Thanks to a significant reduction in fuel costs in 2014, the number of miles driven by Canadians is up dramatically, and continues to be a strong indicator for business growth. In addition, the average selling price per unit sold is beginning to play a bigger role in automotive retail sales revenue models, as are behavioural and generational changes, which are also having an effect on future growth trends, according to David Portalatin of the NPD Group. Portalatin spoke to a packed room at the morning Aftermarket Outlook session held at AAPEX last month.
The number of cars on the road and the extent to which people use them continues to be the main influencer. According to the NPD Group’s research, there are some fundamental dynamics at work in the marketplace that are affecting both new and used car purchase occasions, with some incremental spin on automotive services.
In addition to the 17 million new cars sold in 2015, there are also 35 million used cars changing hands, and those are different kinds of cars with different types of behaviours.
“Last year I predicted miles driven would grow about 1.8%, and the reality is it increased a lot faster,” says Portalatin.
Last year at AAPEX, Portalatin predicted that in 2015 the 29 categories in automotive retail sales would see about $14.4 billion dollars in sales. This translates to a 2.1% increase over 2014. Fast forward to August 2015, and the actual numbers to August 2015 are already at $9.6 billion, a 4.4% increase.
“We made a prediction that sales would grow and it would be driven by increases in miles driven and increases in average retail price, and those things have happened at a more robust rate than we would have expected it to,” explains Portalatin.
“In 2014, the price of gas started dropping dramatically, and people started reverting back to some of their prior behaviours. Now every month that goes by, a new record high is set for total vehicle miles driven in the U.S. In fact, we are now 65 billion miles, on an annual basis, higher than we were in pre-recession times,” explains Portalatin.
According to the NPD Group Aftermarket Report, in the first 38 weeks of this year vehicle owners consumed 4% more gasoline, but spent $87 billion less for it. This is a huge relief for the North American consumer. But what are they doing with all that extra money?
“If you look at retail sales lately, there is not a lot of rebound in consumer spending, so for the most part they are still hanging onto that cash,” says Portalatin.
Before the recession, in November of 2007, the U.S. had reached a high point of annual vehicle miles driven of well over three trillion miles. Then gas prices hit $4 a gallon, and the economy went into a recession and people parked their car. And things stayed that way for nearly a decade.
According to Portalatin, an interesting thing happened during this recession. “There are two thresholds for behavioural change. The most immediate thing that vehicle owners can do is reduce gasoline consumption, and this is the number-one thing that consumers tell us. When times are tight and gas is expensive, people can flip that switch pretty easily; and when times are better and gasoline prices are down they will run around as liberally as they like. It’s a pretty easy change to make.
“But the longer we stay above that $4 level, the more likely we are to engage in some behaviours that are a little more lasting, and some of these things happened over the recession, like relocating to be closer to work, taking mass transit or riding the bus, walking to work, car pooling, and working from home.
“Another thing that happened during the recession was people were out of the workforce, and that dramatically influenced miles driven,” he explains.
There is also a generational component to this, which is going to have some longer lasting effects.
“What is crystal-clear is the millennial generation is not as engaged in vehicles and driving as past generations. Millennials are not kids anymore. They’re moving into the career and family life stage, which are peak driving years, but Millennials are going through this life stage at a much different baseline than the boomer generation did.
“So one of the primary built-in drivers for mileage creation is just not as robust as in previous generations. That’s going to be one of the factors that keeps miles driven from growing as fast as we’d all like it to,” adds Portalatin.
Based on its updated forecast for the end of 2015, the NPD group predicts that the increase will be 3.3% growth in miles driven over a year ago.
“If we go back to the late ’70s, the normal growth paradigm was somewhere between 3 and 5% growth in miles driven. So are we probably going to return to that 3% range permanently? I don’t think so,” he says.
“Because of the other things that I mentioned, some of those changes are a little more permanent. There are generational things that have happened that I think will suppress that number. Our forecast for 2016 is that miles driven will increase, but closer to a 2% range. This is still a good increase over a good prior year.”
In 2008, the NPD Group asked people how they were using their car differently in the last year. Sixty per cent said they were driving less. Today, that number is about 25%.
“Overall the behaviour for trying to drive less is declining. These include shopping less, reduced driving to work, working closer to home, cancelled vacations, use of bike or public transportation. All of these behaviours that translate into less driving are declining.”
The other piece of the puzzle is the average selling price, which is largely influenced by the way consumers try to value products. By not looking for the lowest price but looking for the best value, consumers often choose the higher-priced item today.
“Consumers continue to tell us price is important. Seventy-one per cent say ‘a reasonable price is an important aspect in deciding what I buy.’ But the next four categories are of very high importance too. They include make, quality of materials, gas mileage, and engine performance. So the consumer mindset, looking for value over price, is creating momentum in the marketplace,” explains Portalatin.
“As you think about your products and services, there is opportunity for you to create value by offering these and grow your top-line sales,” he advises.
“There is a lot more weight behind the quality end of the spectrum in automotive. There is an opportunity for jobbers and ASPs to be differentiated in the marketplace, to grow top-line dollars. Ask yourself what’s better quality, what lasts longer, performs better, extends the life of the vehicle, or some other attribute that gives value. If you’d like to grow 15% next year rather than 4%, premium product is the way to go,” says Portalatin.
The same economy-driven consumers who are looking to cut back on miles driven and are keeping their vehicles longer are willing to pay double for that beam wiper blade for the quality it provides. That’s a trend, that’s a mindset, and that’s an opportunity for growth.
“Premium spark plugs, wiper blades, headlights, oil filters, premium or extended-life products – these items sell from anywhere from a 30% premium to some items that are priced four times higher than like items. So consumers are not walking in the door looking for the absolute lowest price; they are really looking for what is best,” explains Portalatin.
“The majority of drivers surveyed are planning to drive the exact same car in 2016. On average, that car is 11.4 years old and it’s moving towards 12 years old. A 12-year-old car is not an old car anymore; it’s just an average car,” explains Portalatin.
According to the NPD survey, 61% will keep driving that car. Twenty-six per cent of DIYers intend on buying another used vehicle. “DIYers are old car customers, and when they replace that old car they will replace it with another used car,” says Portalatin.
There is growth in the number of people willing to go out and purchase a car that is already 10 to 15 years old, because it’s not considered an old car anymore. It’s an average car. They are good cars and they are lasting a long time.
“When you get to cars that are 11+ years, 44% said yes, I am probably going to replace this car sometime in the next three years. The rest are saying, I am going to keep the car for at least another four to six years, some even seven or 10 years. The 44% number is down from last year, so the sentiment is moving in the direction of keeping these older cars longer; so there is some momentum behind this trend,” explains Portalatin.
“So regardless of the fact that we are going to sell 17 million new cars this year, there is still tremendous opportunity in the aftermarket around the existing fleet, which is the majority of the market of older and ancient vehicles that the consumer values and is willing to keep in good condition,” continues Portalatin.
“To grow your business, focus on things that are relevant to the older car market like batteries, water pumps, alternators, etc.,” advises Portalatin. “In the old world, consumers didn’t hold onto a car long enough for all the bulbs to start burning out; now they do. Lens restoration kits for the haze on the plastic headlight lenses, and headlight and tail light assemblies sales, are up 10%. The evidence is pretty clear that if you are differentiated around premium value, or older cars or, in some cases, new cars, you can grow your business much faster.”