Why the Automotive Aftermarket is
Bouncing Back Already
By Philip Atkins, director, Strategic Research & Planning, Automotive Aftermarket Suppliers Association (AASA)
The U.S. automotive aftermarket had its ups and downs last year, but 2021 is once again proving that the aftermarket is resilient. Aftermarket suppliers report that the first quarter had strong sales and are optimistic about the rest of the year. AASA believes that economic conditions and the fundamental drivers of the aftermarket will support the market throughout 2021, though risks are present (and not just from the pandemic).
Market Demand is Stronger Than Expected
At the height of the pandemic, a good solid forecast for 2020 aftermarket sales was a decline in sales, -9% year-over-year (Y/Y), followed by a +12% recovery in 2021. But once federal stimulus payments began in Q2, the aftermarket began to recover as households took their vehicles in for servicing, for repair, and to be enhanced with discretionary add-ons. When the federal government deemed the automotive industry an “essential industry,” this ensured that suppliers could keep their factories open and continue to book sales.
A survey of AASA’s membership showed particular strength in new orders in Q1 2021, which show an average volume gain of +14% though most members expect gains well over that. In comparison the new order average volume one year ago during the pandemic was -3% while the pre-pandemic Q1 in 2019 was just +3%. See Figure 1. This bodes well for the near future in the independent aftermarket.
With member input, AASA is expecting sales in Q2 2021 to strengthen and is looking ahead to another positive year in 2021.
Strong sales are coming on top of a strengthening economy.
Increasingly, the economy is supportive of aftermarket growth with many economists providing forecasts that are more upbeat than earlier forecasts. For example, a February survey of economists by the Federal Reserve Bank of Philadelphia predicted that the U.S. GDP will increase 4.5% this year, up from 4.0% in the previous survey. They also call for unemployment in 2021 at 5.9% rather than the 6.3% predicted earlier. That’s good news… the more people commuting to and from work, the higher the number of miles driven. And as more people return to work, consumers are becoming more confident: Consumer confidence rose to 86.5 in April from 84.9 in March, a 13-month high, according to the University of Michigan and Thomson Reuters. And with confidence, they are showing a willingness to spend: Consumer spending rose 9.8% in March this year, the biggest jump since May of last year.
Consumer Behavior Changed – for Better and Worse
The U.S. made painful adjustments to the pandemic, some of which are headwinds for aftermarket sales and some of which are tailwinds. Stay-at-home and work-from-home mandates are the biggest and perhaps longest lasting headwinds for the market. The result was a sharp reduction in the number of miles driven with April 2020 showing a 40% decline versus the same period in 2019. Negative results continued through 2020 and into 2021 until finally Jefferies modeled a 16% Y/Y increase versus the pandemic-affected March 2020. See Figure 2.
Fortunately, other behavioral changes emerged in 2020 to offset some of the lost commuting miles. One is a shift from virus-risky public transportation to the ultimate mobile PPE, private vehicles. Another was urban de-densification as city residents moved away from close quarters in New York City and San Francisco to the wide open suburban and semi-rural areas to avoid the virus.
Stay-at-home mandates meant that scores of businesses shut down, unemployment rose and consumer spending was reduced to the point where new trade-offs in consumer spending occurred. Several product categories, including durable goods, clothing and out-of-home entertainment, were especially hurt. In the aftermarket, sales in some must-replace product categories such as batteries fared well while others that are miles-driven related suffered.
Of note, one beneficial behavior change has seen households holding onto and repairing the cars that they already own, rather than buying a new car or trading in for a recent model year car. The repair and upkeep of these vehicles is clearly a tailwind for aftermarket sales.
The pandemic was a boon to ecommerce sales in the aftermarket. According to eMarketer, ecommerce sales had a double-digit increase when compared to 2019. DIY helped to spur ecommerce, increasing its share versus DIFM over the summer by 10 points.
Vehicle Demographics Offset Miles Driven Weakness
While the decline in miles-driven led to a decline in sales, other market fundamentals softened the loss. U.S. car parc – the number cars in operation – continued to increase, which puts more “customers” on the road. That leads to wear and tear and ultimately more sales. The aftermarket likes older cars, which are primed for maintenance and repair, and the average age of vehicles on the road has risen to 12 years now. And in fact, average age is increasing at a faster rate now than it has in recent years – a side-effect of COVID-19. Aftermarket sales will also benefit from the increasing number of cars aging into our “sweet spot,” a reference to the age bracket of 6 – 11 years of age. This is a time when many cars are coming off warranty and headed to independent repair shops instead of the dealer.
Clearly there are many indicators pointing to a positive market for the independent aftermarket, but conditions are not without risks.
The pandemic, of course, is the biggest risk. Until herd immunity is achieved, a new surge in COVID-19 cases is a risk and all it entails for shutting down the economy, causing unemployment and dampening the aftermarket’s recovery. But there are other risks to the aftermarket as well, including:
- Shortages in raw materials that has forced producers to spend more time finding what they need and pay higher prices;
- Supply chain issues that are delaying inbound materials and outbound finished goods, with the result that they are missing fill rate objectives;
- And finally labor shortages – suppliers continue to struggle to stay fully staffed in their plants and shipping centers.
After a down year in the aftermarket, the industry’s resiliency has led to a strong start in 2021 and positive expectations for the rest of the year. Though miles driven will remain suppressed, other market fundamentals will help drive sales as the vaccination program rolls out and the economy improves. Although risks remain, your biggest risk is missing AAPEX where you can get access to market experts and peers who have a collective body of knowledge that you can benefit from. Make sure to register. See you there!