Infected with 'the shrinking candy bar' syndrome

There was a time when aftermarket R&D efforts would impact the design and operation of OE vehicles.

Sometimes it was by identifying and fixing shortcomings in OE designs. Or by innovating a product so embraced by the consumer that the OE would have to integrate it into subsequent vehicle designs. Many innovations would result in making it easier to maintain or repair vehicles.

Regardless of the outcome, the aftermarket has long been involved with innovating and improving parts for vehicle owners and those in service and repair.

But in recent years, it has been my observation that such innovation isn’t nearly as frequent. So what happened?
As in so many cases, the answer is simple economics. Cash-strapped manufacturers are not investing in R&D anywhere near the level they once did.

I think the root of the problem can be found in the fact that the automotive aftermarket is a mature market, marked by a reduced impact of brands and a general “commoditization” of products. This has created a situation where price drives almost everything. People want things like extra discounts, extended terms, factoring, consigned stock or any financial device that has the effect of lowering price or reducing investment for the reseller of the parts.

Depending on the decade, people wanted to buy “like Sears,” get “NAPA’s price” or “the AutoZone deal.” Everyone was convinced that there was a better deal. Often they were right. Generally speaking, lack of discipline on the part of manufacturers, combined with the lure of “landing the big one,” translated into deals aplenty. It is my belief that few, if any, manufacturers have been able to build a sustainable business model based on discounting beyond their ability to cut costs, but even those manufacturers who weren’t initiators of the practice wound up involved, as they tried to protect what business they had.

If this wasn’t enough, we must now add low-cost country (LCC) suppliers to the mix, which leaves most North American suppliers using the only weapon they have left in their arsenal: reduced margin. It’s a tactical response but one that is effective only in the short term. When a reseller confronts a N.A. supplier with an alternative LCC supplier featuring suitable quality and a significantly lower cost, the expedient solution is to “talk up the brand” and sacrifice a few points of margin to placate the customer.

In the throes of deep denial, a few manufacturers and remanufacturers saw too late that they were caught in a death spiral. Most others are scrambling to re-assess and re-evaluate their core business strategies before slipping into the same situation.

When budgets go bust
This increased focus on “the deal,” whether to address domestic or offshore discounting, requires that manufacturers focus primarily on today. Their very survival threatened, the main concern becomes delivering a product today that is “fit for use” and can still match street pricing. Those who choose to play must wring out costs from their product, processes or services, or likely from all three. But by becoming price gougers and extreme cost cutters, they, and to some extent the aftermarket, are trading in the future.

Inevitably, shrinking margins result in the shrinking of just about everything.

I have been around many different aftermarket companies that, when confronted with a loss of revenue, react in the same way. They cut advertising, reduce training and education, eliminate sales meetings, go to every two years on catalogs, cut promotions, and reduce headcount in “non-essential” areas like product management, R&D, sales and marketing.

These reactions are appropriate when confronted with a revenue reduction. What is wrong is how they become institutionalized.

Too often, the budget process is about how much money there was last year and not about how much is required to do the job.

This practice of institutionalizing budgets has gone on for so many years that most mid-level managers have come to accept it as standard operating procedure. Over time, its effects are devastating.

There was an economic term that became shorthand in the 1980s for this phenomenon: “The shrinking candy bar.” Candy bar makers, faced with rising costs and afraid to move up retail prices for fear of lost sales, made their candy bars smaller. Of course this cut cost, but it offended the consumer’s sense of value.

The aftermarket’s shrinking candy bar is innovation in products and services. The very ingredients that helped make our candy bars different from the OEs are now being dropped from our recipes in an attempt to survive today.

Historically, much of our value has come in the form of improving the products that we sell over those that can be found at OE dealerships or those that are offered as private labels.

Unwrapping more issues
But the shrinking candy bar is not just limited to shrinking product innovations.

Services too are vanishing. We are “de-contenting” support programs that wrap around our product lines to the point that we’re losing another of the advantages aftermarket parts traditionally had over OE parts.

Aftermarket brands have also reduced their advertising and marketing support. Some that were household names just a few short years ago have all but disappeared from the map.

To illustrate this point to a customer, I recently did an analysis of the advertising on their specific product segment in a single issue of an installer magazine. In that particular issue, 60 percent of the advertising space was for upstart brands, primarily LCC providers. About one-third was for replacement parts programs from OEMs, and only 10 percent was from traditional, established North American brands. Granted, that is a single snapshot, but it offers tangible evidence of the trend. Is it any wonder that more and more professional repair technicians are accepting the upstarts or turning to the dealer for their parts?

If established North American brands are only maintaining a 10 percent “share of voice,” the long-term viability of their brands is at risk. The very survival of the aftermarket supply chain is contingent on our ability to add value. In this quest to find the bottom of the price pit, aftermarket manufacturers are losing much of what made them better in the first place. And in doing so, they are creating an environment that will make the OEs or LCC suppliers more attractive.

But not every aftermarket manufacturer is playing this game: Some continue to innovate. There are those that are still aggressively protecting their brands. There are those that are globalizing their manufacturing before they start chasing their customers to low-cost countries. But they seem to be the exceptions.

Look at this trend in total. Reduced revenue means less innovation. Less innovation means less differentiation from both OE and value lines. Less differentiation means less reason to purchase traditional, established aftermarket brands over house brands, upstart brands or recognized OE brands. And you can repeat the trend again for marketing, advertising, product management, data services, training and tech support.

It is a downward spiral that will only end when manufacturers make the cognizant decision to “put a stake in the ground” and find ways to deliver the total package of products and services that make us better than either the OEs or the upstart brands.