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North American Automotive Aftermarkets: Opportunities and Challenges in 2014

The automotive aftermarkets of the United States and Canada encompass all secondary markets that exist outside the primary market of automotive manufacturing, including commercial activities relating to the manufacture and distribution of parts, equipment, accessories, retailing and repairs that take place after a vehicle is sold by the original equipment manufacturer (OEM).

In 2010, the automotive aftermarket the United States was estimated to be worth over $190 billion, according to the U.S. Department of Commerce. The industry generates a significant portion of U.S. GDP and is estimated to employ more than 4.2 million people. In Canada, the total value of the automotive aftermarket in 2012 was $19.27 billion, and estimated to employ some 420,000 people.

According to the automotive digital agency Hedges and Company, online sales of aftermarket automotive products increased by nearly 16% in 2013 compared with 2012. Additionally, the agency predicts that online aftermarket sales will continue to grow “aggressively” in the coming years.

Aftermarket Challenges

Recent studies of sales trends in the automotive aftermarket indicate that online retailing will continue to have a significant negative impact on aftermarket sales by traditional outlets. Automotive e-retailers are projected to absorb the majority of revenue losses as they lose market share to mass e-retailers like Amazon, as well as to traditional brick-and-mortar aftermarket suppliers who are well positioned to retain regional customers with personalized service and comparable prices.

The main advantage that mass e-retailers have over the competition is an ability to offer lower prices. Prices for automotive aftermarket products sold by e-retailers are, on average, 20% to 40% lower than the prices for the same products sold by automotive e-retailers and dealerships.

Opportunities for Growth

In a report titled “The 2013 Canadian Automotive Aftermarket Demand Study”, AIA Canada outlined the opportunities for growth that exist in the contemporary Canadian aftermarket. While the size of the aftermarket totaled $19.27 billion in 2012, the AIA calculated that if every vehicle owner in Canada followed ‘Benchmark Spender’ maintenance habits (including three service visits per vehicle per year) the size of the aftermarket would have totaled $33.30 billion. This gap makes up the unrealized potential of the market, some $14.03 billion dollars in 2012.

Tapping into this unrealized potential will require careful study of the unique regional markets that make up the Canadian automotive aftermarket as a whole. For example, drivers in British Columbia, the Atlantic provinces and the Prairie provinces exhibit the highest levels of maintenance of their vehicles relative to the potential in the market. Precise causes for the disparity in service visits between different regions of Canada can be difficult to determine, however it is known that the average age of vehicles in B.C. and the Prairies tend to be older than in other Canadian provinces, and require more repairs as a result. In the Atlantic provinces, rigorous vehicle inspection programs are thought to be the primary reason why drivers bring in their vehicles for more service visits.

In the United States, only 11.5 million new vehicles were sold in the United States in 2010, down from 17 million just a few years earlier. Since then, vehicle sales have picked up significantly, increasing to 15.6 million in 2013. Aging vehicles on the streets and highways of America are expected to keep generating revenue for the automotive aftermarket , however new market realities are changing the way automotive customers repair and service their vehicles.

According to Aftermarket Business, consumer sentiment in the U.S. has shifted away from the perception that American-made aftermarket parts are of higher quality, with auto parts customers increasingly accepting of parts made in other countries. Specifically, manufacturers in India and China are enjoying success in the U.S. market, thanks to their production of high-quality parts at lower prices.

This price pressure is clearly reflected in the increasing market share of mass e-retailers who are selling automotive parts in the online market.

Like in Canada, the automotive service market in the United States has significant untapped potential. The aging vehicles on American roads will continue to require regular service visits and replacement parts; and while the parts market has become more competitive as a result of lower-priced online options, regional service centers and garages will continue to attract and retain local customers. Despite this advantage in regional markets, however, it is important for traditional service providers to have a solid understanding of the online marketplace in order to refine and adapt their service offerings accordingly.

Moving Forward

Regardless of their particular product or service offer, businesses active in the automotive aftermarket should pay close attention to the market conditions that are contributing to the increasing market share of mass e-retailers. Online sales of aftermarket products and services will continue to grow in the coming years, and the market in replacement parts and accessories is projected to experience the fastest rate of growth of all aftermarket categories. Garages, repair shops, dealerships and providers of custom vehicle modification services are generally well-insulated from the shift to online retailing, as the service visit cannot be replaced by an online offering.

That said, service providers would do well to invest the time and resources into understanding the online aftermarket and optimizing their own strategy to remain competitive online. Today, many customers who are planning a service visit for their vehicle will simply do a Google search to find the service centers closest to them, as opposed to reviewing the phone book or print advertisements. This one important shift in how vehicle owners find service providers in their area has fundamentally changed the service market: the success of service providers in attracting new customers depends heavily on the visibility of service providers in online search results.

Having an understanding of how e-commerce is changing the automotive aftermarket will help service providers improve and promote their service offering in the modern marketplace. While Amazon and other mass e-retailers may never come up with an online alternative to the in-person service visit, they have been remarkably successful at increasing their market share within the automotive aftermarket. This alone should be enough to prompt traditional product retailers and service providers to learn how the mass e-retailers have done it - and how to beat them at their own game.

Nathan Munn | InterTrade.com

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