The automotive aftermarket sector has always had a reputation for being resilient during challenging economic circumstances.
This past year was no different. Many aftermarket segments outperformed benchmark indexes and by the end of 2022, the overall sector had doubled the performance of the S&P 500 over the past 15 years. Meanwhile, this long fragmented sector once again spurred a healthy flow of transactions, with 352 M&A deals in 2022 – down from 2021 record highs but still well above 2019 and 2020 levels.
As the inflation and supply shocks of the last few years abates, it’s an opportune time to look at what comes next, which is what Jefferies did when we recently gathered over 100 companies and 200 investors for our 2023 Automotive Aftermarket Private and Public Company Investors Conference. We heard so many reasons to suggest this sector is entering what one of our assembled CEOs called a “golden age.” It’s a sentiment shared by frontline workers turning wrenches all the way up to the C-Suite because of record demand occurring now and strong tailwinds that will blow for years to come.
It starts with the simple fact that there are more vehicles on the road that need more repairs and servicing. Amid sky high prices for both new and used autos, consumers are increasingly choosing to maintain and repair their existing cars and trucks rather than buy new ones. That explains why the average car on U.S. roads today is 12.2 years old. Meanwhile, there are now 117 million passenger vehicles that are between 4-11 years old, which aftermarket companies consider the “sweet spot” for the most value-added repairs.
But it’s not just the growing demand that is creating opportunity in this segment. It’s also the seismic changes sweeping every corner of the aftermarket, which will create so many openings for smart operators and sophisticated investors to identify and unlock value. Here are just a few trends that are creating the most excitement across the aftermarket sector.
- Big Data is Even Bigger Than You Think: “In the 1970s and 80s, a car was a car. Today, it’s a smart phone with four tires and a steering wheel.” That was the view of one aftermarket company CEO, while another said, “There used to be dozens of diagnostic codes on a car. Now, there are tens of thousands.”
The growing sophistication of vehicles are by necessity turning many repairs from Do-It Yourself to Do-It-For-Me. “Try changing your own wiper blades on a new BMW”, one CEO challenged the audience.
Technology is also increasingly changing service models which is shifting everything from how products are stocked, to how consumers make appointments for new tires, to how collision operators need to recalibrate the dozens of sensors on today’s vehicles, while also spurring monthly memberships for unlimited car washes. - Companies Need to Create or Get Access to Scale: There are over 300,000 auto service & retail provider locations in the U.S., with only a handful of players maintaining over 1% of location share, making it one of the most fragmented sectors in the U.S. economy.
This can create a powerful advantage for well-capitalized aftermarket businesses – or PE-built platforms – with the resources to acquire businesses and invest in technology, analytics and diagnostic tools they can deploy at scale.
- The Power of Customization, Variation, and Enthusiasm: When your car breaks down, you have to fix it. But the aftermarket is about more than routine maintenance. A growing share of the automotive aftermarket is driven by customers’ desire for more customization and variation in the vehicles they drive. Whether its driven by passion or a functional need like a truck bed cover to secure cargo, the market is underpinned by one of the most reliable and loyal customer bases anywhere. One powersports company CEO and enthusiast panel participant noted how new consumers coming into the market over the past three years will drive the aftermarket sales of the future for years to come.
If you talk to almost any leader in this industry, you’ll hear agreement that these trends are durable and will continue to unfold alongside the slow but steady adoption of more electric vehicles in the years ahead. The automotive aftermarket sector is poised to grow in new and exciting ways, even as it continues to play its longstanding role as a reliable and defensive play for investors and operators alike.
Jonathan Carey is a Managing Director and Global Joint Head of the Automotive Aftermarket Group at Jefferies. Jonathan has been in investment banking for 25+ years and joined Jefferies with his aftermarket team in 2015. Jonathan has managed transactions spanning the entire aftermarket channel including suppliers, distributors, multi-unit retailers, technology players and service providers in every industry sub-sector. Jonathan is a regular speaker at industry events and has served as an active committee member in the industry trade association. Jonathan received an MBA from The Wharton School at The University of Pennsylvania and a BA from The George Washington University.