By Taran Sodhi, CEO Conceptual Minds Inc.
Auto Repair Industry Outlook
First Half of 2023
Being Proactive Amidst Uncertainty
These are precarious times with the stock market declining at a significant rate and discussions and commentary around the looming recession and unprecedented rise in interest rates dominating major business newsfeeds.
Anxiety is at an all-time high, and like many businessowners, auto repair operators are wondering what 2023 holds for their business.
Although none of us have a crystal ball, we can still look to the patterns of the past to better prepare for the future.
This week, I did exactly that and am sharing my findings as a fellow business owner and operator.
For starters, here’s an article from just this morning (Oct 7, 2022) I thought could offer some insights into the auto repair industry for 2023.
This article discusses the current state of car prices, interest rates and their projected impact on the buying power of the consumer and projected new and used car sales.
According to Cox Automotive’s Chief Economist, Jonathan Smoke, “The irony for the auto market is that just as the industry is poised to start seeing volumes increase from supply-constrained recession-like low levels, the rapid movement in interest rates is reducing demand.”
The Increased Cost of New Car Ownership
New loan rates are up 2-percentage points at the end of the third quarter for both new and used cars.
New car rates are up to 7% whereas used car rates are up to 11%.
Combining all these factors contributes to the overall cost of ownership.
According to AAA, cost of new car ownership has reached $10,738, surpassing $10,000 for the first time ever. Average monthly payment has now reached $894 no small sum for a monthly car payment.
The higher cost of new car ownership is expected to directly impact affordability of cars.
Automakers can offset costs with financing deals and discounts, however, they don’t seem to be positioned to do so.
According to Money.com, ten car brands have increased prices by double digits between 13 – 21% on a YOY basis. In fact, just this month, Ford increased the price of its F-150 Lightning pick-up truck for the second time this year. The price is now up 30% from its May 2021 price.
Such price increases are a result of supply chain bottlenecks and a significant rise in raw material costs.
Steep price increases are simply not sustainable. It’s likely prices will plateau and decrease in the market’s attempt to normalize. However, those declines are also likely to be accompanied by higher interest rates.
According to JP Morgan’s Lead Automotive Equity Research Analyst, Ryan Brinkman “There is demand destruction taking place.” His assessment is based on the University of Michigan’s Buying Conditions of Vehicles survey. JP Morgan believes the auto industry will continue to experience “lower volume, higher prices” for remainder of 2022 and likely into early part of 2023.
Cox Automotive is now forecasting new vehicles sales of 13.7MM v. a previous forecast of 14.4MM. The decrease in forecasted new vehicle sales is primarily due to increasing rates resulting in increased cost of ownership.
Increased Auto Repair Service Demand
Decline in new car sales is generally positive for the auto repair industry because most consumers spend their money fixing their current vehicles rather than going out and buying new ones.
Car mileage can also bring an interesting dynamic to the mix with miles driven impacted by economic conditions.
An interesting study published by Oregon State University highlights the relationship between economic downturns and Vehicle Miles Traveled (VMT) across the United States. The date range for this study was from 1929 – 2007.
The chart below shows that most downturns led to a 5-10% reduction in VMT.
Impact of Pandemic on VMTs in 2023
2023 is likely to be a bit different due to the impact of pandemic on VMTs.
To better understand the impact of work from home on Vehicle Miles Driven, I looked at a study conducted and published by University of California in June 2005.
The study suggests that VMT declined by 0.8% or less (94% confidence).
Another study shows miles driven in the state of Maryland dropped by 16% during the pandemic.
The Maryland Department of Transportation team modeled the miles driven recovery, and the study predicts a reduction of 3% to 7% v. pre-pandemic levels. This indicates a recovery of 7% – 12% by 2025. This particular study didn’t take economic conditions into account in their models.
Utilize Data and Patterns to Plan
Based on these studies, we can expect VMTs to trend higher than pandemic levels even though the recovery may not be as quick as expected by the University of Maryland study.
Additionally, declining new car sales should only lead to consumers holding on to their used vehicles.
The good news is such conditions should continue to play a favorable role in auto repair demand over the next 6-12 months! Overall, I do expect near term decline in demand due to high levels of anxiety in the market.
However, I do anticipate the industry will hold up well compared to many other areas of the economy.
Auto repair operators should plan for single digit declines in car count.
If budgets allow for it, proactive and savvy operators should consider expanding their marketing investments in Q4 of 2022 and beginning in March of 2023 to overcome these expected declines.
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