The case at hand

As an example, we tried to get underneath the standard industry trends for the auto warranty industry. Not only did we size the industry and project the growth, but we looked at different vehicle/customer segments and targeted growth strategies for the specific asset in question.  

Our approach

We use proven and advanced methods to determine actionable growth priorities.

Does your operating partner or consultant build up the vehicle fleet targets from the bottom up? We did.

Does your operating partner or consultant have proprietary tools and frameworks that leverage industry data sets? We do. 

US Auto Warranties: 
an Attractive Market

Market Growth in Extended Warranties Since 2009 with Ancillary Products as a Major Subcategory

The US extended warranty market has grown at approximately 8% annually since the last recession. Note the growing importance of ancillary products to the market.

• The warranty market declined an estimated 25–30% from 2007 to the trough of the recession in 2009.

• Vehicle Service Contracts (VSC) have grown over 5% 2009–2019.

• Ancillary Products (AP) have grown into a major subcategory. AP attach rates have grown from one per vehicle (2009) to almost two per vehicle (2019) as consumers increasingly opt for more coverage.

Finding 
Underpenetrated Segments

The Direct-To-Consumer Extended Warranty Market

DTC is the least penetrated of the total addressable market (“TAM”).

Digging into the detail, we find extra strategic value in the under-developed direct to consumer (DTC) channel.

• Dealer POS:

  • VSC and AP sold by franchise and independent dealerships for new and used cars

  • Experienced increasing attach rates (42%-48% for new cars and 40%-53% for used cars) over 2014-2019 period

• “Second Chance”:

  • Dealers’ foregone opportunity. These are new and used vehicles sold by the dealership wherein the consumer did not opt for VSC and AP

  • Primarily a DTC opportunity that is valid from the year of sale and the interim before becoming Off Warranty

• Direct to Consumer:

  • Net Vintage Vehicles off OEM warranty (3 years) and extended warranties (4 years) as well as a select % in 100,000-200,000 mileage category

Targeting 
Better Opportunities

Older Cars: An Expanding Market for Extended Warranties

Greater depth of analysis reveals the “sweet spot” for DTC marketing efforts. Larger fleet of older cars off-warranty presents a robust opportunity for DTC warranties.

“There is simply a lack of 2008 and 2009 model year vehicles due to the lower sales numbers during that timeframe. Even the model years from early in the recovery are lower in number. This disruption simply needs time to work its way through the fleet.”

• 0–3 years: under OEM warranties

• 4–7 years: about half under extended warranty, half available

• 8–11 years: sweet spot for aftermarket warranties; wear and tear beginning to show

• Over 12 years: lower residual values; luxury cars most likely segment

Interpreting 
underlying trends

Going deeper: uncovering additional insights

The increasing complexity of autos is simultaneously driving up repair costs and discouraging the DIY (do it yourself) segment.

• As a result of the increasing average age, the average annual maintenance/repair costs for an automobile has increased.

• As these costs increase, extended warranty products become more attractive for consumers.

• DIY repairs grew during the recession as vehicle owners looked to save money but have since declined in share, as cars are increasingly difficult to repair without professional diagnostic systems.

• Maintenance of newer cars can require updates to software, navigation systems, and other digital components.

Evaluating risk

Learn how we find investment opportunities even in a downcycle

For our evaluation of the potential risk in the auto industry during a recession, see our next installment, “Using economic scenario analysis to evaluate risk in the warranty industry.”