Reading the Tea Leaves:
Experts Weigh In On State of Auto Aftermarket

by Garrett McKinnon
NOLN Staff Writer

Since the dawn of civilization, man has wrestled with a simple yet profound question: What will tomorrow bring? For untold generations, we've relied on soothsayers, fortunetellers, astrologers, etc. to help us predict the future. More often than not, a coin flip would be just as accurate.

Even today, we strive to figure out just what the coming days, weeks and months will bring, especially in regard to our businesses. And while no one can predict with absolutel certainty just what will occur tomorrow, there are experts who have made it their business to closely monitor the trends of yesterday and today in order to make an educated guess about what will happen tomorrow.

When it comes to the fast lube business, there are a couple of major factors — not including the trends we regularly note in these pages like falling car counts, rising cost of goods, climbing ticket averages, etc. — that will likely have a major impact on the lube industry this year: the overall economy and the used car population.

Used Cars: A Valuable Commodity?
What is a commodity? It's a product or service — really any marketable item — produced to satisfy wants or needs. Simplistic as it may seem, cars are a commodity. And as any economist will tell you, when demand for a commodity outstrips supply, prices increase. That, in a nutshell, describes what is happening in the used car market.

Think back with me to 2008. When Lehman Brothers collapsed, credit markets dried up virtually overnight. Consumers, especially those with so-so credit scores, found it extremely difficult to get loans for costly items like homes and cars. In the eight years prior to 2008, an average of 16.8 million new cars were sold annually in this country. In 2009, Americans bought only 10.4 million new cars, and while the market has rebounded slightly (with 11.7 million cars sold in 2010, and more than 12 million expected to be moved this year), the numbers are a far cry from what they were prior to 2008. (In fact, some in the automotive industry are calling what happened in 2008 the "Lehman bomb" because of what it did to the new-car industry and its long-lasting ramifications for dealerships.)

That lack of sales means that, between 2008 and 2014, an estimated 28 million fewer cars will hit the roads than otherwise would have under the old sales rate. The effects of this are myriad, but the fact that there are fewer used cars available for consumers to purchase largely means that used cars are worth more than ever, and that consumers may at some point be willing to spend more to maintain that investment.

It also means the "sweet spot" for the automotive aftermarket is likely to expand.

"Traditionally, the vehicle-service sweet spot — the age group of cars and light trucks in which (service and) repair occurs at a significantly above-average per-vehicle pace —encompassed light vehicles in the U.S. between six and nine years old," said Jim Lang, president of Lang Marketing Resources, an automotive aftermarket research firm. "As a result of the historic decline in new light vehicle sales in the U.S. beginning in 2008, along with rapid growth of car and light truck average age, the vehicle-repair sweet spot is expanding, encompassing a greater number of vehicle years. This will have a profound aftermarket impact."

According to Lang, the upper-age boundary of the vehicle service sweet spot is creeping higher than the traditional nine years, and by the end of next year will cover vehicles up to 10 years of age.

Further, Lang noted that as a result of the "sales loss" of 28 million new cars and light trucks from 2008 through 2014, billions of miles that would have been traveled by vehicles five years and newer are being transferred to older vehicles, increasing vehicle wear per-mile on older cars and light trucks in the United States. This means the "sweet spot" could continue to grow beyond vehicles 10 years of age.

David Portalatin, executive director, auto aftermarket industry analyst for well-known industry research firm The NPD Group, told a crowd at the AAPEX convention in November that market conditions favor consumers continuing to rely heavily on their used cars.

"Consumers are constrained and pessimistic, but favorable toward car care and maintenance," he said.

According to NPD, only 12 percent of consumers plan to purchase a new car in 2012, and that the average consumer plans on keeping his or her car for another 5.2 years. The result is more used cars with higher mileage, and more off-warranty vehicles on the road. Portalatin noted that as of August 2011 there were two-thirds fewer vehicles on the road still under their new-car warranty than for the similar timeframe in 2008.

"Most consumers want to keep their current vehicles as long as possible," Portalatin said, "and they're more interested in maintaining their cars than repairing them."

As positive as the ramifications of fewer new cars on the road may be for lube operators, there's another trend that may have had an equally negative effect.

"It's the Economy, Stupid"
Bill Clinton's advisors may have coined this term during his first presidential campaign, but it has become a mainstay of political talking heads ever since. And they have a point. The economy, good or bad, affects everything. The shaky economy this country has endured since those dark days of 2008 has had a big impact on consumers and car owners, and not in a positive way.

"Convenience takes a back seat to price when the economy gets tough," said Larry Solomon, owner of Strategic Resources of Kentucky, an aftermarket tracking firm. "If convenience was in the driver's seat, then DIY activity would not have increased in 2009 and 2010."

Solomon said a tough economy forces consumers to make choices about the dollars they spend, which has a trickle-down effect when it comes to automotive maintenance.

"If a consumer was going to the dealership, and then times get tough, they are more likely to look for other, cheaper outlets to get their oil changed," Solomon said. "The consumers going to a lube shop might look to a less expensive outlet like a tire store. And the consumers who previously used a cheaper outlet might end up doing it themselves. Very deep recessions like the one we endured lead to increases in value brands and DIY activity."

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