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Braking Into the Friction Parts
         Aftermarket



  Stephen Spivey, Senior Industry Analyst
       Automotive & Tran...
Agenda


• Impact   of the Financial Crisis
• Demand     Analysis
• Total   Brake Pads Aftermarket
• Industry   Challenges...
Impact of Financial Crisis on the Brake Pads Aftermarket
(North America), 2008
                                150
       ...
Demand Analysis, 2008-2014

                                      Average Annual Use
                   25.8              ...
Total Brake Pads Aftermarket (North America), 2004-2014

                  80                                             ...
Industry Challenges, 2008-2014


                   Increasing Commoditization of
                  Friction Parts Makes C...
5 Strategies to Overcome Industry Challenges (2008-2014)



            Carry rotors as a complementary product category

...
Strategy 1: Market to the Installer, Not the Vehicle Owner


• Just over half of respondents said that they would use a pa...
Strategy 2:
Right Part, Right Place, Right Time, Right Price

                                                            ...
Strategy 3: Up-sell Higher-priced Parts to Increase Profits


• Good brake pads represent the least
  profitable product l...
Strategy 4: Be Receptive to Private-label Opportunities
                  NAPA,
                 ACDelco,
                ...
Strategy 5: Include Rotors in the Product Line


                                                                         ...
Conclusions


• Brake pads continues to offer one of the most consistent growth opportunities
  available in the aftermark...
For Additional Information


To leave a comment, ask the analyst a question, or receive the free
audio segment that accomp...
Upcoming SlideShare
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Frost & Sullivan Friction Parts Aftermarket Analyst Briefing

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Frost & Sullivan’s analyst briefing on the friction parts aftermarket.

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Transcript of "Frost & Sullivan Friction Parts Aftermarket Analyst Briefing"

  1. 1. Braking Into the Friction Parts Aftermarket Stephen Spivey, Senior Industry Analyst Automotive & Transportation October 28, 2008
  2. 2. Agenda • Impact of the Financial Crisis • Demand Analysis • Total Brake Pads Aftermarket • Industry Challenges • Competitive Structure • Marketing Strategies to Overcome Industry Challenges • Market to the Installer • Right Part, Right Place, Right Time, Right Price • Up-sell Higher-priced Parts to Increase Profits • Be Receptive to Private-label Opportunities • Include Rotors in the Product Line • Conclusions 2
  3. 3. Impact of Financial Crisis on the Brake Pads Aftermarket (North America), 2008 150 140 AZO 130 120 Price ($ per share) 110 100 90 80 70 60 HON 50 AAP GPC 40 30 ORLY 20 10 PBY 0 FMDL Sept. 3 Oct. 27 FMDL HON AZO AAP PBY ORLY GPC • Since the start of the financial crisis last month, companies that manufacture and distribute brake pads have lost an average of 44.9 percent percent of their value. • Service bay business is estimated to be off by 30 to 50 percent, depending on location • Market participants depend on the availability of credit to complete transactions. 3
  4. 4. Demand Analysis, 2008-2014 Average Annual Use 25.8 16 • Average Annual Use is decreasing because high gas prices cause 19.4 12 motorists to reduce their travel. 1,000 Kilometers 1,000 Miles • This is a negative indicator for 12.9 8 Basis: Two-axle aftermarket parts demand, since many four-tire vehicles components have a service life that is 6.5 4 expressed in miles. 0.0 0 1992 1995 1998 2001 2004 2007 2010 2013 Vehicle Sales 20 Cars (million) Light trucks (million) 18 • Vehicle sales will decline by 11.2 percent 16 this year, reflecting growing pessimism in 14 U n its (M illio n ) 12 the economy. 10 • This can also be a negative indicator for 8 6 aftermarket parts demand, since vehicle 4 owner are likely to delay or avoid needed 2 maintenance in order to save money. 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Frost & Sullivan 4
  5. 5. Total Brake Pads Aftermarket (North America), 2004-2014 80 1,600 Units (Million) Revenues ($ Million) 70 1,400 Units Revenues 60 1,200 Year (Million) ($ Million) Revenues ($ Million) Units (Million) 50 1,000 2004 57.0 993.7 40 800 2005 58.2 1,031.0 30 600 2006 59.4 1,072.4 20 400 10 200 2007 60.5 1,116.4 0 0 2008 61.6 1,165.1 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2009 62.8 1,215.7 2010 64.1 1,268.5 • Unit growth rates have been on the decline in 2011 65.5 1,323.3 recent years as weakening economic conditions cause vehicle owners delay or postpone routine 2012 67.0 1,379.4 maintenance. 2013 68.6 1,437.9 • Frost & Sullivan expects economic recovery and 2014 70.2 1,499.3 growth in the vehicle population to drive pad sales to 70.2 million units by 2014 CAGR (%) 2.2% 4.3% Source: Frost & Sullivan 5
  6. 6. Industry Challenges, 2008-2014 Increasing Commoditization of Friction Parts Makes Competitors Less Profitable and Decreases Innovation Lack of Standardization of Friction Dilution of Formulas Ceramic Makes it Harder Formulations for Brake Parts Aftermarket Confuses Manufacturers to Properly Stakeholders Position and Market Their Products Deterioration of Brand Value Means Manufacturers Need to Find Other Ways to Differentiate 6
  7. 7. 5 Strategies to Overcome Industry Challenges (2008-2014) Carry rotors as a complementary product category Be receptive to private-label opportunities Up-sell higher-priced parts to increase profits Right part, right place, right time, right price Market to the installer, not the vehicle owner 7
  8. 8. Strategy 1: Market to the Installer, Not the Vehicle Owner • Just over half of respondents said that they would use a part that matches the OE specification (53%) without consulting the vehicle owner. • Only 22 percent said they would ask the vehicle owner to make a choice. In terms of the friction materials that you use as a replacement, do you prefer to? 16% Offer options to the 22% 23% vehicle owner and let him or her decide 18% 25% 25% Base your decision on your evaluation of the best option for the vehicle owner based on driving characteristics 66% 53% Use the original friction 52% material per OE specification Total Sample Independent repair Other repair facilities facilities Source: Frost & Sullivan 8
  9. 9. Strategy 2: Right Part, Right Place, Right Time, Right Price 44.4% • Customers demand complete coverage of semi-metallic and ceramic part numbers to 36.6% meet OE specifications Units • They also expect all needed hardware Revenues 55.8% (noise elimination kits, wire-wear sensors, 7.7% etc.) to be included in the box. 50.7% 4.9% Semi-metallic Non-asbestos organic Ceramic 3.2% • To gain market share, manufacturers must win 22.5% 1.2% distribution through major retail chains or 24.5% leading programmed distribution groups to Units 4.8% 6.4% 56.4% reach the maximum number of installers. 11.4% Revenues 9.3% 60.2% • Customers that have broad application coverage are more likely to win customers in the high-volume WD and Auto Retail channels. Internet/Direct Mail/Catalog WD OES Co-manufactured Auto Retail Source: Frost & Sullivan 9
  10. 10. Strategy 3: Up-sell Higher-priced Parts to Increase Profits • Good brake pads represent the least profitable product line. 51.0% Units 46.0% • Best brake pads are the most profitable line, 41.0% 30.0% representing 30 percent of units and 41 percent of revenues. 19.0% Revenues • Better brake pads represent the best 13.0% combination of price and quality $35 Good Better Best $30 $29.34 $25.28 $25 • Most professional installers are using $19.39 $20 $16.60 pads in the Better category. $15 • Suppliers that can move customers in $10 $12.66 $13.87 the Good line to the Better line, and move those from the Better line to the $5 Best line, will be more profitable than $0 those depending mainly on Good and 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Better. Good Better Best Source: Frost & Sullivan 10
  11. 11. Strategy 4: Be Receptive to Private-label Opportunities NAPA, ACDelco, Duralast Private • Sales of private-label brake pads are Labels 30% growing at a faster rate than sales of nationally branded parts. OE Parts • Most leading parts retailers have at 5% least one in-house brand that they Branded promote Parts 65% Wagner, Raybestos, Bendix • Retailers accounted represented 24.5 percent of 2007 sales, and their market share is increasing. • Competitors that produce and sell private- label pads in addition to, or in place of, nationally branded parts will find more opportunities in the future. Source: Frost & Sullivan 11
  12. 12. Strategy 5: Include Rotors in the Product Line • Almost all rotors are manufactured 55.6 Rotors overseas • They are lighter and thinner than OE 60.5 parts, and are replaced more often Pads • Vehicle owners are more likely to get a new set of rotors with each set of brake 0 10 20 30 40 50 60 70 pads they purchase 2008 Units (Million) 3.5% 3.0% • As a result, rotors sales are growing at a Unit Growth Rate (2008-2014) 2.5% faster pace than pad sales 2.0% • Manufacturers and distributors selling 1.5% matching rotors with each set of pads are 1.0% increasing their sales more quickly than 0.5% 0.0% those competitors that are not Pads Rotors Source: Frost & Sullivan 12
  13. 13. Conclusions • Brake pads continues to offer one of the most consistent growth opportunities available in the aftermarket. • However, the short-term outlook will present numerous challenge as vehicle owners drive less and reduce expenses in an uncertain economic environment • Suppliers that adhere to proven best practices are best positioned to survive and grow. • The competitive keys are: • A sourcing strategy that includes broad coverage across vehicle makes and models • A marketing strategy that caters to all customer segments, which differ on the basis of price and performance • A distribution strategy that includes sales to large retail chains, programmed distribution groups, and regional WDs to reach the maximum number of installers possible. 13
  14. 14. For Additional Information To leave a comment, ask the analyst a question, or receive the free audio segment that accompanies this presentation, please contact Stephanie Ochoa, Social Media Manager at (210) 247-2421, via email, analystbriefings@frost.com, or on Twitter at http://twitter.com/stephanieochoa. 14
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