Follow The Moving SKU

There is very little doubt remaining that the Americans, and by proxy we Canadians, are living in slowing economic times. However, while business may not quite be booming, the research experts at Frost & Sullivan insist there are still some areas for positive growth. Unlike easier days though, success has to be strategized–and one sure-fire method identified by the researchers is inventory management.

According to Frost & Sullivan, the North American automotive aftermarket, despite being highly fragmented, offers excellent growth opportunities to participants with efficient inventory management and strong distribution systems; strong brand images and a targeted approach to specific customer sectors are also essential to success in this market.

New analysis from the firm reveals that the market earned revenues of $US 59.46 billion in 2005 and estimates this will reach $69.41 billion in 2012.

“In the current scenario, as distribution becomes an increasingly important factor, merchandisers, quick lubes, and installation chains are setting up joint ventures that help them to expand coverage and leverage buying power,” says Frost & Sullivan research analyst Kyu-min Oh. “Such partnerships and program groups are emerging between auto part retailers and warehouse distributors (WD), and also among salvage yards.”

Meanwhile, the market is witnessing a fundamental shift in the allocation of business to two end-user groups: do-it-yourself (DIY) and do-it-for-me (DIFM) consumers. The traditional three-step distribution system is also being gradually phased out by the two-step system, wherein warehouses sell directly to installers and jobbers buy directly from vendors.

Owing to price pressures and parts proliferation in the aftermarket, jobbers are opting for smaller inventories that help them to cut costs. This lack of inventory leads to a delay in the fulfillment of certain orders, and the two-step system helps to ease this challenge.

Besides parts proliferation, with established brands and small companies competing intensely at local levels, consumers are flooded with options–and they usually opt for the cheapest product. This could result in overstocking and parts being sold at below-average retail prices later in order to clear inventory.

Further, it is vital to accurately forecast demand while ordering parts from overseas manufacturers, since the demand might be outdated by the time the products reach the store. Therefore, efficient inventory management that helps with cost-cutting is critical for success in this aftermarket.

For example, according to the research, jobbers should closely monitor their accessories inventory in the coming months, as that market will be very difficult to predict. Seasonal style trends and the type of equipment influence sales of automotive accessories. A broad spectrum of retail-oriented, over-the-counter products such as neon lighting, light emitting diode (LED) accessories, bulbs, fog lamps, wheel covers, pedal pads, shifter knobs, accessory wipers, graphics, and license plate accessories all offer opportunities under the automotive accessories banner.

“Accessories represent discretionary purchases and are very popular with owners of all types of vehicles,” says Frost & Sullivan senior industry analyst Stephen Spivey. “The long-term outlook is good for buyers and sellers of these products, despite the challenges presented by the current economic environment.”

Automotive accessories are high SKU-count products. The SKU count can quickly escalate once the product manager has decided upon colour options, performance, application fit, packaging, and brand, since the right mix is vital for a successful program.

Since they are low-cost, high-volume, point-of-purchase items, automotive accessories will likely experience stable growth, with a compound annual growth rate of just 0.3% until 2014, due to flat unit sales and declining prices. However, decreased consumer spending in a flagging U. S. economy may constrain this modest growth forecast even further.

“Industries that supply large durable goods are typically the first to feel the effects of a weakening economy,” observes Frost & Sullivan’s Kyu-min Oh. “A slowdown in new vehicle sales will also limit the growth potential of accessory products in the near-term.”

Decreased discretionary spending by customers looking to cut costs, coupled with a drop in accessory prices, provides market stability. For instance, declining prices help end users obtain a low-cost means of improving vehicle value, through enhanced aesthetics, occupant comfort and convenience, and driving safety.

Accessory manufacturers and retailers will aim their product development efforts at the passenger car segment. The market will require constant innovation to stave off price wars as well as to ensure vehicle compatibility and adherence to a contemporary style.

“However, since the majority of accessory products have very low barriers to entry, a large number of competitors [will] offer similar products,” notes Spivey. “Those suppliers that can make their products different or better will be the most successful.”

A market characterized by replication entails high innovation costs. Manufacturers cannot sidestep this process if they wish to survive in the long term. They must focus on offering differentiated and value-added services that reduce product costs while also building consumer loyalty.

Manufacturers in each product category will soon look to make investments in brand development through packaging and merchandising, bundled offerings, and consumer support that make each product the turnkey solution for the distributor or retailer.

Companies currently need more than just a trendy product to attract automotive retailers. Brand, packaging, point-of-purchase presentation, payment terms, and supporting line products are fast becoming standard offerings in the market.

Another challenge participants face is escalating manufacturing costs and the rising price of raw materials such as glass, metal, plastic, and crude oil, which force price hikes all along the distribution channel. Rising fuel prices are also compelling participants to hike product costs in order to absorb shipping costs.

“Despite such challenges, overall revenues for the North American automotive aftermarket have grown between 3 and 5% annually in the last five years,” says Oh. “Current economic and demographic trends indicate that this growth is expected to continue between 3 and 5% from 2006 to 2012.”

One of the reasons for this growth is that the distributors and aftermarket vendors have not allowed the improving quality of original equipment (OE) products to restrain their profits. With intensive research and development, they are formulating parts that meet or even surpass OE quality and are offering them to customers at economic aftermarket prices.