The vehicle aftermarket is a large, dynamic and growing industry. We discuss characteristics of parts retailing and vehicle service and repair in the sections below.

Parts Retailers

As a purchaser of real estate leased to parts retailers, American Automotive analyzes trends in both the Do-It-Yourself (DIY) and Do-It-For-Me (DIFM) categories of the aftermarket. Although aftermarket businesses vary in size and type by geographic market, both the DIY and DIFM categories generally are highly fragmented and competitive.
As the number of replacement parts retailers has increased, discount stores and mass merchandisers have been challenged to maintain a broad inventory selection and provide the service levels that DIY customers require. This has created a competitive advantage for certain specialty parts retailers which have distribution capacity, sophisticated information systems, wider inventory selections, and knowledgeable sales staff, all of which are helpful in servicing DIY customers. This has resulted in the growth of specialty automotive parts retailer market share. Lang Marketing, a recognized aftermarket research firm, indicates specialty retailers increased their market share of DIY sales from approximately one quarter in 1990 to over 40% ten years later. Specialty retailers gained market share during the period at the expense of discount stores and mass merchandisers.

Vehicle Service and Repair

American Automotive purchases properties utilized by vehicle service and repair businesses and we constantly review trends in this industry segment. This helps us improve our property investment and rent coverage analysis, and facilitates our role as a financing partner for our tenants and prospective tenants. The chart and analysis below, derived in part from information provided by Auto Lab, a franchisor of independent vehicle service and repair facilities, summarizes issues which can impact the vehicle service and repair industry.

Issue Effect on Property and/or Tenants Risk
Increased competition Negative Moderate risk
Extended new car warranties Highly negative Low risk and temporary
Lower dealership service pricing Highly negative Low risk
Technician shortage Negative Moderate risk
Advanced technologies Neutral Low to moderate risk
Shift or variation in mix of vehicles None Low risk, and change would be gradual over time
Economic downturn Believed neutral Moderate risk

Increased competition: Increased competition, which can affect rent coverage ratios, may come from new auto service and repair operations or expanded service offerings from existing businesses. The affect of greater competition would be ameliorated if steady aftermarket growth continues.

Extended new car warranties: If automakers extended new car warranties, this would adversely affect independent vehicle repair and service businesses. However, this possibility is believed to be remote. Automakers prefer to incentivize consumer purchases of their vehicles through rebates at the time of purchase. For automakers, rebates are less expensive and have an immediate impact on consumer decisions. Consumers have greater difficulty valuing an extended warranty as its value is unknown at the time of purchase.

Lower dealership service pricing: Such lower pricing would shift business from the independent vehicle service provider to the dealer. This would benefit our rent coverages at dealerships but it would adversely affect rent coverages from repair and service locations. Lower dealership service pricing is not likely as the service department is one of the most profitable areas of the auto dealership business and dealers seek to avoid reducing their profit margins. Dealers also tend to have a built in advantage as the seller of the vehicle to the consumer in the first place. Generally, consumers who return to the dealer are less price sensitive than those who begin to use independent repair facilities earlier in the life of their vehicles.

Technician shortage: The Automotive Aftermarket Industry Association indicates there were in excess of 867,000 technicians working in the aftermarket in 2004. Since 1980, both the demand and the supply of technicians have increased. If a shortage of certified and qualified technicians occurred in the aftermarket, service pricing would increase. There would be an adverse affect on the vehicle repair business if price increases caused consumers to defer non-critical maintenance.

Technician Employment Supply and Demand 1980-2004

Source: Automotive Aftermarket Industry Association

Advanced technologies: Every year, vehicle makers add new or advanced technologies to their vehicles. These additions include new diagnostic approaches or systems. Independent vehicle repair and service businesses usually have at least three years, which comprise the initial vehicle warranty period, to prepare for the new technologies.

Shift or variation in mix of vehicles: The mix of vehicles serviced will differ across geographies and repair and service businesses. For example, East and West Coast repair facilities will service more foreign cars than repair shops in the Midwest. Suburban facilities will service more SUVs than city locations. Capable repair and service businesses are knowledgeable about these variations and can plan their tooling and diagnostic equipment needs for these variations without experiencing a loss of consumer revenue.

Economic downturn: The aftermarket tends to be insulated from the gyrations of the broader economy. When the economy is doing poorly, consumers tend to hold onto their cars longer or buy used cars. Both attributes help the independent repair business. The latter attribute helps the auto dealer as profit margins are higher on used cars than new ones. Consumers which hold onto their vehicles longer are more likely to own vehicles which are out of warranty, increasing repair business revenues. Consumers who are unemployed tend to defer automotive work. Eventually a vehicle will fall into disrepair and require both aftermarket parts and service. With the high content of integrated circuitry and software in many vehicles today, trained technicians with the proper tools typically are required to perform normal maintenance and repairs. The consumer eventually will be forced to take the vehicle in for service, at either the dealer or the independent repair facility.

The diagram below summarizes the relationships between participants in various sectors of the aftermarket.