INDUSTRY SPOTLIGHT: FRANCHISED AUTOMOTIVE SERVICES SECTOR REMAIN STABLE

By Khadija Cochinwala, FRANdata

According to the Hedges Company automotive market research report statistics, there are over 292 million vehicles operating on the road in the U.S. as of 2023. New car and light truck sales were around 16.5 million in 2022 and projected at 15.1 million in 2023. Almost 38.4 million used vehicles changed owners in the U.S. between the first quarter of 2022 and the first quarter of 2023, while new registrations of vehicles came to about 13.9 million units during that period. The franchised automobile industry largely encompasses sectors focused on the automotive aftermarket segment including repair and maintenance of motor vehicles, auto detailing & car washes, auto parts retailing, appearance & restoration services, passenger rentals and leasing, fleet management and gas stations. Though several industries were impacted from the COVID-19 crisis, the automotive service franchises remained pandemic proof as they were dubbed essential businesses. According to a Mordor Intelligence industry report, the U.S. automotive service market is estimated at $177.51 billion in 2023, and is expected to reach $237.33 billion by 2028 — growing at a CAGR of 5.98 percent during the forecasted period (2023-2028).

With the current stormy economic climate, high inflation, rising interest rates and the global microchip shortageinduced imbalance in the supply and demand chain, both new and used car prices have skyrocketed, with consumers favoring comparatively more affordable used cars over their expensive brand-new counterparts. It is also no surprise that consumers are inclined to keep their existing vehicles longer as indicated by the S&P Global Mobility research that found that the average age of light vehicles in operation has risen to an all-time high of 12.2 years in 2022, a nearly 2 percent increase from 2021. During the pandemic, social distancing practices led to a shift from public transportation and carpooling to personal mobility, which also accelerated the demand for used cars amidst a shortage of new vehicles. After the pandemic, carpooling and ride-sharing services regained popularity, in part due to the increase in hybrid workplaces, resulting in higher annual mileage for these cars. There was also a renewed demand for recreational driving and a return to the quintessential American road trip experience, which automatically spurred the need for vehicle service. All of these factors equated to more older cars on the road, which meant more regular maintenance versus replacement, fueling the potential for the diversified franchised automotive aftermarket businesses.

The performance of the automotive services franchise industry is expected to continue its upward trajectory, as evidenced by FRANdata’s New Concept Reports for the period 2018- 2023, which revealed that 41 new brands have adopted the franchise business model in the automotive aftermarket services industry. More franchises have entered the market offering environmentally friendly services ranging from waterless car washes and electric car maintenance to ultrasonic cleaning of emission filters. There is an increasing number of brands that have shifted from a licensing model to a franchising model, driving overall franchise growth in recent years to a five-year high of 17,774 total franchise establishments in 2022.

Trends

1. Escalation in Brand M&A Activity

The consistent expansion of the automotive franchised sector, both during the pandemic and in preceding years, has garnered the attention of private equity groups. According to the Jefferies 2022 Global Automotive Aftermarket Report, there were 352 M&A dealings in the automotive aftermarket sector in 2022, 310 of which were strategic transactions. Although the decrease from 2021 is attributed to the limited availability of capital due to rising interest rates in 2022, investor interest is expected to remain high as the aftermarket segment is fragmented and offers multiple opportunities for platform creation. Some transactions to note:

• Warburg Pincus’s acquisition of El Car Wash is just one of the many private equity-backed multiple platform and consolidation investments in the automotive aftermarket industry in 2022
• Mavis Tire Express acquiring Tuffy Tire & Auto in 2021, which is now affiliated with Express Oil Change, ultimately backed by an investor group led by BayPine in partnership with TSG Consumer Partners and West First Management (WFM), with former majority shareholder Golden Gate Capital continuing to retain a minority stake in the company
• Franchise Equity Partners securing a minority stake in Parks Automotive Group in June 2023, marking its second investment in the automotive retail sector

Additionally, the industry has witnessed the emergence of multi-care programs and co-branding as strategies employed by franchisors to attract consumers. This involves partnering with brands in related industries that serve a similar demographic. Co-branding facilitates the operation of two or more franchises under one roof, allowing them to leverage multiple service offerings and enhance profit margins.

2. Digitalization and Technology

Digitalization of automotive repair and component sales is making inroads as electric car sales increased by 60 percent in the first quarter of 2023 — compared to the same period in 2022 — with predictions of it reaching over 1.5 million by the end of 2023 (according to the International Energy Agency). As more Americans (over one-third according to a Reuters poll) consider buying an EV for their next model spurred by tax credits offered by the Inflation Reduction Act of 2022 and rising gas prices, the aftermarket automotive industry needs to shift gears to make the most of the transitions towards a rapidly growing greener market. The fleet management franchises’ services in taking charge of innovative, autonomous, highly functional and interconnected vehicles on the roads will become indispensable. 

Lucrative EV charging franchise opportunities, yet in the nascent stages, are a promising trend for entrepreneurs looking for solid return on investments and wanting to stay ahead of the competition. Advancements in vehicle and hybrid technology are driving innovation and compelling franchisors to adapt and evolve. For instance, Big O Tires and Midas are including electric vehicle tires in their offerings and Valvoline has begun piloting services such as 12-volt battery replacement; tire rotations; key fob battery, cabin air filter & wiper replacements and state safety inspections to service the increasing hybrid and EVs on the roads.

While the automotive franchise market and the vehicles driving it are evolving, they will remain an important part of everyday life for the foreseeable future. The auto repair franchise industry is in a stable, in fact, thriving position, but franchisors should be prepared to incorporate key changes with newer technologies to remain profitable in the long haul.

Khadija Cochinwala is a Research Analyst at FRANdata. She is part of a team of analysts who measure, track, and analyze franchisor performance. Khadija is committed to producing quality franchise insights that enable strategic decision making and propelling business growth.