Analysis: Meet the new year … same as the old year

Déjà vu.

That’s what January 2022 felt like — a mirror image of January 2021.

Back in the fall, when industry observers like us get their crystal balls out and begin auguring trends for the year to come, I had a markedly different idea of how 2022 will unfold. But so did the COVID-19 virus.

Based on the pre-Omicron scenario, I had expected supply chain disruptions to slowly ease off, vehicle sales to pick up and miles travelled to see a sharp rise. Those predictions now seem as certain as flight schedules these days.

But 2022, in many ways, won’t be an exact repeat of 2021. Things may look gloomy now but there’s some hope. Canada will most likely have a well-boostered population by the end of Q1. If the early insights into Omicron’s relative mildness hold, we may be finally making our way into post-pandemic stability.

The automotive aftermarket has weathered the COVID-19 storm better than other transportation sectors (e.g., new car sales). The industry can also expect more of the same from last year, but with some differences as we progress deeper into 2022.

So here are my top predictions for the industry this year…

Another growth year

Let’s start with the good news. While there’s no reliable overall industry revenue data for Canada, 2021 was a great year for the aftermarket — despite all the supply chain woes. If we use the U.S. market as a proxy, then the Canadian market most likely saw revenue increases between five and 10 per cent in 2021. Uni-Select reported similar cumulative revenue growth between 2020 and 2021 for the first three quarters, to use a Canadian example.

The growth can be attributed to a simple market rebound following a steep decline in 2020. But there’s at least another factor driving the spurt. Vehicle sales remained low in 2021 because of the chip shortage. As both new and used cars were hard to find, people retained and repair their older vehicles, leading to higher demand for auto shop services.

Vehicle sales will continue to be as anemic as 2021 — at least for the first half of the year. Scotiabank Economics has forecasted 1.77 million sales in 2022 (already a much lower figure than the 1.8-1.9 million units we have been hitting consistently in the past). Given the current Omicron threat, I doubt if sales will cross 1.75 million this year.

Another year of low sales — with stable vehicle miles travelled — is very likely to translate to dollars for the aftermarket. Based on my calculations, I think the Canadian aftermarket will increase by 10-12 per cent in 2022.

Auto parts prices, supply to remain volatile

The double-digit growth prediction above might seem too optimistic to some. But hear me out: Most of that uptick will come from price increases, not volume.

Eucon’s analysis of millions of pricing data points in North America shows hard parts prices went up by about 8-10 per cent in 2021. The increases were even higher for certain categories. Supply chain issues and high freight charges were largely to blame for the sector inflation, and costs were passed down the distribution chain.

Many of these costs were initially absorbed at the top of the aftermarket chain (e.g., by suppliers) but analysis shows that they started to trickle down to shops and consumers in the second and third quarters of 2021. Even without Omicron, part prices would have continued to rise in the first half of 2022. The new pandemic surge, and the continuing supply chain issues, will only prolong that upward trajectory.

This trend will continue — in fact, it is likely to get worse in 2022. That can’t be good news for shops and part stores that are already saying that the situation is dire.

Labour shortage

Hiring skilled technicians and counter people was a challenge even before the pandemic. Numerous studies and models have been predicting an acute shortage of labour — particularly for the aftermarket — for the next few years.

COVID-19 has now both accelerated and exacerbated the problem.

Statistics Canada reports that job vacancies are at an all-time high and wages have grown at the quickest pace in many years. For instance, average hourly wages in November were 5.2% higher compared to the same month in 2019.

This trend will continue — in fact, it is likely to get worse in 2022. That can’t be good news for shops and part stores that are already saying that the situation is dire. Through my interactions in the industry, I have heard many stories of cars sitting in the bay or shops having to turn away customers because they don’t have enough technicians.

Over the next few months, aftermarket businesses will have to brace themselves for higher costs of hiring. If payroll costs go up, shops and stores will have to pass them on to their customers or forfeit margins.

Digitization will continue to ramp up

2020 was a watershed year for online parts e-commerce. According to data from Lang Marketing Resources (as published in the 2022 AutoCare Factbook), online aftermarket sales in the U.S. jumped a whopping 37% in 2020.

Although Canada is far less evolved than the U.S. when it comes to parts e-commerce, and reliable data is not available, I have observed very strong localized interest among industry players in positioning their products for B2C online channels. Even B2B platforms from the likes of Worldpac, Altrom and NAPA are being constantly beefed up with new tools and functionalities to make the ordering process more seamless for installers.

Kumar Saha is the Toronto-based managing director of the Canadian operations of global aftermarket intelligence firm Eucon. He has been advising North American automotive industry for over a decade and is a frequent conference speaker and media commentator.