Frost & Sullivan Executive Summary:
U.S. Automotive Aftermarket
30 June 1998
Introduction to the U.S. Automotive Aftermarket
The automotive aftermarket is a mature market for which distribution is becoming an increasingly important factor. The aftermarket is marked by intense pricing pressures, vendor consolidation, intense distributor consolidation, parts proliferation, increasingly powerful distributors, and a fundamental shift in the aftermarket end user.
The do-it-yourself (DIY) market is slowly approaching saturation, and its annual revenue growth has slowed. Increasingly complex vehicle systems, aging baby boomers, and less leisure time mean that the do-it-for-me (DIFM) market has been on the brink of a significant growth cycle. Even though the number of service outlets in the United States has been declining for the past 15 years, service revenues have consistently been on the rise.
Overall, revenues for the U.S. automotive aftermarket have grown between 1 and 4 percent annually during the past five years. Current economic and demographic trends indicate that this growth is expected to continue between 0.5 and 5 percent during the next five years (1998 through 2002).
The population for light trucks and passenger cars in the United States has already passed the 200 million mark, and continues to rise, despite somewhat sluggish vehicle sales in early 1998. These vehicles are being driven farther each year, as the U.S. driver now averages over 12,000 miles per year. Aftermarket growth has also been supported, as the average age of vehicles and the price of new vehicles continue to rise.
Distributors and aftermarket vendors have both been hurt by the increase in the quality of original equipment (OE) products. Sales of parts for sport utility vehicles and trucks will increase significantly faster than sales for passenger car parts, which should benefit distribution channels that adjust inventory mixes accordingly.
Distribution is playing an increasingly important role in the aftermarket. Manufacturers are offering products of equally high quality, and the discretionary purchase nature of automotive products lessens the impact of advertising. High order fill rates and short lead times are becoming the way for vendors to differentiate themselves in the aftermarket. Superior distribution usually means higher margins for vendors and distributor alike.
In the United States, consumers are faced with ever-dwindling leisure time and when their vehicle needs repair, they want it done quickly. For installers and their suppliers, serving the customer means getting the right part to the customer at the right time. And what about having the right price? After being bombarded with everyday low pricing practices and reaping the benefits of pricing pressures resulting from market overcapacity, consumers now assume that the right price is a given.
The growing importance of distribution can be illustrated by the growth of two-step distributors. Three-step distribution, used by most of the aftermarket, is slowly giving way to two-step distribution. Two-step distribution consists of warehouses selling direct to installers, and jobbers buying direct from vendors. Yet as the bankruptcies of APS, Inc., and Reddi-Brake indicate, eliminating a third level of distribution is certainly no guarantee of higher profit margins.
Distribution Channels
This report on aftermarket distribution separates the U.S. aftermarket into the following 14 channels of distribution:
- Auto parts retailers (such as AutoZone)
- Mass merchandisers (such as Wal-Mart)
- Warehouse clubs (such as BJ's Wholesale Club)
- Programmed distributor (such as NAPA)
- Independent warehouse distributor (WD)/jobber
- 2-step warehouse (such as Installer Service Warehouse)
- Original equipment service (OES) channel (such as Mazda dealerships)
- Production engine rebuilder channel (such as ATK Engines)
- Mail order channel (such as Performance Automotive Warehouse)
- Installer chain channel (such as Midas, Inc.)
- Salvage yard channel
- Quick lube channel (such as Jiffy Lube)
- Service stations (such as Chevron)
- Tire retailer channel (such as Goodyear)
Many distribution channels have key strengths that will benefit them in the years to come. Warehouse clubs have a cost structure that allows them to price many of their chemicals and parts at price points which put discount stores and auto parts retailers to shame. Quick lubes have made their mark offering the customer a commodity product that is profitable because the consumer is willing to pay more to have the product installed quickly. WDs and jobbers continue to offer the best product coverage in the aftermarket and have the most experience serving the installer.
Certain distribution channels possess major weaknesses. Warehouse clubs will never be able to sell vehicle-specific parts profitably due to the nature of their business. WDs and jobbers have not matched their auto parts retailer counterparts in terms of inventory management and adoption of technologically advanced information systems. This is slowly changing, but it has given the auto parts retailers a significant head start.
At the same time, auto parts retailers have not had instant success as they begin selling parts to installers. As auto parts retailers try to penetrate the market they are finding out that a lack of experience serving the installer is costing them dearly. The nation's two largest two-step warehouses both collapsed due to problems with inventory selection and (visible only in hindsight) rapid expansion that was too fast for the market to bear. Besieged on all sides, service stations are abandoning the aftermarket in favor of car washes and fast food.
The ever changing automotive aftermarket offers opportunities for some distribution channels to grow at the expense of others. Joint ventures between merchandisers, quick lubes, and installer chains are becoming more commonplace. Even auto parts retailers and WDs have partnered in some cases. As with many distribution channels, salvage yards have been consolidating in recent years.
Merchandisers such as Wal-Mart have set up Internet sites for shopping on line, and warehouse clubs are starting to invest capital into private brands. Installer chains are expanding into general repair in a search for profits. Who would have guessed that Midas, Inc.'s, brake business would be larger than its exhaust system business?
Threats to individual distribution channels usually come in the form of other aftermarket distribution channels. Auto parts retailers are not satisfied with their success in the DIY market and since the early 1990s have begun adding installer delivery programs. Independent jobbers across the country are closing as the national auto parts retailers move into town and WDs start selling direct. Many jobbers have decided to join program groups, further increasing their purchasing power.
Program groups continue to be the sleeping giants of the aftermarket which no one wants to awaken. The majority of parts are still sold through the traditional side of the aftermarket, which consists of programmed distributors and independent WDs and jobbers. The program groups are consolidating, and if they learn to manage properly their inventories, will benefit from the growth of the DIFM market.
The OES channel poses a serious threat to all other distribution channels as it experiments. Another threat to service-oriented distribution channels will be the used car superstore chains. AutoNation bought out its second-largest competitor in 1998, and while this channel is small, someday it could grow to become a serious threat. The aftermarket continues to change, and distribution channels are changing with it in order to survive. Over the next five years, the greatest threat facing distributors and vendors will be to do nothing at all.
