Tuesday, March 1, 2011

2013 Light Vehicle Parts Market Contraction - Expect a 14% Slimdown - Winners and Losers, and Winning and Losing Strategies

by David Carlisle

By 2015 the customer pay light vehicle aftersales parts market is likely to shrink by around 14% (uninflated dollars). We didn’t really miss the recessionary “bullet” in aftermarket car-parts sales in 2009 and 2010. 2009’s sales declines were the direct result of Keynesian Paradox of Thrift that mostly canceled or delayed light vehicle maintenance and repair. 2010’s sales rebounds did not get us to 2008 levels; rather they were propelled by inventory and ordering bullwhip effects on the market, and consumer belt loosening. 2011 will see the market return to more normative conditions, with the tail-end of the recovery bullwhip softening out; my guess is that this will add about 5% to the “normative” market. However, 2013 will be our comeuppance. This is simple math, so no one in the light vehicle aftersales space should find this surprising.

You can see the impact of this on the second chart – “Normative Case Indexed Size of Customer Pay Parts Market.” Under “normative conditions” the size of the customer pay parts market would contract by about 8-9% from today to 2015 (assuming constant dollars, where retail pricing is in line with normal inflation). This conclusion is derived from very simple math – multiplying fleet age parts consumption and volumes. The third chart, “Normative Case Indexed OEM Customer Pay Market Share” shows how these age consumption/volume/share profiles translate into OEM market share. Here, we see the OEMs losing about 4% of their existing market share from now through 2015 (e.g., they will retain 96% of their current market share in 2015). It’s a double whammy for the OEMs – contracting market coupled with contracting market share for the most profitable parts business.

As we’ve seen in the past two years, “normative conditions” have not played out in the market. So, the last two charts need to be sensitized to probable realities that will impact both the size of the market and market shares.

GDP Consumer confidence and various economic factors get blended into “GDP”. GDP could climb 4% or more this year and should continue to increase over the next five years as we come out of the worst recession since the 30’s. Global volatility, state fiscal crises, energy costs and the housing disaster could slow the upward trend but most economists expect continued growth through 2015. Unfortunately, it is unlikely that moderate GDP growth will have any positive (or negative) impacts on either part market size of share shifts.

Fuel Prices & Miles Travelled Retail gas prices peaked in 2008 at just over $4 and we seem to be headed back that way. The chart below shows retail gas pricing since 1990. This will likely result in increased sales of cars vs. trucks, higher fuel efficiency across the entire fleet of new vehicles, and a push towards alternative fuels. If fuel prices continue to climb we can expect a negative effect on consumer income, a slowing of miles driven, fewer light truck sales and, therefore fewer accessory sales, and increased maintenance and repair (M&R) consumer “thrift”. This will have a dampening impact on the total parts market, and result in share shifts away from the OEMs to the IAM.

New Light Vehicle Sales Year over year sales increases are built into the normative case. Considering the age of the vehicles on the road, the expected growth in GDP, and subsequent rise in consumer confidence we can anticipate 15 million new vehicle sales per year by 2014, or earlier if we’re lucky. Increased vehicle sales are practically inevitable assuming GDP and economic recovery, coupled with lots of pent up demand and aging vehicles. Tighter credit, declines in home prices, and job instability could slow the growth curve, but should not derail the upward trend. What’s not built into the normative case are changes to the car/truck sales mix – rising fuel prices and evolving vehicle choices favor a long-term trend of a leaner light truck mix. This will dampen accessory sales and further cause parts market contraction.

Digital Demographics We’ve spent a lot of time talking recently about the emerging digital customer who tends to be young, technologically savvy and influenced by social media. They also aren’t particularly loyal to dealers, as shown by the radar chart “Digital Service Customer Behavior”. Today’s youth will age and be replaced by more technology-inclined youngsters as the size of the older, most dealer loyal group will gradually decline. Furthermore, older non-digital service customers are evolving, too. They are transforming themselves into digital customers. Currently, one-third of all service customers are “DSCs”. It is a safe bet to assume that by 2015 two thirds will be DSCs.

Technology & Quality The ‘”Crashes” chart shows the significant decline in total crashes since 2005, with estimates out to 2015 based on current rates of crash shrinkage. We should expect continued decreases in crashes as light vehicle manufacturers build safer vehicles with better handling and braking systems. New crash avoidance systems are showing up in high-end vehicles and will spread across the entire industry over time, reducing incidents through smart computer systems. Beyond this, the recession and subsequent decline in miles coupled with stricter drunken driving enforcement has impacted the number of crashes. All of this will act to shrink collision parts sales. Consistent with these safety-tech trends are overall vehicle quality improvements that will reduce the need for replacement parts over the entire life of each vehicle. But, for the OEMs, there is some good news – better brand and patent enforcement is gaining momentum and will bolster OEM collision parts market share stability. Ultimately, active Telematics vehicular systems should increase dealer service market share. These OEM advantages are likely to be countered by the independent aftermarket (IAM) through aggressive marketing, legislative lobbying, and insurance company “partnering”, leading to zero-sum share gains for both the OEMs and IAM.

So, What Are the Likely Bottom Line Impacts?

We expect even further market shrinkage and share shifting based on the characteristics of the aging fleet and the key fundamentals that impact how many motor vehicle parts you need and where you buy them.
We need to think of these shifts as significant tidal forces that reflect the enormous momentum of how we build vehicles, how they are serviced, and how many we are selling (of what type) in this post-recessionary world.

System Dynamics and Unintended Consequences
There’s not much that can be done to bolster the market itself – on a constant dollar basis. It’s hard to get someone excited about going out and buying new struts for their 2005 Tahoe when they don’t need them. All of the real action will be in market share battles pitting the OEMs against the IAM. This is not rocket science, and the conclusions are inescapable – the investment community will figure this out all on their own. Thinking realistically, nothing can be done to grow the normative market. The smarter IAM companies will start putting pressure on selling more to dealers, pumping even more money into Right to Repair, launching much more sophisticated pricing strategies that go after any one-size-fits-most OEM pricing rulesets, and pumping big bucks into internet purchase funnel strategies. Emerging from a horrendous 2009, many OEMs are carefully preserving aftersales profitability as part of a natural breather strategy. This might make them late to react to these more direct frontal attacks. Denial and hope will play important roles in numbing their strategic responses: denial of the math behind the simple forecast numbers, and hope that their current set of market share expansion strategies will be low-ball homeruns. Given normative conditions, 2012 will be a down sales year, and for many OEMs it will be difficult to budget significant additional investment for the right strategies. So, many OEMs are bound to price their parts significantly beyond an inflation adjustment. And, things will get worse from there.

Winners and Losers
The OEMs who fared the best in 2009-2010 will emerge from the next few years in the best shape – VW, Hyundai, Subaru top the list here. Obviously, some other OEMs did not fare so well and might see even tougher times in 2013-2015. Some IAM players will be very hard hit – LKQ/Keystone looks like it is holding a losing hand. It reminds me of Blockbuster … in today’s market; wrong product in the wrong market with the wrong value proposition. Declining crash rates will hurt them significantly, and the older car parc will change the nature of their customers. The margins from hanging old junk car parts on old cars that survive a crash (and are not totaled) … well, it looks pretty unattractive to me. They will be competing with tubes of Bondo and it won’t be pretty. NAPA/Genuine Parts will do better in the 2014-25 market – their strengths are their number of locations, history of selling to the older car parc, historical diversification into all vehicle segments, and the loyalty of traditional Independent Repair Facilities (IRFs). AutoZone will struggle, but is brilliant and will figure things out. The others? If you have any stock in the dogs-breath of other IAM companies, sell soon. The market will soon start to stink to investors.

Twelve Winning Strategies for Crappy Market Conditions

  1. Market share expansion strategies targeting older vehicles
  2. Telematics strategies that are active and target older VINs – this is absolutely critical for survival
  3. T&C strategies that reward dealer purchase loyalty and share expansion – wholesale
  4. Brilliant pricing strategies that cut your product lines at a very fine level of detail
  5. Extremely effective tire and round-the-wheel program
  6. Effective fast lane LOF program to stop early customer defections
  7. Dealer digital customer service training
  8. Extremely effective free inspection programs
  9. Fresh and well thought-out customer rewards programs
  10. B2C, B2B, B2B2C web strategies
  11. Customer owner center on the web that is “sticky”
  12. Strategic (not tactical) third party and social media strategies that ensure your dealers get a fair shake when customers research service options

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