Discussion panel offers industry insights

Jan. 1, 2020
We recently hosted an automotive aftermarket Q&A panel discussion in New York, focused on big-picture trends and industry developments with management from companies spanning the entire aftermarket supply chain.

We recently hosted an automotive aftermarket Q&A panel discussion in New York, focused on big-picture trends and industry developments with management from companies spanning the entire aftermarket supply chain. Our expert panel consisted of Larry Sills, chairman and CEO of Standard Motor Products; Richard Roy, president and CEO of Uni-Select; Ray Arthur, executive vice president and chief financial officer of Pep Boys; Shane Evangelist, CEO of US Auto Parts; and Phil Daniele, vice president of merchandising and Brian Campbell, vice president, treasurer, internal revenue and tax, both of AutoZone.

Overall, we think aftermarket trends remain solid and the early start to summer (and extreme heat across much of the country) should keep the momentum from a strong March/April continuing into the fall. Below, we provide our top takeaways from the panel discussion.

More than just a one-year wonder
One thing all the panelists agreed upon was that the strength seen in 2009 and to date in 2010 is unlikely to prove short-lived. High unemployment, depressed new vehicle sales, an aging vehicle fleet and improving miles driven should continue to provide a solid underlying footing for aftermarket fundamentals well beyond 2010.

Extremes are good
The very strong trends in March and in April were a result of many factors, but the harsh winter was certainly a significant contributor. The early spring demand for parts repair provided a solid boost for both DIY and DIFM segments. The extreme summer temperature in many areas, particularly the East Coast and Southeast, have spurred demand and should give a lift to many parts categories (most notably in temperature control).

Books, electronics, and auto parts?
Yes, the on-line channel for the aftermarket should continue to grow. While online penetration of the aftermarket is only approximately 2 percent today, it does appear that aftermarket participants are placing a greater emphasis on expanding the online parts channel. The DIY segment makes up the majority of part sales with an emphasis on collision parts, larger mechanical items, performance parts and, accessories. A big difference between the traditional “brick and mortar” aftermarket and the online parts channel is the average ticket, and this is key. We think the average ticket for a traditional retailer such as AutoZone may be only $20-25 whereas the average ticket for an online auto parts purchase likely exceeds $100. While the time-sensitive nature of automotive repair and average ticket hurdles (shipping, etc) may place a governor on the long term market potential for online transactions, we do believe that additional expansion is likely.

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The sweetness of depressed new car sales
We think there were two key thoughts regarding the sluggish level of new vehicle sales. First, participants viewed the recovery as a long process where the current seasonally adjusted annual rate (SAAR) of 11 million or so may only reach 14 million over the coming years, and likely to plateau at a materially lower level than the 17 million-plus of just a few years ago. Second, and perhaps more important is that the “sweet spot” for the aftermarket appears to be expanding. A growing number of late-model vehicles are entering the aftermarket sooner as consumers struggle with constrained budgets and the perception of higher repair costs at dealerships. In addition, improved vehicle design and construction as well as an increased longevity of parts are keeping cars on the road longer.

Don’t count the dealers out quite yet
True, trends for the aftermarket are better than ever and should continue for some time. However, the lack of new car sales has awakened a sleeping giant as dealers look to offset warranty declines with greater cash-pay business initiatives such as quick lube, tires, accessories, and even greater levels of overall customer service (extended hours, CRM, price matching, etc.). While there are many obstacles in the way of the dealers gaining back significant market share, the independent aftermarket must continue to keep up the pressure and avoid complacency at all costs.

How to manage all these parts?
Parts proliferation remains a hot topic for the industry and with growing makes and models, the stress on the supply chain will only intensify as retailers and distributors are forced to manage an ever growing number of SKUs. The key will be greater collaboration with 1) suppliers and 2) their customers. In addition, technology investment will be necessary to refine “just-in-time” practices as well as limiting returns. It also appears that consolidation of distribution centers and greater reliance on hub stores to manage inventory effectively continues to gain acceptance.

One thing that is clear to us is that the fundamentals of the aftermarket today are likely the best they have been in well over the last decade. With improved profitability and a cash generation, aftermarket participants must now find the fine balance between reinvesting for the future with the need to maintain a lean cost structure. It is always easier to plan and position one’s business for the long haul when times are good, and it is very possible that the operating environment will look much different five years down the road.

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