The panel consensus was that the combination of lower gasoline prices, easing cutbacks in miles driven, expectations of lower new vehicle sales in coming years (down to 10.9 million units on a seasonally adjusted annual basis in October as shown in Figure 1), the OE network under pressure and dealerships closing their doors has the potential to "jumpstart" aftermarket sales trends in the near to intermediate term. With so much economic anxiety and tightened auto finance standards, many consumers are likely to keep their existing vehicles for some time longer, placing a greater emphasis on general vehicle maintenance.
Continued parts, make and model proliferation represents one of the largest challenges to the industry, with the suppliers bearing much of the burden over recent years. With a tighter credit environment, the impact of carrying the cost of inventory has been magnified further. While distributors obviously want to keep favorable pricing and term structures with their suppliers, this has to be balanced with the need to keep vendors healthy to avoid a supply channel ripple effect. For manufacturers, working capital and supply chain finance options are being carefully considered today. For the future, we believe better intercompany communication and enhanced models for forecasting parts demand will be crucial for keeping excess inventory levels in check.
Despite its historical presence, we wondered if the importance of brand at larger service chains has diminished somewhat in recent years, and if this "brand-conscious" mindset and technician loyalty are no longer applicable to all technicians. We found in our discussions with management of some of the larger repair chains that, in many cases, "brand" and reputation of the service shop itself are more important to the average consumer than the name on the parts box. For parts procurement with technicians, it's still logistics, speed and availability of parts that take priority over brand.
As we move up in the aftermarket supply chain, it is not surprising to hear that panelists placed more importance on brand — culminating at the manufacturer level, where companies can sell their branded products at a premium to their private-label product offering. For distributors, it is important to avoid comebacks to technicians at independent service shops — they create un-monetized bay time and leave the consumer questioning the quality of work.
Operators of independent aftermarket service and repair chains do not have the clout or recognition that larger chain operators possess, thereby increasing the likelihood that they will rely on a branded part to get the job done. Our distributor panelists agreed with service chains that most customers don't focus on part brands or product lines installed, but noted that the technicians do, and the key to branded product management is in finding a way to keep the professional technician happy with name brand lines while still having the private label coverage to compete effectively with other more retail-oriented operators such as AutoZone and Advance Auto.
For suppliers, solid brand equity is still a greatest asset, and the premium commanded for a recognized, branded line is key. At the end of the day though, those suppliers with the ability to offer quality breadth and depth of part coverage (whether private label or branded) at a competitive price are likely to see incremental business opportunities.
Heading into the panel, we believed that the pressures impacting the OE channel and franchised dealerships were likely to result in enhanced opportunities for most aftermarket participants over the next few years. Our conversations with panelists from the technician and distributor segments of the auto aftermarket only reinforced this thesis.
With potential demand increases from professional installers, we believe the warehouse distributors, jobbers and even the retailers stand poised to benefit given the increased needs for commercial parts distribution. As more OE parts manufacturers look to gain share in the aftermarket, we think that pricing will be used to secure incremental business wins. In our opinion, there already is some excess supply among the core aftermarket supplier base, and in conjunction with price cutting by more-OE exposed players, the aftermarket retailers and distributors could see enhanced gross margin opportunities from improved pricing on parts procurement. Part of this profit may also work its way down to the service shop and installer channel, but we believe this trend is a negative development for those companies already manufacturing product for the aftermarket, as they are forced to compete even more to hold customers. BB&T Capital Markets is a full-service investment-banking firm that focuses on specific industries, including the automotive aftermarket. 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 $137 billion in assets.
Disclosures: BB&T Capital Markets makes a market in the securities of Dorman Products, Inc.; Motorcar Parts of America, Inc.; and O'Reilly Automotive Inc.
BB&T Capital Markets has managed or co-managed a public offering of securities for AutoZone, Inc. in the last 12 months.
BB&T Capital Markets has received compensation for investment banking services from AutoZone, Inc. in the last 12 months.
BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Advance Auto Parts, Inc.; AutoZone, Inc.; Dorman Products, Inc.; Midas, Inc.; Motorcar Parts of America, Inc.; and O'Reilly Automotive Inc. in the next three months.
Midas, Inc. is, or during the past 12 months was, a client of BB&T Capital Markets, which provided non-investment banking, securities-related services to, and received compensation from, Midas, Inc. for such services.
An affiliate of BB&T Capital Markets received compensation from Advance Auto Parts, Inc.; AutoZone, Inc.; Midas, Inc.; and O'Reilly Automotive Inc. for products or services other than investment banking services during the past 12 months.
