The continued growth of urbanization and the consequent increase in vehicles in operation have resulted in more stop-and-go traffic than ever before. Combine this with the increasing average vehicle age (currently 10.4 years in Canada), and you have higher wear and tear on brake components, resulting in strong, continuous growth for the aftermarket.
Brake pad sales across Canada and the United States reached approximately 89.2 million units in 2013, according to the latest report from Frost & Sullivan on the North American brake pads and shoes aftermarket. Factors such as the rising average vehicle age, as well as higher prices for new SKUs entering the aftermarket, are expected to drive brake pad revenues up by 4.3% annually through 2019, totalling more than $2.1 billion in revenue.
According to the report, consumers are spending more on parts and service because they are keeping their cars and light trucks longer, due to prolonged economic uncertainty. The increasing average age of vehicles will continue to drive the aftermarket for brake rotors, drums, and calipers. Jobbers should still concentrate on maintaining and expanding market share, as a wave of mergers and acquisitions is expected to heighten competition in the market.
The Frost & Sullivan report says the market earned revenue of $1.39 billion in 2013, and estimates this to reach $1.64 billion in 2020. Rotors account for approximately two-thirds of the total market revenue.
“The decreasing service life of vehicle parts will support demand for brake components in North America,” says Frost & Sullivan automotive and transportation aftermarket program manager Stephen Spivey. “In particular, rotors wear quickly as they have become lighter and thinner and need to be replaced often.”
The continuous entry of new stock-keeping units into the aftermarket is also increasing the potential of this market, as distributors add them to their inventories. In addition, manufacturers are raising the price of vehicle parts to cover the rise in cost of raw materials and transport, boosting market revenues.
However, large retailers in North America such as AutoZone, Advance Auto Parts, and O’Reilly Automotive, who exert significant power in the automotive aftermarket by virtue of their size and consolidated two-step distribution channel, are driving a migration to private-label brands. They are also putting pressure on manufacturers to reduce the prices of brake rotors, drums, and calipers, and accept lower margins in return for market share.
The accelerating trend of consolidation among large distributors, as demonstrated by the recent acquisition of General Parts by Advance Auto Parts, is reducing the number of distributors in the market. This is intensifying the competitive pressure on manufacturers to make additional concessions in order to gain shelf space in retail stores and stay in business. Manufacturers that are not aligned with one or more of the large retail or wholesale distribution groups will not be able to establish a strong presence.
“Manufacturers may, however, find increasing success using e-commerce sites like eBay and Amazon.com. Consumers and installers are expected to purchase 10% of the total spare parts through such channels by 2020,” notes Spivey. “Although these e-retailing sites lack the just-in-time logistical link that many service shops require, they enable shoppers to enjoy lower prices and a wider selection of products, which are key incentives driving traffic to Internet sellers of brake rotors, drums, and calipers in the North American aftermarket.”
Demand for premium pads remains high, and they continue to take share from lower-priced parts. Pads in the “Good” segment (defined as those without a shim, lowest grade of friction materials, and limited warranty) represented about 15% of manufacturer revenues in 2012. Premature replacement at 15,000 km is causing demand for these products to drop sharply at the installer level. Pads in the “Better” segment (defined as those including a shim plus hardware and higher grade of friction materials) represented about 43% of manufacturer revenues. Pads in the “Best” segment (includes a moulded shim, platform-specific friction materials, and limited lifetime warranty) made up 52% of manufacturer revenues.
The aftermarket has also done a good job of responding to changes at the OE level with products that properly replicate the fit, form, and function of original parts. Ceramic SKUs represented about 60% of total industry revenues in 2013, with semi-metallic parts making up 33%. Non-asbestos organic NAO pads made up 6%. Traditional two-step and three-step distribution channels continue to dominate, but the OEMs are starting to make some progress in the aftermarket.
Fifty-six percent of manufacturer-level sales were to warehouse distributors and programmed distribution groups. Auto parts retailers – the fastest growing channel because of its two-step structure and low prices – represented about 29% of manufacturer-level revenues. The original equipment service (OES) channel made up approximately 12% of revenues. However, dealerships are starting to see growth in their brakes business as more aftermarket parts and tiered pricing is made available to consumers.
Rising costs for raw materials and new product development, as well as macroeconomic factors such as weakness in the value of the U.S. dollar, will drive brake pad prices higher and generate revenue growth for manufacturers. The average price across product lines from manufacturer to distributor (adjusting for rebates and discounts) was approximately $17 per pad set in 2012.
Despite the positive outlook, manufacturers can expect to face tough competitive challenges. These include higher competition from private labels and the need to develop new copper-free brake pads to comply with “Better Brakes” legislation taking effect by 2021 in the United States.
According to Frost & Sullivan, private labels represented 57% of brake pad sales, while manufacturer brands accounted for 43% of brake pad revenue.
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