Thursday, 14 January, 2021
North American Aftersales Outlook 2021
Covid-19 will turbocharge digital solutions for the aftermarket
2021. Rarely has there been a year as pivotal as this one, a year on which the hopes and aspirations of the entire world have been placed with such anticipation. If all goes well, 2021 will see the deadly pandemic finally under control, economies rebounding, employment increasing, and a semblance of normalcy returning to our lives.
The automotive world is no exception. Industry stakeholders and insiders are being cautious, but there is an underlying buoyancy in what to expect from the market in 2021.
To be clear, 2020 didn’t quite turn out to be the disaster for the automotive industry as it was predicted back in the early days of the pandemic in the U.S. and Canada. New vehicle sales did drop off a cliff - about 40%-50% - around March-April but rebounded quickly. In fact, sales even hit higher on a year-over-year (YoY) basis in the month of September. Total sales for 2020 is expected to finish somewhere around 14.5 million in the U.S., a 15% decline from 2019. Not great, but given the circumstances, phenomenal when put it in perspective.
Aftersales typically fares better than new vehicles in tough years. The Automotive Aftermarket Suppliers Association (AASA) had predicted back in June that sales will decline by 8%-9%. The jury is still out as 2020 financials wrap but I feel the impact may end up being a little more muted with a 5%-6% drop.
So how did the industry avert disaster? There are many reasons for it (e.g. government relief, higher disposable income of white-collar workers under lockdown) but the biggest differentiator was digitalization. Years of investment in digital retailing for car sales, parts and services enabled OEMs, dealers, and retailers to adapt their businesses to a “contactless” reality. In part sales, e-commerce emerged as a winner. Amazon and eBay thrived for sure, but so did the online platforms of traditional sellers such as Autozone or O’Reilly.
The pandemic also finally buried the ongoing debate and skepticism around the importance of digitalization, connectivity and virtualization in what has traditionally been a “physical” business. In 2020, digitally ready dealers reaped the benefits while others rushed to digitize their operations. In a virtual roundtable at AAPEX last year, CEOs of major aftermarket retailers underlined the importance of e-commerce to their growth strategy. The consensus? Digital is here to stay.
So how will these trends carry forward? Here are the five key developments that the industry can expect to see in aftersales in 2021 and beyond:
- Double Digit Rebound in Aftermarket: The AutoCare Association and AASA predict that the aftermarket will grow by about 11.7% in 2021 in the U.S. There is significant pent-up demand in the market and the projected growth is quite possible. The aftermarket will see immediate liftoff while growth may be a little more muted for the OES channel.
Service revenue for dealers will suffer the most as 2020 shed over 2 million vehicles in the U.S. For 2021, analysts estimate about 15.5-16 million in sales - which will lead to a shortfall of about 3 million vehicles that could be potentially hitting dealer bays in 2021. Under these conditions, OEMs with a deeper lifecycle portfolio strategy and competitive aftermarket pricing will fare better than those that primarily target new owners and use cost-plus pricing strategy.
- North America Sharpens Focus on Europe, China: The pandemic exposed the vulnerabilities of emerging markets such as LATAM and South Asia - two regions that suffered heavy economic losses in 2020. When you combine that with the traditional difficulties of doing business in these markets, North American companies are likely to steer clear from them in the short term.
On the other hand, Europe will appear more attractive than ever. We have already seen the likes of NAPA, LKQ and Uni-Select cross the Atlantic with acquisitions in the last few years. Europe may have low growth but it is a stable market - with opportunities. As the parts business evolves from local to regional to global, competitors face increasing pressure to build sophisticated supply chains and digital capabilities. But most distributors in Europe are simply too small - and often too cash-strapped - to make investments to upgrade their operations. These businesses were also probably most affected by the pandemic and will be the ones struggling to rebound. Deep-pocketed distributors, retailers and suppliers may view this as an opportunity to build global scale and presence, as some of the local European players will be open to acquisitions at reasonable prices. It won’t be very surprising to see the likes of Autozone or O’Reilly making their moves in Europe.
China presents another bright spot. The recent trade issues with the U.S. have been complicating Western trade and investment, but it has also emerged as the only major global market that has remained economically steady in the pandemic. If the new American administration can find a way to ease tensions and create a more business-friendly environment, China’s rising car sales and transition toward a more modern market structure will present opportunities for North American competitors.
- Ecommerce and Digitalization Takes Center Stage: Growth of digitalization in automotive transactions - whether in car sales or aftersales - is one thing we can be sure of in 2021. As mentioned earlier, the pandemic turbocharged e-commerce growth last year. Hedges & Company, a marketing agency that tracks aftersales ecommerce, projected that the pandemic will lead to an incremental revenue bump of about $1.9 billion in 2020. While the 50%-100% surge observed in March and April will be gone, most analysts agree that online part sales will continue on its double digit growth trajectory in 2021.
Majority of the ecommerce growth has come from DIYers, and will continue to do so. Overall DIY sales may be declining because of vehicle complexity, but the accelerated Amazonification of buying habits during the COVID-19 crisis will lead to a platform shift for these customers.
- Increased Investment in Connected Solutions and Predictive Data: 2020 virtualized everything - well, almost everything. For years, OEMs and dealers have been circling around digitizing their sales platforms, with mixed results. Many argued that the vehicle business is too physical in nature to be digitized, and there isn’t much customer appetite for it (despite data showing the opposite).
2020 finally forced many to change and clearly demonstrated that it can be done. In an effort to go contactless, the customer journey skewed increasingly virtual as vehicle owners selected products online, made electronic payments and signed documents through digital platforms. But many competitors were also caught short - when it came to interactive inventory selection, financial transactions and so on, websites were often found lacking. This year, these businesses will rush to upgrade these platforms and prepare for the future.
Some will go even further. OEMs will use their connected access to vehicles to anticipate service and repair demand and develop competitive edge. Connectivity will also enable them to further virtualize the customer journey for vehicle repair - making OEMs and dealerships more attractive in a post-COVID world.
In this scenario, vehicle data will become more important than ever for the aftermarket as a way to anticipate demand, reach customers and repair advanced cars. Part suppliers already understand the urgency and have begun to eye connected capabilities. In 2020, global parts supplier Sensata made a significant investment in Pitstop, a Canada-based predictive maintenance solutions platform. More such partnerships are expected to emerge in 2021 and beyond.
- Stakeholders Accelerate Adoption of Market-Based Pricing: Research has consistently shown that 70%-80% of customers price shop online for first when looking for parts and services - even if they end up going to a garage or a dealer for the final repair. But more and more customers - both B2B and B2C - are making the purchase online. The trend will only gather pace in 2021, creating a big impact on how parts are catalogued, inventoried and priced. There will be a lot of price transparency in the market, which will lead to more demand-based, dynamic pricing – a shift away from the cost-plus model largely used in the aftermarket.
National aftermarket retailers are already beginning to follow the dynamic pricing model of Amazon, which entails continuous, active price monitoring and action. OEMs and dealers will have to keep up with this frenetic pace of pricing action to be competitive with the aftermarket. Many investing in their pricing strategy to stay ahead. Similarly, parts suppliers are accelerating more active monitoring and enforcement of Minimum Advertised Price (MAP) in order to ensure their products remain competitive without being devalued.
Pricing will also become a key revenue generation lever, gaining in more strategic importance than ever, as replacement rates and parts volumes continue to decline because of overall improvements in vehicle quality. It will only gain further ground in a year with lower vehicle sales, reduced vehicle usage, and a delicate economy.
Eucon is a digital pioneer for data and process intelligence. As a trailblazer for digital change, Eucon has been supporting companies in the automotive, insurance and real estate industries since 1997 in digitalizing their processes, leveraging data treasures and implementing digital business models. Eucon has comprehensive market data and in-depth expert knowledge and combines this expertise with cutting-edge technologies such as Artificial Intelligence and Robotic Process Automation to create intelligent automation solutions. With around 400 employees, the company serves 250 customers in more than 80 countries from offices in Europe, North and Latin America and Asia-Pacific.
Written by Kumar Saha, Head of Market Intelligence, Eucon North America, and Managing Director, Eucon Canada