This is not what companies along the supply chain had planned for, and business owners found themselves tweaking their game plans as the year continued. Some saw sales and revenue start to pick up toward the end of the year, but not everyone has reported positive years and good outlooks for 2009.
According to the research firm Mintel, total U.S. aftermarket sales are estimated at $109.2 billion for 2008, which adjusted for inflation will be a decrease of .4 percent from 2007. Given the market conditions, things could have been worse – and hopefully will get better.
"Everyone in the automotive industry had to chuck their playbooks, their business models, out the window in 2008," says Mark Guarino, senior analyst at Mintel. "They had been reaping the benefit of the big car boom — and didn't realize how good they had it until it was gone. But as we get close to 2009, they've adjusted to the new market realities — focusing on smaller, more energy-efficient cars — and should see some improvement."
Mintel estimates 2009 total U.S. aftermarket sales at $112.6 billion — an increase of .3 percent adjusted for inflation. If the analysis is accurate, it's probably not good enough to be considered a championship season, but at least it means the industry is playing winning ball again.
Oh, the opposition
Fuel prices have officially taken the role of scapegoat for the industry's problems. It is a label that has been rightfully earned.
"All segments of the motor vehicle parts supplier industry — aftermarket, heavy duty and original equipment manufacturers — have been affected by the dramatic increase in fuel prices this year. Fuel costs have driven up the cost of doing business for all sectors of our economy, but our industry clearly has been hit hard," says Steve Handschuh, president and chief operating officer of the Automotive Aftermarket Suppliers Association (AASA).
Part number explosion, continuing information technology advancements, needed facility upgrades and difficulty in recruiting quality people topped the list of challenges encountered this year by Doug Washbish, president of Moog Louisville Warehouses in Kentucky, but fuel prices were the most prominent obstacle.
"Gas trumped all. It was the magic price that pushed the consumer to say, 'That's enough. I will change my driving habits and vehicle of choice.' No research or analysis would have predicted the huge decline in miles driven that we are witnessing," he says.
Gas prices are just one factor leading to lower car counts, a big problem many repair shops faced throughout 2008.
"I'm sure people have been putting things off. Money's tight here," says Randy Eakin, owner of Randy's Automotive in Medfield, Mass. "Even this week alone, the phone hasn't been ringing. I don't think people know which way to turn."
The mortgage crisis and current economic situation surrounding the bailout also has put a damper on 2008's business. At press time, Congress had just passed its $700 billion bailout of Wall Street.
"Money may not be available, or if it is, it's going to cost a lot more," says Jack Creamer, president of Distribution Marketing Services. "The sooner they get the banks and the lending institutions stabilized, the better it will be for all businesses, not just the automotive aftermarket."
Without the resources of financial institutions, companies throughout the distribution chain will have trouble raising capital for expansions, buyouts, or even, depending on company size, paying accounts receivable.
Plus, the impact on consumers has everyone worried.
"We're in Florida and we're hit very hard by the homes and the foreclosures here. I've actually had to let technicians go," notes Mike Rubio, owner of Auto Works of Brandon in Brandon, Fla. "I've had to adapt to the economy by putting less staff in place so everyone can perform at 110 percent rather than three guys performing at 70 percent."
To battle these problems, these repair shop owners, as well as Jensen Auto Service manager Paul Jensen have been increasing their direct mailings and other advertising methods. Many owners report success in turning their fortunes around with these methods.
"We've typically been booked out a week to two weeks behind, 24/7. We've always been busy and it just let up," says Jensen, whose shop is in Ogden, Utah. "We've never had to do direct marketing, the customers have always come to us. I don't know if that's through name recognition or that we've been open 35 years."
But they turned to that for the first time this year, just to combat what everyone is facing.
Executing different plays
But the gas prices are not viewed by everyone in the aftermarket as a negative.
"I see this as a big opportunity for the aftermarket, if we are willing to embrace the challenge in two ways — by preparing for fuel-efficient technology repairs, like hybrids, and to be more proactive in helping consumers keep their vehicles well maintained for improved fuel efficiency," says Frank Ordonez, president of Delphi Product and Service Solutions. "Consumers are more open to this than ever right now, and our industry needs to take advantage of it."
But Americans are also driving less; the amount of miles driven has declined by 53 billion from 2007, according to the U.S. Department of Transportation. "To put that in perspective in terms of aftermarket suppliers, that means 2 ½ million fewer brake jobs and 10 million less oil changes to be sold," Handschuh says.
And margins continue to shrink as competition is forcing more aggressive price sales, fixed costs, like fuel, healthcare and wages continue to rise, says Dan Freeman, Auto Parts Associates program group president.
"Unfortunately it does not appear that these conditions will change quickly. Perhaps later in the year we may see some improvement in the unemployment rate and the economy," he says. "Obviously we all hope the economy improves quickly, and with 2008 being the worst year in nearly 20 years for new car sales in North America and used car sales also slumping, there is a great deal of auto repairs and maintenance that is needed."
Actually, the lack of quality technicians also is a problem some repair shops are facing.
"The shortage of quality technicians, that has to be the title of the year," reports Hank Amor, owner of Austin, Texas' Oak Hill Automotive. "We've hired, we've trained and we're still coming up short. That's been our biggest obstacle this year. And I would say it wasn't an obstacle last year, but at the end of last year, we could see it was coming. Here we are in the ninth month of the year and we're still short."
That's a precarious situation, given that while the car count might not be there and neither might be the technicians, the work is. Amor says preventive maintenance comes in cycles at his shop, but they push it a lot, especially to combat their dealership counterparts.
"I think that everybody needs to promote that PM services. I think we need to promote it not because that brings more business to our door, but I think what it primarily does is better educate the consumers and helps us alleviate problems we're running into," Amor states.
Rubio's shop pushes preventive maintenance, but still is saying a lot of repair work coming into the bays, as people have put off work. The increasing work should continue as repairs continue to mount.
The industry has many other of these pockets of hope, despite reality's often glaring reminders of struggle.
Arrow Speed Warehouse in Kansas City, Okla., is the newest victim of faltering sales and financial instability, confirming many resellers' concerns that the market is, in fact, as dismal as they feared. "Arrow Speed Warehouse filed for Chapter 11 bankruptcy protection this week. Until the filing is complete, our communication is very limited. Kinda sums up the situation," says Wyly, categorizing his company's financial experiences in 2008.
One of the issues impacting the bankruptcy is the SUV and large-vehicle sales, Freeman says. "Their business is really impacted by the sales. If that is happening to them, it has to be happening to the retail guys out there. It is a situation we all have to get through," he says.
Yet while Wyly's company and many others struggle to stay afloat, industry retailing giant AutoZone recently reported that fiscal year 2008's fourth quarter showed a more than 12 percent increase in net income compared to the same period in 2007. Net sales also spiked, reaching $2.2 billion — a 10.4 percent increase over 2007's fourth quarter.
"We are pleased to report our eighth consecutive quarter of double-digit earnings per share growth, particularly in light of the challenging macro environment," says Bill Rhodes, AutoZone chairman, president and CEO. "For the year, we reached many new milestones, which included exceeding $6.5 billion in sales."
The exceptional sales improvement is an anomaly in such a faltering economic environment, but some resellers take the categorization a step further to the realm of unbelievable.
"It makes me curious that AutoZone and O'Reilly are reporting double-digit sales increases above last year," Freeman says. "The vast majority of our people are struggling with sales that are flat to down and with the price increases, they should be up considerably."
Scouting the competition
The time clock is almost up on the 2008 business year, but aftermarket industry players cannot forget what was a bad chapter in market history — 2009 is still ahead, and whether or not it will provide much relief remains unknown.
"Some customers and drivers, as well as companies, are unsure on what the situation will be, since we have elections, economic problems in the financial sector and other global issues like oil and conflicts with other countries," says Alfredo Vega, marketing manager for Hella. "We will see even more changes in 2009 and how fast we can react and how clever we can be to be ahead of those changes will be our challenge."
Handschuh fears fixed costs will remain a problem and continuous battle for suppliers and manufacturers.
"Raw material costs continue to be a challenge to motor vehicle parts suppliers. These costs ran a close second to fuel costs as the top issue this year. It will continue to affect aftermarket suppliers and their counterparts in other motor vehicle industries even after fuel prices are resolved," Handschuh says.
Even if raw material prices remain high, it is important for the industry to continue pushing to consumers the importance of high-quality replacement parts for the betterment of their vehicles. "We need to communicate that it's time to invest in parts which will not fail, parts that will fit perfectly the first time, parts that have been tested and parts that have a warranty and a backup," Vega says. "Some people think a cheap part is good, but this might be a short-term solution and an extra expense that might hurt them and the economy more."
The impending credit crisis is also looming in many company's peripheral vision as an issue to monitor. Rubio, of Auto Works of Brandon, and Eakin of Randy's Automotive both think consumers' wallets will continue to be tight. That likely means that preventive maintenance, though stressed, will be put off and only repairs will be performed.
"I think it's more of an economic issue. I think (WDs and jobbers) do a good job. They want us to buy the parts, but we need the customers to buy the parts," Rubio notes. "They're hurting just like we're hurting. They're not putting out as much parts as they were. We're in the same boat together. The more business I have, the more business they have."
Those WDs and jobbers recognize this, too.
"I am not qualified to predict what our economic future holds, but we can foresee escalating credit problems. If the credit market doesn't right itself, business investments or lack of will cause unemployment to rise, home foreclosures will continue and the consumer will become even more cautious," Washbish says.
No matter what actually lies ahead, the sheer unknown leaves the aftermarket floundering on which direction to take.
"I don't know. I don't know what it's going to bring," says Jensen. "With fuel going down and the economy seems to be doing better, whether it's related to that or people not being so afraid of fuel savings, I'm not sure."
Ordonez adds that beyond the repair shops' views, the global economy also is a challenge.
"Whether it is the fluctuations in the price of a barrel of oil, the radical swings in financial markets or the changes in consumer sentiment, each of these has the potential to impact business in 2009," he says.
However, Kathleen Schmatz, Automotive Aftermarket Industry Association (AAIA) president and CEO, says the aftermarket as a whole is more prepared each day to take on the challenges it's now facing.
" I see the aftermarket pulling together more, being more collaborative. I also see that every member of the aftermarket is learning to be a marketer," she says. "Whether you're a manufacturer or a warehouse or a program group or even a repair shop, I see every single member understands their responsibility to be a marketer of the good things that the aftermarket does.
That will be possible also with more collaboration throughout the supply chain, she adds. Teamwork here will make the end goals more attainable.
"There's no doubt about it, the manufacturers have been squeezed pretty hard. They are facing huge obstacles it the area of costs," says Schmatz. "Can members of distribution on both the traditional and retail side work together with their suppliers to have a reasoned profit for everybody in the chain?"
Developing a winning culture
Though predictions and hopes abound, the best indicator of what lies ahead is time. The industry must wait to see if the economy improves and if their efforts to enact change and heighten efficiency have been successful.
"There is no doubt that the current economic environment is uncertain, which means that as an industry, we need to focus on areas that we can control," Ordonez says. "For instance, the time is ripe to be looking for opportunities to increase efficiencies that will result in a positive market for everyone involved."
The aftermarket must continue to forge ahead, or it runs the risk of getting lost among the shuffle of parts and imports from other countries, Handschuh says.
"The North American automotive aftermarket must continue to do what it does best — manufacture quality parts. We must continue to improve communication throughout the aftermarket supply chain, especially with the end user — the automotive service professional," he says.
But above all, change is critical for improvement.
"We've been an industry that hasn't had a lot of change in the way we've done business for decades," Freeman says. "Now, we need to start to look at doing things differently, more effectively, because we are starting to see retailers going after the same customer base and we need to be smarter with how we do things to maintain and grow our customer base. We need to keep an eye out for new opportunities and take advantage of them."
That also means working together to make sure the repair shops have the tools and backing they need to convey the message to consumers about the importance of vehicle repair and that they can do it properly. Eakin says that starts with the flow of information.
"The amount of scan tools we need, the amount of money we have to spend on that," he offers. "Having information sources that are complete are necessary. When we run into trouble, that's where it is. It's always in the information, trying to find it."
Legislative battles
Along with gas prices, another major obstacle the aftermarket faced in 2008 were the continuing roadblocks by OEs to prevent access to diagnostic and repair information, according to Kathleen Schmatz, Automotive Aftermarket Industry Association (AAIA) president & CEO. But in 2009, the aftermarket might have some leverage to push for substantive "Right to Repair" legislation.
"If the car companies want a bailout or loan, I think that should come with some strings attached and that one of those strings should be the guarantee of access to technical information," says Schmatz on the $25 billion loan/bailout package given to U.S. auto manufacturers by Congress.
The loans are intended to help the industry refurbish decades-old plants and develop advanced batteries and gas-electric hybrids, categories typically dominated by the manufacturers and dealerships.
"If the manufacturers are developing vehicles that are going to be greener and more fuel efficient, they're likely to be more digital," she says. "That's an even bigger reason that we should guarantee the technical information is available to the consumer. The American consumer is paying for these loans, and as such, they should be able to choose where they want their vehicles repaired."
Along with fighting for Right to Repair, Rodney K. Pierini, president and CEO of the California/Nevada/Arizona Automotive Wholesalers' Association (CAWA), says that the aftermarket must be vigilant in 2009 for other state and federal legislation that could adversely impact the industry.
In 2008, he mentions that the association fought off legislation at the state level that would have prohibited an aftermarket replacement part being put on a car that is three years or younger. The California Air Resource Board (CARB) also pushed to adopt environmental legislation that sets strict vehicle emissions standards and passed regulations requiring car companies to extend emissions warranties for defective vehicle parts.
Both pieces of legislation would drive consumers back to dealerships, rather than allowing the aftermarket to serve their needs.
"Environmentally no matter who gets elected at the federal level there will be stronger environmental regulations and consciousness about the environment," says Pierini. "I think our industry has to step to the plate to determine where it can impact the environment in a positive way and demonstrate that and be able to tell our story to the media and others about the aftermarket's contributions to a more friendly environment."
Dr. Tim Nash, dean of the Devos Graduate School of Management at Northwood University, Midland, Mich., will present an "Economic Overview of the Global Fuel Market" as part of a special Executive Briefing session at the 2008 AWDA Conference in Las Vegas. The Executive Briefing, titled "The Petroleum Problem: Strategies and Solutions for Distributors," also will feature a panel discussion of four aftermarket WDs regarding strategies for reducing the impact of rising fuel prices.
The Executive Briefing will take place Sunday, Nov. 2, 2008, from 2 to 4:15 p.m. at the Venetian Hotel and Resort. Registration is free for AWDA Conference participants and $50 for all others.
What was the most surprising finding when researching the "Petroleum Problem"?
Predicting the price of oil can be a tricky business. Economists can look at the very same data and come up with very different predictions as to where the price of oil is going. I predicted back in July that the price of oil would be below $100 a barrel, and it looks like that's where it's headed. Perhaps the most surprising thing for Executive Briefing attendees will be the sheer number of issues that can ultimately impact the price distributors pay at the pump. Geopolitical, economic, climate, financial, weather and a host of other issues all play into the price of oil. Some of this can be controlled by people, and others are outside of our control.
What can attendees expect to gain from the Nov. 2 seminar?
The Executive Briefing on Sunday will do two things: First, it will provide a much better understanding of how the global petroleum markets function and what factors impact supply, demand and, ultimately, price. The second part of the briefing offers a frank discussion about what distributors can do (or not do) to help control their own fuel consumption costs. This is really what the University of the Aftermarket does best: Combining university-level business education with real-world aftermarket experience.
Are there any plans to continue this presentation at future industry events?
Absolutely. The University of the Aftermarket, as an educational alliance of AAIA, AWDA and MEMA, will continue to work closely with these organizations to help with their educational needs. At AAPEX, for example, we have accredited most of the educational programs for CEUs toward an attendee's Automotive Aftermarket Professional (AAP) or MAAP (Master Automotive Aftermarket Professional) certificate.
How, in your opinion, will fuel costs affect our industry in upcoming years?
The impact to the aftermarket is far reaching and goes well beyond just getting a spark plug from a jobber to a service dealer. Of course, the cost to move a product from point A to point B is directly related to the cost of fuel. But just as importantly, petroleum is a key ingredient in many, many automotive products, such as rubber.
2008 State of the Industry: Major Events
O'Reilly's purchase of CSK Auto
Consolidation is happening all throughout the supply chain, and one of the key examples this year was the purchase of CSK Auto Corporation by O'Reilly Automotive, Inc. for $1 billion in April. The merger has almost doubled O'Reilly's global footprint, opened the West Coast for market penetration and significantly narrowed the store count gap relative to the two largest auto parts retailers in business today — AutoZone and Advance Auto Parts.
"In a pretty down year, O'Reilly's purchase of CSK frankly added some stability to the marketplace," says Jack Creamer of Distribution Marketing Services. "The worst thing that could have happened would be CSK to fail. Then we would have been left with a lot of unhappy vendors with unpaid bills."
Federal-Mogul emerges from bankruptcy
In December 2007, Federal-Mogul Corporation announced its planned emergence from Chapter 11 bankruptcy, seven years after damages sought for asbestos-related diseases forced the company to file. A judge approved Federal-Mogul's reorganization plan, and the company plans to focus on growth in key markets like China, Eastern Europe, India, Russia and South America, while also evaluating the potential for long-term growth in emerging markets.
AAIA's Report on Telematics
The importance of understanding and preparing for the continued advancement of vehicle systems was stressed by the Automotive Aftermarket Industry Association's release of a comprehensive telematics report, presented at the eForum conference in July. Almost 30 percent of vehicles in the United States have telematics devices installed, and this number is slated to grow 10 percent by 2012.
The AIG bailout
To avert what could have been the biggest casualty of the credit crisis to date, the U.S government bailed out global insurance giant American International Group (AIG). The fed will lend up to $85 billion to AIG and the government in return will get a 79.9-percent equity stake in the company. This puts the government in control of a private insurer, a historic development.
Uni-Select's continued expansion
Continuing its massive purchasing streak throughout the country, Uni-Select purchased Parts Depot — landing the company's parts distribution operations including nine regional parts distribution warehouses and 67 parts stores in Delaware, North and South Carolina, West Virginia, Virginia, Ohio, Pennsylvania, Maryland and Tennessee. The consolidation was expected to add $180 million in annual sales for Uni-Select.
Arrow Speed warehouse files for bankruptcy
In September, Arrow Speed Warehouse, based in Kansas City, Okla., filed for protection under Chapter 11 of the Bankruptcy Code after posting a $3.1 million loss on sales of $70.7 million for the fiscal year that ended Aug. 31. At press time, Keystone Automotive Operations had bid approximately $12 million to acquire inventory and other operational assets of Arrow and other affiliates, which distributes a wide variety of product lines nationally to customers via their warehouse facilities and sales offices.
