Why Is The Auto Parts Industry Booming?

Is it time for car dealers to start investing resources in their Parts and Services departments to better compete with the Jiffy Lubes and auto parts retailers of the world.

The three largest U.S. sellers of replacement parts are experiencing surging sales, sending their stock prices on a roll. AutoZone, Advance Auto Parts and O’Reilly Automotive have each gained at least 20 percent this year, thereby trouncing the 1.3 percent decline for the Standard & Poor’s 500 index. These retailers are benefiting from the fact that Americans’ cars are aging, as well as the reality of a new wave of technologically advanced vehicles that are boosting sales to professional mechanics. It seems that, at least up until this point, auto parts sellers have proven to be largely immune to the growth of alternative options that threaten the Parts and Services departments of many car dealerships.

Why is it that the auto parts industry is doing so well, despite the challenges that are facing many dealerships and other brick-and-mortar retailers?

“The auto repair industry is well-positioned because it’s not being disrupted by places like Amazon,” said Bret Jordan, an analyst at Jefferies L.L.C. “When you need a part, you can’t wait for tomorrow’s delivery. You need it today.”

There are currently approximately 250 million vehicles on U.S. roads, which is a record number. This is partially due to the lingering effects of the most recent recession, which has caused the average age of vehicles to climb to 11.4 years, which is the highest ever, according to data compiled by Bloomberg. At the same time, lower gas prices and higher employment have resulted in drivers putting more miles on their cars, thereby creating a booming market for oil and replacement tires.

According to Michael Montani, an analyst at Evercore ISI, this trend may cause auto part consumption to increase as much as 3 to 4 percent for the next four years. “With so many old cars on the road, there will be a huge surge for repairs, most of which need immediate parts,” he explained.

Overall, car dealerships’ Parts and Services departments have been flat for the past several years. With increasing competition from Jiffy Lube and many other service-oriented companies, dealers are hurting from their lack of growth in this sector. It’s possible Amazon will eventually start targeting local repair-shop operators to take commercial business away from parts retailers, echoing the strategy that it has employed in selling to small businesses to take market share away from office supply retailers such as Staples. However, this has yet to happen, and at least for now, auto parts retailers are experiencing increasing sales. For car dealerships, there’s no better time than now to reevaluate and update their fixed ops departments to take back some of the market share of this highly profitable and growing sector.