Tony Cristello
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The aftermarket is working to put to rest the ghosts of aftermarket past, present and future that haunt the industry in order
to move forward with success and profitability. As the ghost of aftermarket past shows, we believe that mounting consumer
pressures, particularly in our aftermarket coverage group, began taking shape almost three years ago — despite the recession
only officially being declared in December 2007.
Figure 1
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In 2006, gas prices climbed to the $3 range and caused many in the aftermarket to see slowing sales trends as spending patterns
and driving habits started to shift. The psychological shock of gas prices crossing the $3 barrier put in motion an extended
period of declining miles driven (as shown in Figure 1), with year over year declines in 22 of 31 months from April 2006 until
October 2008, with 12 months of consecutive declines since November 2007.
In hindsight, we think what began as a temporary deferral of automotive maintenance and repair services has perhaps led to
a more permanent shift in pattern. Discretionary categories, such as truck running boards and lights, experienced an even
more pronounced slowdown, followed by a decline in demand for such products as washes and waxes.
As gas prices retreated, both aftermarket demand and industry optimism improved somewhat, with the thought that in 2007 things
would gradually get better. Unfortunately, this sentiment did not last. Despite pockets of strength, we would characterize
2007 as weak, even against the weaker sales comparisons from 2006. The ghost of aftermarket present reveals that we thought the sales comparisons of 2006 and 2007, coupled with an inherently
defensive industry, would translate into increased demand for auto parts and services in 2008.
Figure 2
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The second quarter of 2008 showed some promise as most publicly traded companies posted better than expected sales results.
As the summer months progressed, $3 gasoline rapidly became a thing of the past as crude oil prices climbed toward $150 per
barrel and gasoline peaked at more than $4 per gallon. The magnitude of miles driven declines became more pronounced as consumers
rapidly adjusted their driving habits, creating further revenue headwinds for the aftermarket.
Two major hurricanes also hit toward the end of Q3, creating a gasoline shortage in the Southeast and major sales disruptions
in the Gulf Coast regions. That said, same store sales growth appears to have rebounded in October and November as fuel prices
moved materially lower, and to date December results appear to be holding steady. For now, it seems to us that the more "non-discretionary"
elements of automotive parts and service demand should be sufficient to offset much of the impact of the deteriorating economy,
particularly as the purchase of new replacement vehicles is likely to be postponed.
The ghost of aftermarket future is predicting that while the operating environment is likely to remain trying in the short
term, we think it is important to remember that easing year over year comparisons in miles driven, gasoline prices at their
lowest level since early 2004, and the turmoil under way in the OE channel should result in heightened demand for aftermarket
parts and services.
Consolidation is also likely to play a larger role for the rest of the year, as the rate at which independent operators have
been exiting the parts and service markets has gone up in recent months, driven by a tough operating environment, capital
constraints, and in many cases, a lack of succession planning. Against this backdrop, we believe that many of the larger
industry players stand to benefit, as they are better positioned to weather near-term results and will ultimately be the beneficiaries
of lessened competition.
