Wednesday, March 2, 2011

Are Auto Parts bought at Auto Zone Inferior Goods??...It is not as bad as it sounds...Or is it?

Are auto parts sold in Auto-Zone or O'Reilly's "inferior goods"? This does not mean they are of poor quality. In economic terms inferior goods are goods whose demand decreases as incomes increase (an inverse relationship between income and demand). This article suggests that as new car sales increase and pass the 14 million mark, the sale of auto parts to maintain used cars will decrease significantly.

For auto parts to be classified as an inferior good, we have to link the increase in new car sales to increased incomes.  This may not be so clear at this point.  Perhaps many people who have put off buying a new car because of the recession, must finally pull the trigger and purchase because their cars are simply worn out and due to be replaced.

A sign that this might be the case would be to look at the average miles of trade-in vehicles. If it is higher than in the past, then this might be the compelling reason for the new car sales burst of recent.  If it is, then it will be short-lived. A sustained increase in incomes across the board will prompt people to trade-in their vehicles sooner and keep the momentum in new car sales moving forward.

Extra-Credit:  If an increase in income is not cause of a decrease in demand for auto parts, then how else could we categorize auto parts in relation to the car market, new and/or old?  Too easy? Give it a shot!

Auto-Parts Stores Watch New Cars Fly By
This spring, high-flying auto-parts retailers may be in for a fall.

The sector has been one of the brightest spots in retail the past year. The three big chains—AutoZone, O'Reilly Automotive and Advance Auto Parts—have expanded aggressively, snapped up smaller competitors and benefited from consumers' propensity to fix up cars rather than buy new ones.

But the times they are a-changing. Auto makers on Tuesday will post February sales figures expected to total about 12.6 million units at an annualized pace, up from 10.5 million a year ago.

While a far cry from the peak 17 million sales pace of 2000, the rebound so far has still proven stronger than expected.

That may be good news for the U.S. economy, but not for auto-parts chains.
New-car sales above the 14 million mark are seen as a tipping point for a significant slowdown in replacement-parts demand. That may be a ways off—and the three big parts retailers may have room still to expand given that they have only a combined 20% share of the national market.

Still, the inflection point may be closer than investors had expected, especially if banks continue to ramp up auto lending.

The spike in oil prices only makes matters worse. "Very simply, when gas prices spike, people drive less," says Stifel Nicolaus retail analyst David Schick. "And when people drive less, parts break less."
It is a "double-whammy" for the retailers, he adds, when people are more willing and able to trade in fixer-uppers for new cars offering better mileage.

New-car sales above the 14 million mark are seen as a tipping point for a significant slowdown in replacement-parts demand. That could mean trouble for chains such as AutoZone. estimates the average fuel economy for vehicles sold by U.S. manufacturers in February was 20.5 miles a gallon, up from 19.4 a year ago. Deutsche Bank notes that, by next year, more than 130 hybrid and electric vehicles will be on the market, up from a dozen during the oil-price spike in 2008. At current levels, oil prices are more likely to support car-buying than to suppress it.

After a 72% run in 2010, auto-retailer shares are already showing weakness. Shares of Auto-Zone, which releases fiscal second-quarter results Tuesday, are down about 7% this year. The S&P 500, meanwhile, is up some 5%.

Better times for auto makers may come at the expense of auto-parts retailers
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