Thursday, March 8, 2012

The Mysteries of Life and Parts Sales Trends

I have had the opportunity to learn from a wide range of folks. At the top of the heap was Stu Wagoner from General Motors. He encouraged me to slave away for months and create the “Crystal Ball” presentation at each year’s NAPB. He challenged me to leap and take risks with what I saw. Mediocrity and lazy thinking would result in much harsher lashings than hard fought, but na├»ve, stupidity. It is OK to be wrong when nobody else has yet to form an opinion. It is OK to be wrong when you are the first to catch your error. We have jettisoned the Crystal Ball, but we are still musing about things in the market. This crazy parts market has got me thinking.

I had dinner last week with a brilliant fellow who understands our aftersales parts business as well as anybody I know. I asked what was going on; he replied, “It looks like we have made more than a dent in retention.”

I will be talking a lot about this at the NAPB session on the aftermarket. The “what’s going on.” We seem to be in uncharted waters and have been since 2009 when sales took a fairly significant hit due to the recession. In the first chart I’ve plotted two different parts sales glide paths. The red bars represent what I term to be “the fundamentals.”

What I did was to tear apart the fleet into age of vehicle, forecast it out in time, and compute parts sales based on consumption rates for maintenance and repair (and powertrain), collision, and DIY. I ignore accessories simply because they are driven by new vehicle sales – they add about 15% to the bars in the chart. Next, I normalized the data so that it was no longer a predictor of $ but a predictor of trend. As you see, the red bars nicely dip in response to the huge drop in new vehicle sales that were a consequence of the recession – it will still take years for the industry to get to pre-2009 sales levels.

The green bars in the chart represent what’s really been going on and what will probably continue to go on. Here, I show the results we’ve seen from our monthly MarketWatch – 2009, 2010, and 2011. We have a large enough and broad enough sample to extrapolate it to the entire OEM sales segment and be roughly right. In 2009, the OEM segment slumped more than what was predicted in my “fundamentals” model. That made sense simply due to market overreactions caused by paradox of thrift and bullwhip effects. However, since 2009 the OEM segment has rebounded with annualized growth rates in the 8% range. They were growing when they should have been shrinking.

The second chart – the one with lines all across it – maps reported sales data from the most significant publically owned aftermarket parts companies. It contains two streams of percentages: the top one shows AAIA annual aftermarket segment growth for p-car and heavy truck, the bottom stream shows annual consolidated growth for the listed public companies. The composite group shows roughly double the growth shown by AAIA. A large portion of this “excess growth” is from industry consolidation where the top auto chains have been gobbling up each other. When I look at AAIA’s numbers, I see modest parts sales growth mostly coupled with pricing.

Roughly right, AAIA’s parts segment is growing about 3 percentage points a year due to price, and maybe 1 percentage point a year in true growth that reflects the needs of our burgeoning car parc. Recent post-recession growth for my set of public companies is in the 10% range, of which 4% is easy to explain. The other 6% is a combination of consolidation and acquisitions, and golly-I-just-don’t-know. It’s OK not to know everything.

I can better understand the OEM parts segment growth that has been in the 8% range for the past two years. The third bar chart helps – it is from the 2012 Customer Sentiment Survey. It shows where folks went for service the last time they went and where they typically go. They are either the “original” vehicle owner, or they bought the vehicle used. What this shows is that original vehicle owners go to the dealer a lot more than used vehicle owners. It is pretty whopping – the big numbers in the chart show this by age of vehicle. According to RL Polk, vehicle retention (i.e., holding on to cars longer) is up 31% since 2007. That’s a lot. When you take both these phenomena into account, you can begin to understand the OEM growth numbers.

Bottom Line: There seems to be evidence that the OEMs are regaining parts market share, and the most convincing argument in support of this is longer vehicle ownership by new car buyers, which has been bolstered by the recession’s bite out of consumer pocket books. It also seems logical that the parts market for p-car and heavy truck is growing at a faster rate than AAIA predicts. This is due to parts consumption rates from an older car parc. But, there’s a heck of a lot more to this story. See you in Chicago.

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