Automotive M&A update – Q2 2020

Automotive aftermarket products and services are often considered less susceptible to cyclicality as the sector has generally performed better than OE parts suppliers during an economic downturn. Irrespective of economic conditions, car owners still need to keep their vehicles running – which has fueled demand for the aftermarket. Steady long-term consumer demand and a fragmented population of parts and services suppliers have provided an attractive environment for M&A activity in the aftermarket sector.

U.S. Light Vehicle Sales (million units)⁽¹⁾ and Auto Care Industry ($bn)⁽²⁾, 2002-2019, million

Note: Aftermarket size includes DIFM and DIY sales of auto parts and services including tires, trim automotive aftermarket, specialty equipment products, and collision repair body parts.

The COVID-19 related downturn is different

In the current environment, people are leaving their cars in the garage. Government mandated stay-home orders, a shift to work-from-home, and fewer shopping trips have resulted in a reduced level of vehicle miles traveled (VMT). This abrupt change in consumer behavior has taken a much heavier toll on aftermarket sales than previous downturns, as replacement demand caused by wear-and-tear came to a near halt – despite higher spending on DIY repairs during the lock-down. KPMG estimates overall aftermarket revenues to decline by approximately 13% this year from 2019 levels.⁽³⁾

The Impact on VMT will be powerful and enduring

An analysis of VMT conducted by KPMG suggests that some changes we are experiencing as part of the response to COVID-19 are here to stay. A more permanent shift to work-from-home and online shopping could reduce VMT by as much as 10% or 270 billion miles per year. This decline will impact demand for aftermarket parts but affect certain aftermarket sub-segments differently. For example, demand for wear-and-tear products is a function of miles driven, and fewer miles will directly reduce demand for products such as brake pads and tires. On the other hand, parts like batteries will have an even shorter life if unused for an extended period, or if used more often for shorter trips in a work-from-home environment.⁽⁴⁾

Surge in vehicles reaching the aftermarket sweet spot

Another key dynamic in the aftermarket segment results from the expected rise in vehicles reaching the historical replacement age of 6 to 11 years. Sales volumes reached record levels and stayed at around 17 million per year during the period from 2015-2019 – vintage years that will hit the “sweet spot” starting in 2021. At the same time, there has been a considerable shift toward higher-priced light trucks and SUVs. Owners of these vehicles are more likely to prefer branded aftermarket parts. These parts offer a favorable price-to-value proposition as compared to more expensive OE parts, which are often required by warranty or lease agreements in the first years of vehicle ownership. They also outperform cheaper, often imported white label parts, better aligning the vehicle’s remaining life with the expected life of the replacement part.