapse of new vehicle sales in the 2007-2009 period, dealerships have increasingly relied on service and parts revenue to boost their profits. But now that vehicle sales are improving, dealers may face a decline in service work.
That's because the dramatic drop in sales four years ago is catching up with service, and may exacerbate an ongoing decline in warranty work. According to data from J.D. Power and Associates, the number of vehicles in operation that are less than five years old will drop to 63 million this year, down from 84 million in 2006; that means fewer late model vehicles and less warranty work will be headed to dealer service bays.
With fewer new vehicles coming for service, dealers could face a dip in profits. According to the National Automobile Dealers Association, while service and parts were just 13 percent of overall sales for a typical dealership in 2011, they accounted for a whopping 72 percent of operating profits.
Other factors are at work that will have significant ramifications for both dealerships and the aftermarket. According to data from R.L. Polk, average miles driven per vehicle have flattened the past few years, and actually declined in 2008 (by nearly 3 percent) and in 2011 (by 1.2 percent) — a trend driven by increases in both the price of gasoline and the rate of unemployment. The number of vehicles per household is also flattening.
"We haven't seen an economic situation like this since the early 1980s," says Mark Seng, global aftermarket practice leader at R.L. Polk.
But the drop in sales from 2007 (when light vehicle sales were at 16 million) through 2011 will continue to dog dealer service departments. In 2008, light vehicle sales sank to 13.2 million according to R.L. Polk; in 2009 they dropped again to 10.3 million, and only rose slightly in 2011 to 11.5 million. According to J.D. Power's data, the number of units in operation less than five years old will begin rising next year, but it could be another four or five years before those figures return to 2006 levels.
That means fewer vehicles will be under warranty, as well. According to the Automotive Aftermarket Industry Association's Channel Forecast, dealership share of automotive aftermarket sales has dropped from 33 percent in 2000 to just over 28 percent. During the same period, the share of light vehicles under warranty dropped from 21.3 percent in 2000 to just 12 percent in 2011, thanks to the increasing age of the vehicles on the road (which in 2011 stood at an average of 11 years).
Warranty work continues to drop
The decline in warranty work isn't just the result of the sales slump. According to J.D. Power's 2012 U.S. Vehicle Dependability Study, overall dependability in the 2009 model year averaged 132 problems experienced per 100 vehicles (PP100), a 13 percent improvement over the 2011 report average of 151, and the lowest average in 22 years.
“Despite facing immense challenges in 2009, automakers placed a keen focus on delivering outstanding levels of quality, which they understood would be essential to their long-term success,” says David Sargent, vice president of global automotive at J.D. Power. “Three years later, owners of these models are enjoying unprecedented levels of vehicle dependability and manufacturers are experiencing market recovery. This is good news both for owners — who are holding onto their vehicles for longer than ever —and manufacturers, since perception of quality and dependability is a critical factor in vehicle purchase decisions.”
The top five nameplates with the highest dependability rankings were Lexus, Porsche, Cadillac, Toyota and Scion. Twenty-five of 32 brands have improved their dependability scores since last year, and domestic nameplates have improved in 2012 at a slightly faster rate than imports.
With initial vehicle quality and long-term dependability improving, fewer vehicles are coming back to the dealership service bay within the traditional five-year sweet spot. Not only does that generate less revenue for the dealerships, it also erodes the relationship between the service department and the vehicle owner; once they do need major services after the warranty period is up, they are less likely to return to the dealership. That's why many dealers have increased their focus on commodity service items like oil changes, batteries, tires and brakes, along with instituting "quick lane" services, so that drivers will be less likely to take their scheduled maintenance work to the independent aftermarket.
That also indicates that the decline in warranty work isn't just the product of fewer new vehicle sales. Dealership service departments face a future in which warranty work will continue to decline, even as new vehicle sales improve.
Dealerships target the aftermarket
Service and parts revenue at dealerships have been increasing, but the double whammy of less warranty work and the dip in late model vehicles on the road could detrimentally impact sales over the next few years.
Many dealerships have positioned themselves already to meet a very different service demand. The shrinking number of domestic dealerships has meant increased business for service operations at the remaining dealers, and others have retooled to draw in more post-warranty vehicles by adopting an all makes/models strategy.
Sales of new vehicles have also recovered, although not yet to pre-recession levels. LMC Automotive and J.D. Power have forecast 2012 light vehicle sales at 14 million (including fleet purchases), up from 13.8 million last year. Polk reports that new vehicle registrations will reach 1.2 million per month this year; during the worst periods of the recession, registrations dipped below one million (the peak number was 1.4 million per month in 2006).
As a result, dealers can expect to see at least some improvement in warranty work and customer pay work on late model vehicles.
“Concerns about the financial crisis in Europe are not holding back the momentum of the automotive recovery in the U.S.,” says Jeff Schuster, senior vice president of forecasting at LMC Automotive. “The industry is currently well positioned for the best performance since 2007 and is expected to approach full recovery in the next two years with total light-vehicle sales at 16 million units by 2014.”
Despite lower sales the past few years, dealer profits have been rising. Dealerships now have the cash, the customer loyalty research and the motivation to try to take back some post-warranty market share from their aftermarket competitors.
"They are aggressively pursuing improved service and maintenance loyalty programs, engaging with customers electronically, leveraging technology on the service drive and even instituting prepaid maintenance programs," Seng says.
