As we write this in early November, it now appears that Q3 shaped up to be a much better-than-expected quarter for many industry participants, especially those with greater exposure to the non-discretionary and installer channels. Two themes we see developing are 1) the widening gap between demand for DIY parts/services and those of the DIFM segment and 2) a category shift to value-line products. The parts retailers have been quite clear that the strength of the business continues to be on the DIFM side as the budget-constrained consumer continues to find ways to delay or defer, simply out of necessity.
We estimate that sales trends in the DIFM channel are likely in the mid to high single-digit range versus slightly down, to up low single digits for the DIY segment. With high gas prices, high unemployment and macro instability, we sense consumer confidence will move only slightly from what are 20-year lows and keep DIY trends (along with spending on big-ticket items such as tires) under pressure.
Another theme we see developing is increased demand for value-line products. This is perhaps more interesting to us, as it has much more widespread ramifications for the industry. As many of you reading this article know and understand, the major parts retailers, such as Advance Auto, have been making a big push into the direct sourcing market in an effort to 1) keep cost of goods in check and 2) increase exposure to value-line products in categories (we hope only those categories) where high-quality standards may not matter as much.
Factor in the price sensitivity of the DIY consumer and in some instances an installer base willing to lead with price to drive traffic and the importance of the value line should continue to grow at a fast pace in our opinion. It’s hard to know just how big a percentage of mix the value line will ultimately become, but we do know it’s big enough to have manufacturers altering strategies to compete. Two examples of how large aftermarket suppliers are approaching the issue can be seen with Standard Motor Products and Federal-Mogul.
While each of these suppliers participates in different categories, the importance of increasing value-line exposure has been a high priority for each company. However, the approaches are much different. With Federal Mogul, we have seen an internal building of essentially a new product line that will act as the value line to differentiate from its core branded product lines. The process of launching internally has taken time and in doing so we think it lost out on some of the tailwinds and general industry momentum that drove very strong results, particularly for North American aftermarket suppliers over the past 12 months.
Federal-Mogul did recently announce $120 million in new mid-line wins as a result of its efforts, so perhaps we are seeing early signs that success may be underway; but only time will tell.
Standard Motor Products chose the faster approach via acquisition. Recently, the company announced the acquisition of Forecast trading group, which most of you know as a leading supplier of value-line products in the engine management category. While we don’t anticipate any dilution to its BWD brand, it will be interesting to see how the customer base develops. We would expect to see SMP at some point take some of the manufacturing in house and away from existing third-party vendors.
While we think SMP may have paid somewhat of a premium to acquire this company, it does add immediate accretion in 2012 and we see limited impact on its current day-to-day operations.
Coming out of the AAPEX show, we do sense a continuation of strong trends that are likely to continue. However, an element of cautious optimism persists especially with the uncertainty of the macro, fears of global recession and unprecedented low levels of consumer confidence — all things that should lead to above-average growth in the aftermarket and make for a very interesting 2012 election race.
