This month: U.S. market trends

June: The DIY market

July: The Do-It-For-Me segment

In the automotive aftermarket, the term soft-parts describes those categories not covered under the umbrella of hard-parts (i.e., mufflers, brakes, shock absorbers and so on). Soft-part categories include motor oil, automotive chemicals and appearance chemical products. Each of these categories has its own user behavior pattern and user demographics. And while its not a cause-and-effect indicator of future trends, motor oil consumption is a general indicator as to how these other categories will trend.

For example, if you are a marketer of automotive chemicals (i.e. oil and fuel additives, antifreeze/coolants, brake parts cleaners, etc.) and you cannot afford to conduct expensive usage behavior segmentation marketing research studies, you might look to see how motor oil consumption is trending as a general indicator as to how those other product lines may trend. Among other questions, you should ask:

Is the overall market flat, rising or even declining, and why is the market trending that way?

Is the percentage of oil-change Do-It-Yourselfers growing or declining overall? Which segments will remain DIYers no matter what? Among those who will eventually go over to the Do-It-for-Me side, which segments will remain DIY the longest?

Is the DIFM percentage growing or declining overall? Which installer outlets do patrons go to most often, which segments are the best to target, and how much influence does the oil-change professional have on the brands used?

This motor oil trending information is a general indicator for marketers, distributors, or professional installers to see where the brands they market or carry are going. So you should be asking these same questions whether you are a motor oil marketer, a soft-part distributor or a professional installer.

Which Way Next?

Any analysis of the motor oil aftermarket needs to start by examining the fundamental trends in private-sector cars and light trucks. In a presentation last November to the National Petrochemical Refiners Association, Strategic Resources Inc. highlighted the following conclusions:

1. More private-sector cars and trucks are in the vehicle population, due to reduced scrappage rates.

2. When consumers live in a constant state of gasoline price fluctuation, gasoline prices are constantly on their minds. When gasoline prices fluctuate (sometimes up to 15 to 20 cents per gallon from one day to the next), it truly affects driving behavior – contributing to fewer annual miles driven per registered private-sector vehicle.

Moreover, constant gasoline price fluctuations affect consumers choices in the automotive care products they purchase. Consumers are now reevaluating products that may provide greater fuel efficiency.

3. Oil change intervals are extending due to fewer annual miles being driven per registered vehicle, among other things. Were also seeing auto manufacturers and a major oil company recommending longer oil change intervals, and automakers increasingly have installed oil-change light indicators, which consumers are obeying.

As described in my recent presentation (Yet, Another Marketing Look Into The Future, NPRA paper LW-06-07), overall private-sector passenger car/light truck motor oil consumption is flat because, although there are more vehicles in the driving car pool, vehicles are being driven less and users are extending drain intervals. On a per-vehicle basis, consumption is declining, but the effect of more vehicles in the car pool has been to flatten consumption.

Lets look at the facts that led to those conclusions, what has happened since November, and if any of these conclusions have changed six months later.

Follow the Fleet

An excellent source for U.S. vehicle registration data is the automotive data and research firm R.L. Polk & Co., because they subtract the number of vehicles scrapped each year as well as add in new vehicle sales. Its data show U.S. private sector registrations of passenger cars/light trucks grew to a total of 191 million vehicles in 2006, a 2.1 percent gain over 2005. (Private sector registrations exclude commercial and public sector vehicles such as fleets, taxicabs, government vehicles, etc.) In 2005, the growth rate was even better, 4.1 percent over 2004, and 2004 vehicle registrations were up 3.3 percent over 2003. (See Figure 1.)

The primary reason for this spurt in vehicle registrations was not that annual production grew; new car sales have remained steady at about 17 million a year. The primary reason for the 2005 spike in registered vehicles, R.L. Polks data indicate, was fewer vehicles were scrapped – just 4.8 percent of total vehicles in the pool in 2005 compared to over 6 percent scrapped in previous years. The scrappage rate continued to shrink in 2006, to just 4.5 percent of the fleet.

Less vehicle scrappage means more vehicles on the road. Those interviewed at R.L. Polk said they believe that vehicles are now being built better so they can last longer and be driven for more miles; they predict that the percentage of vehicles 5 years and older will grow from 61.5 percent to 65.5 percent by 2010.

My colleagues at R.L.Polk anticipate passenger car/light truck registrations will grow 2 percent to 2.4 percent each year for the next five years – consistent with the data presented to NPRA last November. It appears that trend is still on target.

Pique at the Pump

Prior to 2005, industry sources were predicting that consumers were adjusting to higher gasoline prices and that driving behavior would not be affected in 2005 and beyond. Predictions were that miles driven per vehicle would grow 1.6 percent over 2004, according to the Automotive Aftermarket Industry Association. By contrast, in a presentation to NPRA in November 2005, I predicted 2006 annual miles driven would tick down, from an average 11,900 driven per vehicle to 11,700 miles.

That prediction was based on correlating annual miles driven in the years following major gasoline price increases. Research showed that when there is a significant increase in gasoline prices, the following year annual miles driven goes down (or at least maintains) from the previous year.

When gasoline prices rise at the pump, consumers complain – then adjust their lifestyles to accommodate the price change and go on with their lives. Their consumption data would reflect this adjustment, then become consistent again. However, if consumers drive by their favorite gasoline station and see the price jump 20 cents per gallon from the previous day, then see prices trickle down over the next week or two, only to see them jump again by 15 to 20 cents per gallon, it drives them crazy – and it makes it harder for them to adjust to rising gasoline prices.

This fluctuation keeps the issue of gasoline prices in the forefront of their minds. As long as gasoline prices fluctuate significantly, consumers will be reevaluating driving behavior and automotive products used to maintain their vehicles (including gasoline, motor oil, automotive chemicals, etc.). Such consumers also will be reevaluating products that provide greater fuel efficiency.

In November 2006, gasoline prices ranged from $2.50 to over $3.00 per gallon, but then dipped to between $2.00 and $2.50 because oil companies shifted over to their winter fuel blends and it was a relatively mild winter, for the most part. These gasoline price reprieves have caused some to revert back to older driving habits. However, the oil companies are now converting back to summer blends (which now contain ethanol), and at this writing gasoline prices have nudged back above $2.50 per gallon. Once gasoline prices begin to average between $2.50 and $3.00 or more per gallon, consumers can again be expected to reevaluate aftermarket products which may provide greater fuel efficiency.

Oil Change Changes

In 2005, research indicated that consumers changed their oil on average 3.22 times per year. In 2006 this number fell to 3.19 changes per vehicle per year – significant when multiplied across the U.S. fleet. Our data indicate this downward trend is continuing so far in 2007.

Gasoline price fluctuations appear to negatively affect annual miles driven, and this decline in annual miles driven is just one factor that negatively affects the average number of annual oil changes. Other factors that contribute to fewer oil changes per year include:

Manufacturers are recommending longer oil change intervals with newer vehicle models. Ford for example, has just extended drain intervals on many models to 7,500 miles, from a previous 5,000 miles.

Others, led by General Motors, are installing oil change interval lights on a greater number of their models (starting in 1999). A major oil company, ExxonMobil, has positioned its product for longer/extended oil drains, encouraging drivers to go 5,000, 7,500 and even 15,000 miles between oil changes.

Put It Together

As described above, there are more vehicles in the driving car pool every year but each is being driven less, and users are extending drain intervals. On a per-vehicle basis, consumption is declining, so the net effect of more vehicles in the car pool is to flatten consumption of motor oil.

The next question is, how does this translate to actual gallons consumed? Consumption will continue to remain essentially flat over the next five years as a result of intervals extending and the passenger car/light truck pool increasing around 2 percent per year (Figure 2).

There are two channels to serve these vehicles: the DIY and DIFM segments. Strategic Resources estimates that just under 30 percent of U.S. motor oil demand, or approximately 200 million gallons, is consumed by those who change their own oil. This share is down from over one-third of the volume consumed six years ago, and is projected to continue to fall off to about one-quarter of the volume consumed the next five years.

What does this shift mean for motor oil marketers who are targeting the Do-It-Yourself market segment? Next months article will take a closer look.