It had been our fear that the tough Q3 2011
comparisons would be the catalyst for a potential
misstep from an industry perspective. While only a
mild speedbump if you will, given what remain still
favorable fundamentals, we were concerned that
results would show a slowing. Throw in
gas
prices that remain roughly 30 percent higher year
over year, along with declining miles driven and it
was hard to think the industry would not show some
chink in its armor.
As we write this in early November, it now appears
that Q3 shaped up to be a much better-than-expected
quarter for many industry participants, especially
those with greater exposure to the non-discretionary
and installer channels. Two themes we see developing
are 1) the widening gap between demand for DIY
parts/services and those of the DIFM segment and 2) a
category shift to value-line products. The parts
retailers have been quite clear that the strength of
the business continues to be on the DIFM side as the
budget-constrained consumer continues to find ways to
delay or defer, simply out of necessity.
We
estimate that sales trends in the DIFM channel are
likely in the mid to high single-digit range versus
slightly down, to up low single digits for the DIY
segment. With high gas prices, high unemployment and
macro instability, we sense consumer confidence will
move only slightly from what are 20-year lows and
keep DIY trends (along with spending on big-ticket
items such as tires) under pressure.
Another theme we see developing is increased demand
for value-line products. This is perhaps more
interesting to us, as it has much more widespread
ramifications for the industry. As many of you
reading this article know and understand, the major
parts retailers, such as Advance Auto, have been
making a big push into the direct sourcing market in
an effort to 1) keep cost of goods in check and 2)
increase exposure to value-line products in
categories (we hope only those categories) where
high-quality standards may not matter as much.
Factor in the price sensitivity of the DIY
consumer and in some instances an installer base
willing to lead with price to drive traffic and the
importance of the value line should continue to grow
at a fast pace in our opinion. It’s hard to know just
how big a percentage of mix the value line will
ultimately become, but we do know it’s big enough to
have manufacturers altering strategies to compete.
Two examples of how large aftermarket suppliers are
approaching the issue can be seen with Standard Motor
Products and Federal-Mogul.
While each of these suppliers participates in
different categories, the importance of increasing
value-line exposure has been a high priority for each
company. However, the approaches are much different.
With Federal Mogul, we have seen an internal building
of essentially a new product line that will act as
the value line to differentiate from its core branded
product lines. The process of launching internally
has taken time and in doing so we think it lost out
on some of the tailwinds and general industry
momentum that drove very strong results, particularly
for North American aftermarket suppliers over the
past 12 months.
PAGE 2 Federal-Mogul
did recently announce $120 million in new mid-line
wins as a result of its efforts, so perhaps we are
seeing early signs that success may be underway; but
only time will tell.
Standard Motor Products chose the faster approach via
acquisition. Recently, the company announced the
acquisition of Forecast trading group, which most of
you know as a leading supplier of value-line products
in the engine management category. While we don’t
anticipate any dilution to its BWD brand, it will be
interesting to see how the customer base develops. We
would expect to see SMP at some point take some of
the manufacturing in house and away from existing
third-party vendors.
While we think SMP may have paid somewhat of a
premium to acquire this company, it does add
immediate accretion in 2012 and we see limited impact
on its current day-to-day operations.
Coming out of the AAPEX show, we do sense a
continuation of strong trends that are likely to
continue. However, an element of cautious optimism
persists especially with the uncertainty of the
macro, fears of global recession and unprecedented
low levels of consumer confidence — all things that
should lead to above-average growth in the
aftermarket and make for a very interesting 2012
election race.