The year 2005 brought seasons of change to the automotive aftermarket. There were more than 29 mergers and acquisitions among retailers and distributors. Parts stamped with “made in China” flooded warehouses and stores at alarming rates.OEMs introduced technology that is driving even more consumers to dealerships. Aftermarket distributors continued their struggle to find accurate product information. GM and Ford lost additional market share, and major aftermarket manufacturers labored to make a profit.
Anyone can see that the atmosphere in the aftermarket is not for the weary or faint of heart. Parts distributors and shop owners must be vigilant in order to succeed in such a volatile business climate.
At this past year’s Automotive Aftermarket Products Expo (AAPEX), Aftermarket Business sat down with several members of our Editorial Advisory Board, along with columnists Mitch Schneider and Bob Moore, to discuss both the calm and rough conditions that lie ahead for the industry.
Reaching a boiling point?
Probably no issue in recent years will have a more profound implication on our market in its iterations than the influx of products from low-cost country (LCC) suppliers. It will only be a matter of time before we can gauge the exact repercussions (or rewards) in the North American aftermarket.
Jack Creamer, president of Distribution Marketing Services and a 40-year veteran in the aftermarket, explains that distributors should be using product and pricing information to leverage their existing vendors, but have to be careful not to “blow up our industry” by “taking on offshore vendors to replace perfectly good vendors who are knocking themselves out trying to meet the market now.”
But distributors have quickly taken advantage of the new price points for fast-moving items by gobbling up products that are gaining significant market acceptance among their customers, both consumers and professionals, forcing mainstream parts manufacturers to find alternative ways to remain competitive in this newly global market while still offering technical support, marketing services, cataloging information, warranties and more.
Co-president of the Automotive Distribution Network Mike Lambert sees the phenomenon as a continuation of the “Wal-martization of this country.”
As consumers, he says we all want lower prices, but as businesspeople we tend to think the cost structure could and should be higher.
Ted Wise, co-president and COO of O’Reilly Auto Parts, explains that the reason most distributors stock products from low-cost suppliers is because they have to. “Someone started it and they could do it and when one starts or two starts, everyone has to follow suit.”
This is just competition, adds Ken Walker, president and CEO of Meineke Car Care Centers. “It’s all supply and demand. If someone is willing to supply it at that price, someone is going to be willing to buy it at that price. Anything we say to take an Americanization stance on it is just swimming upstream, because this is going to be the way it is as long as it’s quality product.”
And quality is no longer the issue it was several years ago. More and more consumers and technicians readily accept non-American made products.
Walker suggests that nobody is creating any sins by taking advantage of lower prices if quality is not being compromised. “That’s our job — to get the most out of market price,” he says.
Ron Levene, president and CEO of Tier Parts Warehouse in N.Y., confides that for a number of years, his business didn’t take part in purchasing products from low-cost country suppliers and it ended up being to their own detriment. “We’ve had to change our attitude. We’ve had to start working with some of the people who source overseas” in order to remain competitive, he tells the group.
Andy Fiffick, CEO of Rad Air Service Centers in Cleveland, Ohio, says that for most of his customers, price isn’t as important as quality and service, but they do compete with “price gougers and have to buy some of the cheaper stuff” at times because of all the product that’s brought in from overseas.
Creamer is worried that, as prices get lower, it’ll be extremely difficult to raise costs in the future as expectations for these rock-bottom bargains has been heightened in recent years.
“Twenty-five years ago, I was selling chrome valve covers for more money than they bring in today,” says Jon Wyly, vice president of Arrow Speed Warehouse in Kansas City, Kan.
He isn’t too concerned about quality since quality product can and does come from anywhere, but “allowing the margins to go down the toilet” is what is unacceptable in this industry, he says.
Dick Fairbanks, president of Hyannis, Mass.-based Orleans Auto Supply, is concerned that there will no longer be a wake in terms of creating price expectations with branded products if the demand starts to dwindle due to Chinese products reaching higher levels of sophistication.
This strategy to use the brand name product as the highest price point has helped keep margins up for some in the aftermarket, he explains.
Walking on thin ice?
So what’s this new purchasing model mean for today’s North American suppliers — those who provide the full product line and all the marketing and technical support?
Creamer wonders who will insure the products when something goes wrong as LCC suppliers typically don’t guarantee or support their work the same way traditional suppliers do. But Wise says that distributors inherit that risk when they stock those parts.
Bob Moore, an Aftermarket Business columnist and president of his own aftermarket-consulting firm, doesn’t think that distributors should expect their N.A. suppliers to continue offering the slower moving items at the same price that they are today. He emphasizes that the intention of N.A. suppliers was to offer full-line products to their channel partners, with the assumption that they would purchase the entire line from them, as long as the product was good, the price was competitive and the necessary support was offered.
In the future, it may become impossible for North American suppliers to continue following their current business model without making compromises. Many in the industry believe they are competing with manufacturers on an un-level playing field — suppliers in China don’t have the same mandates in terms of safety regulations or labor and insurance costs that exist here.
But Levene argues that this is just part of doing business, as full line resellers were faced with the same dilemma several years ago when manufacturers gave better prices to retailers selling partial lines while wholesalers received smaller price breaks even though they were purchasing the entire line.
“It’s not get even…it’s the reality,” he adds. Relating the situation to that of the textile industry, Levene believes “we are going to be a knowledge-based economy and not a manufacturing-based economy” due to the new economic structure the automotive industry is taking.
Phill Porpora, co-owner of Lee Auto Parts, has been in the slow-moving parts business for years, and he believes that the top 20 percent of the SKUs have “always been a football game out there.” He believes his business has done well with slow-moving parts because that’s where they have exerted most of their energy.
Mike Gingell, vice president of Strategic Markets at R. L. Polk & Co., thinks the manufacturer business dynamic will surely be different in the future if Asian-sourced parts continue coming in with high quality and lower prices; however, he believes as China becomes a more affluent country, costs will eventually rise, creating a more level playing field for those producing parts in North America.
Telematics: The sky is falling
New vehicle technology and its subsequent changes are influencing the market much like offshore parts. Vehicles are becoming more complicated, they are lasting longer and OEMs are making every effort to offer technology that takes consumers back to the dealership for service.
The use of in-vehicle diagnostics and telematics has many in the aftermarket wondering how to build customer loyalty when OEMs and their dealership networks have a closed communication system that allows them to interact directly with the vehicle owner through the car.
“That’s what scares the dickens out of me…I’m yelling the sky is falling and I don’t have a solution,” says Walker, who references a recent BMW commercial where the car calls the driver to tell him he needs his oil changed. “If we don’t put an infrastructure in place,” the aftermarket will be at risk of losing an exponential amount of business.
What concerns most members of our Editorial Advisory Board is that nobody in the aftermarket is really addressing the topic as a potential threat. And some worry that if we don’t get legislation in place that allows the aftermarket access to a similar infrastructure, there is no way we’ll be able to compete at the service level.
Moore explains that with onboard diagnostics, someone is going to be able to tell vehicle owners exactly how much capacity is remaining in certain systems. “There is a fundamental difference between telling someone it’s been three months since they’ve had their car in and ‘your left rear tail light is out.’ It’s intelligence coming from the car.”
So, what’s the solution? Nobody knows for sure. Some suggest legislation similar to Right to Repair. A few think it’s a Be Car Care Aware issue. Other members of the board think that the aftermarket must develop its own infrastructure.
Telematics is “the biggest risk we’ve got by a magnitude of 10,” laments Walker.
Adding to this very real threat is the fact that dealerships have access to all the necessary parts to complete a job. They don’t struggle the way the aftermarket does with incomplete catalogs and inaccurate data, according to board members. Often, technicians aren’t sure which part to order for a job, and jobbers don’t know which parts to deliver due to issues with product identification, which sends some techs running to their local dealerships.
“I don’t think that the parts guys at the car dealers are any better than the parts guys at my stores…but I think they have more ammunition than we do. They have more precise product information. We are just now starting to get photos,” Porpora informs us.
Lambert adds, however, that an aftermarket counterperson has to be well versed in virtually every vehicle make and model, whereas a dealership counterperson only has to be trained on one vehicle manufacturer, and usually only for a shorter period of time — an obvious advantage.
“With cataloging, I don’t think anyone is evil. I think there is a bit of a blind spot on the part of our aftermarket manufacturers,” according to Fairbanks. He explains that some manufacturers claim to have a VIN lookup, and it’s “just not true.” They may have a system in place, but it’s not the same as the dealers have, he laments.
Hybrids high on radar
Hybrids represent both a growing concern and a great opportunity for many. According to R. L. Polk & Co., new hybrid vehicle registrations in 2004 were at just over 83,000, an 81-percent growth over 2003. By October 2005, there were more than 187,000 hybrids registered. Gingell says that their research suggests consumers are very open to hybrids and that much greater volumes will hit highways in the coming years. While these sales offer new opportunities for the industry, they also pose a risk to those who don’t know how to service them.
“I’m very concerned about the hybrid vehicle. I read somewhere that 24 people have died on the assembly line and I’m worried our techs and our public aren’t going to know what they are doing because of lack of training,” suggests Porpora. Schneider, who owns a shop in Simi Valley, Calif., says that when he sent two employees to a training class, the program opened with images of injuries related to repairing electric vehicles.
But the only problem Fiffick sees with hybrids is “keeping them out of dealers and getting them in my shop.” Fiffick, who owns a Ford Escape Hybrid himself, has a staff that’s highly educated on hybrid technology. What’s really going to affect the industry is that hybrids require many different parts and service intervals than typical gas-driven vehicles, he tells us. “Regenerative braking is going to take the brake industry and turn it on its head” along with other repair and maintenance.
Degree of change needed
Fiffick’s predominant concern for any new vehicle technology is the lack of valuable training in the aftermarket. He has made it a point to hire outside contractors for educating and teaching each of his employees on new technologies but says not every shop has that luxury. And unfortunately, he adds, many of the clinics offered by manufacturers are “more of a sales pitch or an overview.”
Schneider believes the industry needs uniform standards for all shops to adhere to, “but until we start talking about certification and licensing at that level, we are just going to be making ourselves feel good without substantive results.”
Many of the Editorial Advisory Board members on the distribution side admit that they wrestle with what to offer their technician customers, since several just don’t seem interested in training.
“We’ve done very well with tech training but it’s very frustrating when you are canceling classes,” says Porpora. “Five percent of our shops fill classes and the rest don’t.” His business has made great strides, however, in tracking the hours technician customers spend in their programs. Upon completion of 40 hours, a plaque is received and Lee Auto has awarded more than 1,000 plaques. After 100 hours of training, a different plaque is given out and Porpora reports that about 300 have been distributed. “Based on those numbers, I’d say our training is pretty successful.”
Wise says O’Reilly’s has turned its training program into more of a partnership by asking their technician customers what they are interested in. “We train them on what they want to be trained on. We facilitate it so they don’t cancel it because they’ve already paid for it or signed up in effect.”
Fairbanks is a little more cynical when it comes to driving change among his service dealer customers. “I’m very pessimistic in my ability to drag a 40-year-old man who is already set at a given level of income and quality to a place that he hasn’t wanted to go by now.”
But Schneider says that it’s more important than ever to start cultivating the younger technicians now since a large number of shop owners are nearing retirement age. And one of the only ways to avoid adding pressure to the auto aftermarket is to offer adequate programs for them to tap into.
Performance products heat up
Most agree that there is nothing sexy about automotive hard parts and chemicals, but some manufacturers and developers in specialty equipment may beg to differ. “Anybody with any vision on the SEMA (Specialty Equipment Market Association) side of the market views the replacement parts market as a huge opportunity,” says Wyly, who also serves on SEMA’s board of directors. They see it as a way to broaden their market coverage, he reveals. Likewise, there is an opportunity for those selling hard parts and chemicals to get more involved with selling accessories and performance items. Even though “it’ll always be a niche, there is an opportunity there where the math is undeniable,” Wyly tells us.
But Porpora believes as a wholesaler, it’s hard to determine what demand will be for anything other than needed wear-and-tear items.
Orleans Auto Supply’s Fairbanks agrees, adding that the transaction can be a miserable experience for a wholesale counterperson. “Now someone is in there an hour and a half looking through catalogs asking, ‘Is this going to look good on my Accord?’ It’s to the point that the wholesale counterman doesn’t want to get anywhere near it.”
Fairbanks is worried, too, since consumers can already go online to make purchases and know what they’re looking for.
“We don’t understand it, so why should they come to us? We are not adding fundamental value to that order.”
On the other hand, Levene, whose business — Tier Parts Warehouse — is 80-percent wholesale, has teamed with a local performance supplier to launch a trial in one of their markets. He adds that the key for a traditional wholesaler is using a vendor that caters to the market. “I’m going to someone who understands the market and specializes in the market — I don’t want to be the professional.”
For a retailer like O’Reilly Auto Parts, Wise says they, too, rely on their partner warehouse, which in this case is Arrow Speed, to handle the specialty lines, while they manage and carry the “20 percent of the SKUs” that get the majority of sales. What’s important, he says, is that any behind-the-scene transaction is invisible to the customer.
But regardless of a distributor or reseller’s decision to tap into the market, it is clear that a large percentage of vehicle owners have a desire to personalize their vehicles, and the performance segment may be growing faster than any other. “This is the ‘want to’ stuff and it’s pretty darn recession proof,” concludes Wyly.