When compared to increasingly technology-heavy automotive systems and sub-systems which the aftermarket addresses, the exhaust systems segment seems almost quaint. making those seemingly passive pipes turn, however, requires as sophisticated a marketing approach as any other automotive sku.
Industry mergers and acquisitions, realigned regional distribution strategies, and improving OEM products are all factors which are making sales in this segment a challenge.
Specialists squeeze jobber market share
John Shannon, president of Valleyfield, Quebec-based Pieces D’Auto Valleyfield Inc., must cope with a growing competitive issue in the exhaust segment. “We have a problem with ‘short liners’ in the exhaust system market,” he says. With a SKU base limited to fast-turning numbers, Shannon’s short line competition moves “Mexican mufflers” with typically aggressive pricing. The conundrum is a common one in the segment. Exhaust is a space-consuming category, squeezing both smaller operations and larger jobbers who need to meet a minimum sales-per-square-foot to justify a segment. As is often the case in the automotive aftermarket, a small percentage of the SKUs is responsible for the majority of exhaust system sales, tempting margin-squeezed jobbers to shorten their own lines.
Fine-tuning ought to stop when customer perception of complete coverage wavers, but with the combination of short liners and specialty shops slimming margins, the temptation remains. Of course a given jobber can’t stock every pipe in his program, but with auto manufacturers such as Kia, Daewoo and others entering the arena, at some point either the inventories will expand, or warehouse turnaround must improve to defend against the specialty shop challenge. And the specialty shops’ reach can extend beyond the consumer to a jobber’s installer base as well.
Jason Heidelbrecht, general manager of Action Auto Parts Plus in Medicine Hat, Alta., runs a highly successful operation, but notes that exhaust shops have muscled into his exhaust products market. “We have really good market share on most of our product lines, but our penetration on the exhaust market is very limited. We have a 3% to 5% market share. Our problem, and I don’t think it’s a unique situation, is that a lot of the specialists do a lot of the work on sublet. Locally the guys get 20% off invoice from the muffler shop, which picks up the car and drops it off when they’re done. They don’t touch the car and make 20%. For a busy shop, it’s a no-brainer.”
Performance systems a tough sell
The performance side of the exhaust market has yet to break into big numbers, mainly because of the limited size of the Canadian enthusiast market combined with the unique difficulty upselling this segment. “Good, better, best” stratified merchandising isn’t new in exhaust, but with the trend to longer life, and often stainless-steel OEM components, the maneuvering room is on the other end of the market.
The “quick and dirty” low cost replacement represents the downsell increasingly popular in Ontario and B.C., where I/M programs demand system integrity. Customers looking down the barrel of a smog check are understandably reluctant to splurge before the final estimate is in, yet the system must be repaired before the test.
Tony Page, vice-president of Northern Performance Ltd. in Hamilton, Ont., describes the feedback he receives from his installer customers. “They (car owners) hate you. They walk in angry because they’ve got to pay you four or five hundred dollars which they don’t have, haven’t saved for, and then you try to upsell them. You have to have a guy wanting a performance system; that guy will pay anything for it.” The other aspect of I/M is the effect on the existing enthusiast base. The classic “headers and duals” approach to performance is changing to small, mainly Japanese engines where imported performance exhaust parts are available and work with stock emissions devices. They’re generally expensive and are rarely installed as a DIY project.
And as stock systems become more integrated with engine management systems, lowering backpressure without making other engine modifications may actually lower vehicle performance.
Stalking the elusive muffler
Exhaust system products are largely commodity products in the eyes of the installer community, so getting the business depends strongly on price and delivery. For some markets, the priority is definitely on delivery. Ian Creaser, owner of Lunenberg Auto, Lunenberg, N.S., describes the business environment for many jobbers at the geographic rim of the country. “It is harder for us. Our distribution center in Moncton is good, but when we need specialty items, we have to incur more costs. We’re finding ourselves having to deal with more than one supplier to get what we need.”
Ken Newton, president of Burnaby, B.C.’s Humphrey Automotive, is even more emphatic about the supply issue. “We’re not doing too well out here because we don’t have anybody out here to buy exhaust systems from; there are no warehouses. They’re all moving out to Toronto. It’s hard to get a proper converter, and it’s hard to get proper pipes. It’s getting harder to get the stuff. Nobody wants to sell exhaust. It’s getting that bad.”
In Regina, Sask., Brian Bast, president of Parts-Mart, faces a similar problem. “One of the biggest problems in Saskatchewan is product availability. There’s no warehousing available to us compared to, say, the Winnipeg area. We’re looking at two days to get just about anything. The manufacturers don’t realize the problem we have in product availability. It’s a wide open market for anybody wanting to promote their product.”
Bast serves a market dominated by a devastated agricultural sector, with predictable results. “It’s been one of the weaker years we’ve seen in the last five to six years.” Saskatchewan is known for the number of older vehicles in service, probably as much due to the salt-free environment as economic conditions, but the aging fleet hasn’t translated into hot exhaust segment sales. “We still have vehicles of the ’50s and ’60s vintage on farms, used as secondary vehicles, but on exhaust system parts they seem to patch and repair. It’s extremely price-competitive right now, so even the muffler shops are fighting for business.”
I/M and durable OEM parts challenge jobbers
Ed Pedskalny, president of Pedskalny Auto Supply in Iroquois Falls, Ont., does well with the segment, but questions the outlook for the future. “It’s a good line for us. It probably supplies us with 10-12% of our sales. It’s a substantial market for us, but we don’t know if it’s going to be a growing market, because we’re noticing that the newer cars take longer to sell (replacement systems for). My wife’s ’95 Sable still hasn’t needed an exhaust system.” The increasing use of stainless steel and aluminized pipe which Pedskalny describes underscores the irony of the exhaust segment. The evolution of widespread I/M programs and the aging of Canada’s vehicle fleet, both factors which should boost sales in this segment, are coinciding with the move to much longer-lasting OEM components. Just as the 100,000-mile psychological barrier now means little, the systems now hanging below new cars may last through the vehicle’s first, and possibly second owner. As the vehicle nears the end of its life, the potential for system sales will likely devolve to the entry-level product.
Tough OEM pipes are a long-range threat, but for Ontario dealers awaiting the arrival of the provincial Drive Clean program, consumers have an added incentive to delay repairs.
Jim Nixon’s Shelburne, Ontario-based Jim Nixon Auto Parts simply hasn’t moved the expected amount of exhaust product over the last 12 months. Nixon suspects the staged implementation of the provincial Drive Clean I/M program, and changes on the manufacturer side as well. “It’s terrible. We do a lot of walk-in, and it’s very seasonal. It didn’t really go crazy in the summer time. It’s hard to say. A lot of people are still cheating on the converters, because up here the
y have until 2001 (before Drive Clean takes effect in the region). If they figure that they can get another year if they stretch it, they will.” Nixon feels that industry consolidation has had a definite and detrimental effect on supplier account management. “The reps are covering more area, so we don’t see them as often.” Nixon also feels that POP and planogram programs have slipped, and identifies the move away from manufacturer-documented muffler warranties to customer invoice systems as a particular problem area. “We’re confused and the customer is confused.”
Go big or go home
In Edmonton, Alta., Ron Speitelsbach, president of Southtown Auto & Industrial Supply, summarizes results in the segment which are very common to jobbers facing specialty shops. “It’s not great. It seems that the majority of the exhaust work goes to the exhaust shops. We’ve put it into the inventory three times, went all out, but it didn’t seem to work for us. You’ve either got to have $10,000 worth of inventory or it’s not worth stocking it. We still sell some, but we don’t stock it.” Speitelsbach notes that in urban markets like Edmonton, close proximity to a distribution center makes respectable sales possible without an active in-store program. Although Speitelsbach warns of the need to commit fully to a program for success, he remains open to a fourth assault on his market.
What makes jobbers like Ron Speitelsbach entertain the notion of entering a market against nationally branded specialty competition? Mainly the understanding that the exhaust system segment operates by the same basic principles as most other aftermarket products: Make a determined, financially sensible commitment to the segment, carry the right inventory for your market, and you will be rewarded with pipes that make money, instead of just passing gas.