More Questions than Answers

More Questions than Answers

The title of the song says - there are more questions than answers. This was the title of a presentation given by AutoParts-Online Editor, Brian Taylor to open the Aftermarket 2000 conference in February this year. His brief was to look at how changes in the provision of personal mobility over the years continue to affect parts distribution channels. His presentation is printed below:

The year 2000

The year 2000. I don't know whether you felt the same way as me, but there was so much hype about it being the start of a new era wasn't there? Although the celebrations were all very impressive on the night, I have to say that I had become quite sick of the word millennium well before then. It must have been the most overused and abused word of the decade.

If the word millennium was a woman it would have been considered as gang rape. The only other phrase I can think that was used so often was 'England batting collapse'. And what about Y2K? What is that all about? They both became fashion Icons. If you didn't drop them in to conversation or a written piece you were about as respected as British beef in a French supermarket.

The view projected was that we had reached some auspicious water shed due purely to the date change. Whereas in practice, and apart from the religious and millennium bug connotations, the most significant thing about the year 2000 is that it follows the year 1999 and precedes the year 2001. In business terms it is simply a continuance of the dramatic changes that have been affecting our industry over recent years. It certainly is not a new beginning for the late starters to catch up.

Consumer demands

In this light, consumer demands - both from the private and fleet sectors - have led to several developments. Certainly on a per car mile basis, warranty claims, service and parts needs and vehicle faults are all reducing - although faults are still higher on older cars compared to new vehicles. Cars are lasting longer, repairs are reducing and accident rates are going down - despite increases in traffic. And insurance company pressure is reducing profitability for companies supplying parts for accident repair. Whichever way you look at it, the trend is for market contraction.

In fact, ICDP research has identified that car servicing has fallen by 70% in the last 20 years and will half again in the next 10 years. The result will be that annual repair bills will drop by 30% over the next decade. It's unlikely that the vehicle parc will grow by the 30% to counteract the demand trend. Or that people will be prepared to pay 30% more for their service and parts needs.

At the 1999 ADF Workout, the dramatic impact of improved component quality was clearly demonstrated by a startling series of demand curve graphs prepared by Knibb, Gormezano & Partners. They showed component replacement demand for exhausts, shock absorbers, steering parts, brake pads and clutch components - all on a downward path. The same component groups that were used as examples of reduced demand were chosen to display part number proliferation. It was all pretty chilling stuff and presents big challenges to those involved in parts distribution and installation.

In parallel with consumer demand driven change, legislation has been moving things along in three key areas - emissions, health & safety/employment law and recycling.

Emissions

The discussions about access to on-board information for diagnostics rumble on. At the of writing this report it appears that approved independent installers will get key access to engine management information associated with the control and production of emissions by o.e. parts. But that still leaves considerable difficulty for independents on a lot of other electronically controlled components, which could favour vehicle assembler replacement parts strategies and their associated installers. And the format in which this information is made available could well mean increased investment for small independent installers in particular if they want to work on late model vehicles.

So any new legislation may well open up some installer opportunities that might not have been available to them without a change in law. But it's not new work. In the past this work was easily available to independents. And it could mean a loss of work to independent parts distributors with vehicle assembler parts distribution channels gaining ground.

Furthermore, it is still not clear whether independent aftermarket component manufacturers will have access to all they need to manufacture aftermarket components. So reverse engineering could still be a key requirement for them without special relationships with vehicle assemblers.

Health and Safety

And there has been a whole bunch of new employment laws - much of it from Europe and all adding cost. Some of the additional cost is the result of reduced efficiency on labour use. But new equipment and monitored procedures have been required in many workshop areas. This is affecting bodyshops more than most.

Recycling

Since the first cars hit the road many years ago, component remanufacturing or refurbishment has been around in one form or another. But with the advent of end of life vehicle responsibilities and general pressures to green up our way of life it is likely to become a major aftermarket factor again. The vehicle assemblers themselves are getting involved, and this side of the industry will develop and become much more professional.

Aftermarket trends

Getting down to some trends in aftermarket values in the UK car parc will provide more insight. After growing year-on-year for many years, the parc now stands at around 26 million cars.

But a 1999 Mintel report highlighted that although the replacement parts market sales turnover in the UK has gradually increased in revenue terms to around £4bn in 1999 at best it has only kept pace with inflation in real monetary terms. Graph 1 shows the details. Despite longer lasting components, aftermarket parts revenue has been maintained by the growth and ageing of the car parc. But the effects of inflation have somewhat neutralised any real revenue gains resulting from the vehicle parc increase. On top of this, extended service intervals are now decreasing labour sales per car mile. And to cap it all, an oversubscribed market has kept prices down.

But we must also look at some other general trends to understand the effects they too will have on parts distribution. And a point often missed today involves parc age dynamics, Although the UK car parc has increased in number, the mainstay of independent garages - the 5-8 year old vehicle age group - has reduced. This is shown in graph 2.

It's a result of the collapse in new car registrations at the beginning of the 1990s, which caused great distress to forward thinking franchised dealer and vehicle assembler aftermarket departments at the time. It is now affecting many independent garages and fast-fits - but in both the latter cases not to the same degree as with franchised dealers. Service regimes tend to be more owner-driven as cars get older, rather than being dictated by vehicle assembler service schedules. And although focused on middle aged cars, independents tend to draw customers from a wider vehicle age group than franchised dealers.

Graph 1 - Replacement parts and inflation

Source; Mintel

Graph 2 - The UK car parc age profile

Note: a lot less cars of the age typically using independent garages for service

Source; Pemberton Associates

Graph 3 - DIY service collapse by car age

Source; Mintel

Graph 4 - Car parts replaced on own car in preceding 12 months

Source; Mintel

At the same time, the parc of cars of an age that would typically be maintained using DIY service has grown - as all those cars sold during the late '80s reach mature years. Over 30% of the parc is made up of cars aged 10 years old or more. So you would think DIY service channels should be doing well, wouldn't you?

But as far as service line products are concerned, they are not doing as well as many might have hoped. And in practice, the car servicing sector that has suffered the most over recent years has been DIY. So why is there an apparent contradiction? Mainly it's because cars are of a better quality, people have been keeping them longer and owners of older cars that might previously have used the DIY method of service and repair have moved back to professional channels for servicing - independent garages and fast-fits in the main. The cars are more complex and more important in household mobility terms. Leisure time has also become a premium. The older the vehicle the greater has been the decrease in DIY activity as Mintel research clearly demonstrates. This is shown on graph 3.

But as well as independent installer growth in business from older cars we need to consider another factor. There is an increased proportion of younger cars just about to exit vehicle assembler warranty regimes. Many losing their local dealerships as franchised dealer networks contract. People will only travel so far for service when the choice is theirs to make. This fountain of work on younger vehicles will become increasingly important to independent garages, due to scrappage rates on the high number of cars registered during the late 1980s and the low number of cars registered during the early 1990s - all resulting in a reduced number of older vehicles in the parc. This latter trend is likely to deplete DIY servicing to very low levels.

We need to remember that in total, the aftermarket covers servicing, repairs and accessory sales. They all have implications for distributors and installers. So which products are driving car owners in to workshops or retailers most frequently? Graph 4 shows the trends

The Mintel research shows tyres as the number one item replaced by motorists within the previous 12 months. They are followed by filters and wiper blades. Brakes, exhausts, plugs, batteries and lights are also at interesting levels - many linked to MOT and servicing requirements. But the results clearly justify the fast-fit approach. And the value of operating or offering an MOT test facility is very clear - in product sales and maybe more importantly in customer retention terms. However, it should also be remembered that a considerable proportion of drivers reported no replacements at all within the preceding 12 months.

Big factors driving change

But back to the big factors driving change - particularly at franchised dealers. They had to come to terms with the crash in new vehicle registrations and the resulting effects on parts and service profits at the beginning of the 1990s. Volume marques were hit the hardest in % share terms. At the same time parts were lasting longer.

So their reliance on aftersales departments providing the lion's share of total dealership profit put most dealers on the rack, although some marques performed better in vehicle sales terms than others during recession. It also put vehicle assemblers on the rack because they depended on a profitable network of a substantial size to guarantee vehicle sales levels - let alone parts profits.

Network outlet servicing capacity still typically reflects service and parts needs of owners of younger cars - a result of warranty work being a fountain of profit to dealers up until the late 1980s, and the need to focus on new car owners to keep them in new cars. This latter point is still a priority for dealers of course because the network is designed to sell and service cars. Clearly if dealership network profitability is to be maintained, any declining performance in new vehicle sales will require a reduction in network servicing capacity; unless, that is, aftersales strategies are in place to attract owners of older vehicles to the dealership for parts and service. Conversely, an improving new vehicle sales performance will require a network servicing capacity in line with the on-going growth in the parc caused by this success.

They also need enough network cover to provide the increasingly high levels of service expected by owners of new cars bought from the dealership. Even though the parts profit potential per car on new units is reduced. Constantly jacking up the parts and labour prices is a route to poor customer satisfaction and less likelihood of attracting owners of older vehicles for their parts needs.

The ADF Workout highlighted the importance of parts profit to vehicle assemblers by displaying an automotive profit pool pie chart which identified the profit from selling vehicles to franchised dealers at around 1% of the total profit pool associated with a vehicle through-out its life. Finance products and parts sales far outstripped it.

As the profit from car assembly on its own is unlikely to increase as a percentage of the total profit pool, vehicle assemblers will clearly turn more to related services for profit. Just keep an eye on Jacques Nasser if you want a good steer. They want and need more of the aftermarket cake, as the car increasingly becomes a commodity item. So clearly retaining customer loyalty by a satisfying aftersales link is absolutely vital if the franchised dealer channel is to provide enough business to keep vehicle assembler parts offers viable.

Can they reach out

I want to now incorporate three important dynamics associated with developing franchised dealer aftermarket strategies in particular. The changing car's value as it gets older, the movement of parts and labour potential towards ever-older vehicles and the ability of franchised dealers to reach out to the older parc.

Value

A car's depreciation is very fast in its early years and continues downwards. Cheaper access to mobility gives more people the opportunity of car ownership but they cannot afford the same level of maintenance costs as those owning younger cars. The costs must relate to the car's value.

Aftermarket potential

But aftermarket parts and labour potential is moving towards ever-older vehicles as longer lasting components and extended service intervals reduce owner operation costs in the early years, and increasingly sophisticated components and systems require expensive repair and replacement in later life. So the aftermarket ownership costs are moving towards the owners who can least afford heavy costs.

So clearly, if they want this parts business, franchised dealers have to stretch out deeper and deeper into the parc - and be flexible with the pricing of their parts and labour.

It's a long stretch

They must begin to retain a high proportion of 4-9 year old cars if they want to sell service and parts in acceptable volumes. A superb retention performance of <4 year old cars on its own will not deliver acceptable parts and service profits - to vehicle assemblers in particular.

So all this brings us to a fundamental point. If they want to be an effective parts channel, the big change for dealers is I believe that in aftersales terms they need to think full parc potential - not just work associated with new car purchasers who are still first owners, which is still the typical dealership approach. It's a big change and some won't be able to make it.

That's why vehicle assemblers are now working on new trade parts sales links to independent installers. Because however good or efficient they are - vehicle assembler fast-fits associated with dealer territories and traditional cultures will find difficulty in capitalising on the full parc aftersales potential - particularly if they are positioned to be marque specialists, which tends to act as a double edged sword on owners of older vehicles.

Change and consolidation

All the changes we've mentioned have impacted on both the parts and accessory markets which increasingly demand a wide range of products and ever-broader fitment capability within the product ranges. And as many of the independent installer and retail businesses involved are generally quite small - those single site owner operated businesses in the independent sector anyway - it is the wholesaler or motor factor route that more often than not offers the best supply route solution. Particularly as far as a readily accessed range of products being available locally at the right price. But many of these distribution businesses are also fairly small so to become even more efficient and provide real competition to franchised dealers, consolidation of independents has been seen as a way forward - by acquisition and partnership.

In fact, consolidation is something that pervades our whole industry. Chain ownership of fast-fit outlets by tyre manufacturers has been around for decades. It guarantees them market share and the ability to be involved in the fleet sector on a tyre brand basis. But the approach is now much broader, with the owned chains being added to by independent fast fit outlets on tyre manufacturer support programmes.

Some of these programmes include packages on those mechanical products handled by fast-fits like shock absorbers and brakes. It has presented mechanical parts distributors with a new opportunity and many independent fast-fits have chosen to go with full service parts distributor programmes rather than those offered by the tyre manufacturers. These tend to provide them with more options for expansion and less reliance on tyres or other single product support programmes. But in all cases, the ability to deliver a national offer is becoming the basic entry requirement.

Accessories

I want to spend a short time on accessories because we don't often get much information about this sector yet it is important for distributors. Mintel value accessories covering the areas of safety and emergency items at £119m in 1998 - down on previous years. However they place the market for functional, convenience and decorative accessories up - at £179m in the same year.

Graph 5 plots the market trends for these two Mintel classifications using an index with 1994 at the 100 level. You can see the growth in functional, protective and decorative accessories and the decline in safety and emergency items, as more of these are included as o.e. fitments.

This growth in functional/protective accessories is supported by research published in the 1999 Lex Report on Motoring shown on graph 6. This highlights a swing away from the enthusiast, towards the functionalist, as far as attitudes to their cars are concerned.

But this is still not the complete story on accessory market values. There are other markets not covered by the Mintel definition of accessories. It's difficult to get hold of good market value figures but other products include

Car care at £360m
Performance Audio or ICE at around £500m - must be hi-tech and fashionable because o.e. fitment is now throughout all model ranges
Security at £240m (over half of which is fitted professionally) - must be very hi-tech and fashionable due to o.e. fitment or low tech and cheap for older cars and as an extra visible deterrent.
Treatment chemicals at £45m
Auxiliary lighting - part of the £190m lighting aftermarket.

Clearly it is a big market. And accessory ownership trends across the two main Mintel groups of products are useful indictors for identifying opportunities.

Graph 5 - Trends in accessory sales

Source; Mintel

Graph 6 - Attitudes towards cars

Source; The 1999 Lex Report on Motoring

Graph 7 - Number of cars without accessories

Source; Mintel. Pemberton Associates

Graph 7 displays the product potential, showing the number of vehicles not currently fitted with each accessory group - the biggest potential being at the top of the list. You have to look down at positions 9 and 10 before safety items are featured, but it still indicates big numbers of cars not fitted with these accessories. However, it has to be remembered that this does not necessarily reflect revenue or profit order.

So we've trawled through some interesting trends covering parts, labour sales and accessories. Most observers expect the internal combustion engine to be with us for at least 30 years. Development of petrol and diesel engines will continue. There is a future based on familiar technology, but it's a changing one and other forms of power will be gradually incorporated over time. So what about this future?

Lean supply systems

Whatever happens, lean or super efficient supply systems are necessary to provide cost-effective service and repair work that delivers the car fixed first time when promised at a competitive price. Pre-diagnosis by installers is part of this, along with correctly identifying the parts. So parts distribution plays a crucial role to ensure the availability of correct parts on time.

In a scenario of expanding part numbers the problem needs to be addressed from a vertical channel point of view rather than each installer and factor ensuring his own backside is covered. A system of national and regional warehouses needs to be more closely linked with installers rather than the current un-economic system which typically produces an over-stocked system, with too much slow moving stock at installer or local factor level and not enough in the channel for fast delivery to where its needed.

To a greater or lessor extent this basic scenario applies to vehicle assembler franchised dealers and independent parts distributors, although it must be said that some franchised dealer channels have become much more efficient over recent years.

Closer relationships

This is because of their fully integrated systems and all suppliers will require closer relationships with their installer customers and the end users of their products. It's the only way costs can be taken out of the system whilst at the same time retaining the demanded quality of the product in service and the service levels at installers. Distance retailing programmes of one kind or another will be a major feature of the future. Either that or more lateral and vertical ownership.

More importance on servicing

Tighter environmental legislation will focus attention on servicing - along with higher repair costs if vehicles go wrong due to poor maintenance. So this has to be good news for the environment and those in the aftermarket.

Competitive and professional

But I believe the aftermarket will remain competitive and that the more professional independent garages capable of servicing cars in volume will play a major role in the future. They will need to be capable of solving the majority of problems associated with keeping hi-tech cars serviceable as they get older.

And only efficient, high vehicle throughput servicing points will be able to fund the increasing skills and equipment necessary to capitalise on the growing need for professional servicing that car owners will require. They will need the help of their suppliers to do so. The adversarial customer/supplier relationship has to be condemned to history and be replaced by a true partnership or ownership.

Service only outlets

Contracting franchise dealer networks will mean that service only outlets will be needed to fill the gaps in coverage and keep customers satisfied. Only the volume marques can fund such solus service networks from their vehicle parcs and even then they will be marginal in profitability terms and therefore un-competitive.

It is likely that they will need other service partners. So my guess is that professional independent multi-make service sites will be approved to access on-board information and satellite diagnostic channels from vehicle assembler owned or approved diagnostic support centres - these often based in other countries.

Network operators

To me it appears that the logical partners will be garages already within a quality network of some kind. Because the network operators will be able to deliver a national network straightaway - thus saving the vehicle assemblers time and money. For independents, being part of a network will provide more than a comfort factor. It will be the only route to survival. And the network will have to be much more than a badge on the wall exercise.

Think the unthinkable

And I believe there is much more to come. We need to think the unthinkable. So let's do that and be controversial. The traditional vehicle assembler franchise dealer structure as we know it will not be capable of selling enough parts or labour to fulfil the existing parts profit needs of the dealership or the vehicle assembler.

Furthermore they will not be able to provide the local service levels required by car owners - even on new cars. It's not because they don't try hard because many of them do. It's because developments in component quality have produced a fault line in the site business equation, which in practice still relies on servicing new cars. Whilst the networks remain new car sales led this will remain a fact of life in all but a few cases.

As well as developing their own dealer based installer initiatives designed to attract owners of older cars, vehicle assemblers must look to the existing parts supply channels to feed o.e. parts to owners of older cars. Hence parts trade clubs.

Ford has already bought the biggest chain of independent fast-fits so who will GM buy? Maybe they will buy a tyre manufacturer that already has a retail chain? When will we see GM's Delphi or Ford's Visteon 'coming out' and buying into parts distribution proper? At the moment they seem to be quietly beavering away at buying into parts manufacturing. Some appear to believe they can buy into installation and feed those outlets with a proportion of o.e. product, and increasingly aftermarket brands owned by them. You don't have to be Einstein to work it out.

Most of the vehicle assemblers are developing parts trade clubs of one kind or another. Who will be the first to launch a service club - one authorising independent installers to carry out official service and maintenance tasks?

Who will be the first independent parts distributor to officially channel o.e. parts to franchised dealers and independents? Which will be the first distance retailing programme to provide a national network and parts channel of official service outlets for vehicle assemblers? And when will we see motor factors or WDs start acquiring installer outlets. Some already own chains of accessory shops.