Automotive Franchise Industry Report
Automotive franchises come in all shapes and sizes. They include motor vehicle parts and supply stores, automotive equipment rental and leasing, tire dealers and automotive repair and maintenance franchises. The automotive franchise industry, excluding dealers, generates around $25 billion in sales annually and employs over 175,000 people in 35,600 franchise establishments. This is according to an International Franchise Association sponsored study "Economic Impact of Franchised Businesses: Vol. 2" by PricewaterhouseCoopers, March 2008. The study also shows that the automotive industry contains more individual franchise companies than any other franchising segment except food.
The automotive franchise industry comprises franchises operating in the automotive aftermarket and car rental and sales franchises. The motor vehicle aftermarket industry includes the products and services purchased for vehicles after the original sale. These include replacement parts, accessories, appearance products, lubricants and service repairs. It is an important sector of the U.S. economy. According to the Automotive Aftermarket Industry Association (AAIA), it is valued at $285 billion and employs approximately 4.5 million people. Franchises operating in the automotive aftermarket segment include:
- Transmission franchises
- Body repair franchises
- Windshield repair & auto glass franchises
- Automotive general repair franchises
- Car wash franchises
- Oil change franchises
- Brake repair franchises
- Appearance franchises including bumper repair, paint chip repair and dent removal franchises
- Tire franchises
- Tune-up franchises
- Vinyl & upholstery repair franchises
- Interior auto maintenance & reconditioning franchises
- Automotive electronics franchises
- Auto detailing franchises
- Motor vehicle parts and accessories franchises
Car sales franchises are most often distribution franchises rather than business format franchises. According to the aforementioned study there are around 60,000 car dealer franchises employing almost 1.5 million people and generating $115 billion in sales per annum. The main players include Penske Automotive Group, AutoNation, CarMax and Sonic Automotive. The industry is highly fragmented. The top 50 companies have less than 15% market share. The business climate for new car dealerships is very difficult. Low consumer confidence, tight credit and plummeting sales have resulted in increasing closures of car dealerships. A study by consulting firm Grant Thornton LLP predicts that up to 20% of car dealerships could close by the end of 2009. Adding to this, car dealers are facing competition from Internet web sites where private market sellers can bypass bricks-and-mortar retail channels.
The closure of car dealerships offers a market opportunity for aftermarket auto franchises. Many car dealerships provide repair and maintenance services. The increase in closures opens a gap in the market which independent repair shops can fill.
Growth Drivers in the Automotive Franchise Market
The size and growth rate of the automotive aftermarket, in which the majority of auto business format franchises operate, depends primarily on a number of factors:
- The number of vehicles on the road
- The age of the vehicles on the road
- The number of miles driven annually per vehicle
- The increased technology and complexity of new vehicles
Source: "Market Update: M&A in the Auto Aftermarket" (May 15, 2007). The Aftermarket Analyst newsletter by The Capstone Financial Group. The Automotive Aftermarket Suppliers Association.
Other factors and trends influencing the market size and potential include:
- $55 billion in annual unperformed vehicle maintenance
- Increased used car sales
- Increased demand for fuel efficiency
- Increased cost of cars
- Increased buying power of women
Number of vehicles on the road remains high
The number of vehicles on the road in the United States grew significantly in recent years fueling ongoing demand for products and services offered by automotive franchises. Based on U.S. Department of Transportation data, between 1997 and 2007, the U.S. auto fleet increased by 25% to over 240 million registered vehicles. There are now more cars than ever in need of maintenance and repair.
Drivers are holding on to their cars longer
The decline in new car sales can be viewed as good news for the auto franchise industry. The average age of vehicles on the road has been increasing in recent years and is now 10 years for cars and almost 9 years for light trucks. This increases the demand for maintenance and repair services. According to industry analysts there is strong demand for service or replacement of exhaust systems, brakes, shocks, suspension, engine repairs, oil changes, and other related services. It is predicted that this trend will continue for several years which means there will be growing demand for auto aftermarket franchise products and services*.
* S&P Economics 2009. The Capstone Financial Group 2007.
Decline in the number of miles driven annually per vehicle
Auto franchises have benefited from a steady increase in total miles driven, which reached a peak of 3 trillion miles in 2006. The more miles driven, the more wear and tear there is on the vehicle thereby increasing the requirement for maintenance and repair. However, due to increased gas prices and the economic downturn, Department of Transportation data show a steady decline in the total number of miles driven since 2006. Car travel fell by 3.6%, or almost 108 billion miles, in 2008 from 2007.This trend has an adverse effect on the auto franchise industry since tire changes, oil changes, tune-ups and repairs are not required as frequently.
As a result of increased gas prices use of public transit has increased significantly reaching a peak in 2008 when gas prices set records rising above $4 a gallon. There has also been an increase in car pooling, use of alternative modes of transport like scooters and even bicycles in some cities.
American communities and suburbs are designed very much around the car. Many cities lack any reliable public transport. Without major investment in mass transit infrastructure it will not pose a major threat to car use. Americans will continue to rely heavily on their cars for the foreseeable future. Already in 2009, the rate of decline of miles driven has slowed modestly. Gasoline prices have dropped to around $2 a gallon. As long as gasoline prices remain stable in 2009, auto franchises will benefit as consumers have more disposable income to spend on deferred car maintenance and repairs.
Increased technology of new cars
Cars have become more complicated and computerized. Due to their increased complexity, today’s cars require specialized tools, skills and computer software for service and repair. This is a trend which potentially favors auto aftermarket franchises. Fewer car owners are capable of repairing their own vehicles opting instead for service providers who have the specialist equipment and skills required. It is a trend which will continue as more and more functions that used to be operated manually are now done electronically. The reasons for the increased complexity of cars include the need for high tech engine controls to meet emissions and fuel-economy standards, reduction of wiring in cars, advanced diagnostics, new safety features and new comfort and convenience features. Microprocessors control everything from sun roofs, alarms and airbags to engine transmissions. The increased demand for navigation systems, car safety systems and entertainment and communications systems has created growing niche markets for auto franchises.
Controversially, owners of new late model cars are often forced to return to the dealership for service and repair. Car manufacturers often restrict access to the know-how and specialized tools required to fix cars by favoring auto dealers and putting independent repair companies at a disadvantage. They also stand accused of limiting consumer choice by denying them the ability to shop around for better prices and more convenient locations. Legislation in the form of the Right-to- Repair Act is currently being considered by US congress which if passed would allow independent repair shops to compete for the business now guaranteed only to dealer controlled service and repair shops.
Large untapped market of unperformed maintenance
According to the Automotive Aftermarket Industry Association (AAIA) there is over $55 billion per annum of unperformed and underperformed maintenance by vehicle owners. A 2008 study by the Car Care Council estimates that 80% of vehicles need service and parts. It is estimated that one in ten drivers continue to drive, ignoring the dashboard “check engine” light which is a major focal point of auto repair shops. This unperformed maintenance represents a significant untapped market for auto franchises. While in the current economic climate customers are more likely to defer expensive repairs on their cars, they are more likely to repair them eventually than to replace them.
Increasing used car sales
While new car sales are declining there is increasing demand for used cars. This is to the extent that the price for average good quality cars is increasing substantially. Strong used car sales increase demand for the services of auto repair and auto reconditioning franchises. Mobile dent and vinyl repair and other appearance franchises are well positioned to meet increased demand from auto dealerships for their services.
Increased demand for fuel efficiency
Before the economic downturn US auto manufacturers were already losing sales to Japanese car makers. Fluctuating gas prices have resulted in a shift in consumer demand from big, gas guzzling cars, pick-up trucks and SUVs to smaller, fuel efficient Japanese cars. President Obama has stipulated that improving fuel efficiency must be a cornerstone of future strategy for auto manufacturers. The government bailout of the industry is contingent upon manufacturers producing fuel efficient vehicles, reducing emissions and developing alternative fuel vehicles like hybrid cars and electric cars.
Further down the road, this will result in niche franchise opportunities for the servicing of hybrid and alternative fuel technologies vehicles. Some franchises have already responded to the “greening” of the auto industry. For instance Honest-1 Auto Care has set in place very specific eco-friendly initiatives such as recycling oils, batteries, filters and antifreeze; using environmentally friendly cleaning and degreasing products; and offering eco friendly services like their Green Tune-up. They have also developed a line of new products that are designed to increase fuel efficiency and decrease engine emissions.
Car wash franchises are also expected to benefit from increasing environmental awareness as people look to save water by using industry services. Most car washes now recycle their water, treat it and reuse it as a way to reduce water use, reduce pollution and control costs.
Increased cost of cars
According to Comerica Bank's Auto Affordability Index, new cars are becoming more expensive relative to average family income levels. The average price of a new car sold in the United States in 2008 was about $28,400. Given that the car is an increasingly expensive purchase consumers are more likely to preserve their investment through maintenance and repair. This benefits aftermarket auto franchises. In addition, the increased cost of cars relative to income has stimulated demand for good quality used cars with consequent increased demand for auto franchise products and services.
Increased buying power of women
According to research conducted by the Automotive Aftermarket Industry Association* almost 90% of female drivers are involved in the decision-making process for the maintenance of household vehicles and 68% of women take their vehicle in for service themselves. Industry statistics show that 66% of customers bringing in vehicles for service are female. The increased buying power of women in relation to auto service and repair has resulted in a niche for auto franchises prepared to tailor their premises to the preferences of women. Honest-1 Auto Care centers for example are clean and family friendly with children’s play areas, large screen TVs, and attractive restroom facilities. Precision Tune Auto Care have redesigned the lobbies of their centers by providing comfortable waiting rooms. Auto franchises are also actively recruiting women operators to attract a larger share of this market.
*AAIA "Vehicle Maintenance & The Female Motorist” (2004)
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