Do slumping vehicle sales mean big business for the aftermarket?

Two weeks ago, automakers announced that sales for the first quarter of 2008 had plummeted 12 percent for both domestic and import vehicles. And although the announcement came on April 1, the results were no laughing matter. With the price of gas, fuel, food and other necessities skyrocketing, consumers are staying away from car lots and keeping a firm grip on their closed wallets.

Still, a drop in car sales should mean a flurry of business for the aftermarket, shouldn’t it? Yes, says Jonathan Carey, an investment banker with BB&T Capital Markets — but only to a certain degree.

"Consumers who are trying to get another year or two out of their vehicles will need to perform maintenance," Carey said in an exclusive interview with Aftermarket Business magazine. "I believe that aftermarket participants will receive the bulk of this business volume because they are generally more convenient and offer a better value than new car dealers."

According to an article published in Business Week, U.S. light-vehicle sales for the month of March fell 12 percent from the year-ago month, to 1.4 million. That was the worst result so far this year, based on monthly year-over-year comparisons. For the first quarter of 2008, U.S. sales were down 8 percent from the year-ago quarter, to 3.6 million.

Each of the Big Three had large double-digit sales decreases in March. General Motors posted sales decreases of 18.9 percent, to 277,751. Ford Motor's sales dropped 14.2 percent, to 212,379. And Chrysler's sales fell 19.4 percent, to 166,386.

The news wasn't much better for imports. Overall, sales fell 10.3 percent, to 217,330, for Toyota Motor. Honda Motor's sales dropped 3.2 percent, to 138,734, and Nissan's fell 3.8 percent, to 106,921.

Carey is quick to point out, however, that lower car sales in general are not good for the aftermarket's long-term stability. He worries that a drop in sales implies that, four or five years down the road, fewer cars will be coming out of warranty and hitting their peak aftermarket years.

Graham Payne, managing director of Capstone Financial Services, agrees. "It's a very competitive market right now, a very challenging time," he says. "Although you would assume that a decrease in new car sales means bad news for the aftermarket, there are certain segments of the industry that can benefit, particularly the hard parts segment."

Payne adds that the rising cost of gas has caused overall miles driven to flatten out over the past year or two, which affects the aftermarket. In addition, the national consumer confidence index is currently at a five-year low. Payne says that many experts believe this index is a better indicator of consumers' interest in the aftermarket, more so than gas prices or the drop in new vehicle sales combined.

"It's a real conundrum. If we're talking about the kind of indicators that drive growth or drive declines in the aftermarket, it's very complex," he says. "We can't point to one specific factor as the be all or end all of the aftermarket; instead, it's a combination of all these factors that for the most part have tended to put a damper on the aftermarket to date."

Although the short-term outlook for the aftermarket seems positive — especially in the hard parts sector — both Carey and Payne are concerned about the future of the aftermarket.

"Competition for maintenance dollars will increase as new car dealers start to feel the results of declining sales," Carey says. "It is possible that they will then become even more aggressive in going after post-warranty repair and maintenance, which would then be detrimental to the aftermarket."

Payne adds: "Say you have 10 million cars coming online this year, but you are 12 million going out of service. At the end of the day, you're going to have a decline. So, a decrease in auto sales, while perhaps beneficial in the short term, is not sustainable over a longer period of time — not for automakers or the aftermarket," he says.