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Car maintenance and car enhancement market

In recent years, the car maintenance market is believed by the Directors to have declined marginally in size due to improvements in part quality and the increased complexity of cars and car parts, which has led to consumers being less able, or less inclined, to perform their own maintenance.

The Directors believe that the key drivers of growth within the car maintenance and car enhancement market include:

• the growing number of vehicles registered in the UK (known as the “UK car parc”). Due to UK population growth, increasing numbers of two-car families and the relative affordability of cars, the car parc has grown consistently at a compound annual rate of approximately 2.4 per cent. in the three calendar years 2001 to 2003 (Source: Mintel). The Directors expect that growth in the car parc will continue to drive demand for car maintenance and car enhancement products;
• favourable trends within the UK car parc:
  • the car parc is continuing to age as cars become more durable, resulting in a longer period over which maintenance occurs and during which owners invest in the appearance of their vehicles. Older vehicles are also less likely to be supported by original equipment manufacturers’ warranties, resulting in greater reliance on other providers, such as Halfords;
  • private car ownership is increasing, driven in part by changes in UK taxation policy. The Directors believe that private owners are more likely to spend on vehicle improvements and enhancement than company car drivers;
  • the proportion of drivers covering over 10,000 miles per annum increased from 35 per cent. to 42 per cent. in the three calendar years 2000 to 2002 (Source: BMRB). The Directors believe that this increase in the amount of time spent in cars, together with the trend towards replicating home entertainment systems in-car, has driven growth in in-car entertainment products;
• technological improvements which have extended part life and car reliability have also increased the sophistication and complexity of car parts and of motor oils, and consequently their cost. The Directors consider that the resulting price inflation has partially offset any decline in volume of sales of car parts due to extended part life and car reliability; and
• a growing “enthusiast” segment, focused on car enhancement.

In addition, the relatively non-discretionary nature of vehicle repairs and servicing provides some protection against macro-economic conditions in the car parts segment (the largest element) of the car maintenance and car enhancement market.

The market is highly fragmented, with a large number of small, independent retailers, although competition within the market varies by product group. In relation to car parts, Halfords’ main competitors are dealers or independent stores, whilst in relation to in-car entertainment and car styling products, Halfords’ main competitors are specialist stores or mail order/online operations. There is a wider range of competitors in product groups such as oils, cleaning products, workshop tools and body repair products due to the more universal nature of the products. These competitors include independent retailers, garage forecourts, DIY stores and certain supermarkets.

Travel solutions

This category covers the market for travel solutions products, including car travel equipment such as roof boxes and cycle carriers, travel accessories such as batteries, safety equipment, child travel and safety products (including child car seats) and outdoor leisure equipment.

Competition within this market is fragmented, and includes independent and general retailers and car dealers with few offering the same breadth of range as Halfords. In relation to child safety products, Halfords competes principally against retailers such as Mothercare and Toys R Us. In relation to outdoor leisure products, Halfords’ main competitor is Blacks Leisure Group plc.

Cycling

Halfords also operates in the UK retail cycling market, which comprises the sale of new cycles and cycle accessories (such as lights, locks and cycle safety helmets).

The new cycle market is mature, with between 2.3 million and 3.0 million cycles sold per annum in the nine calendar years 1995 to 2003 ( Source: GfK). The Directors believe that factors such as the increasing popularity of cycling as a leisure activity and for commuting, Government initiatives encouraging cycling and an increasing number of higher spending enthusiasts, have underpinned sales of cycles over this period.

Sales can also be (and have been) affected by factors such as:

• product innovation – e.g. the introduction of new or retro products (such as the Raleigh Chopper bike), which can provide periodic stimulus to the market, whilst product developments in other leisure categories, such as games consoles, may adversely impact the market; weather conditions and one-off occurrences (such as the foot-and-mouth epidemic which impacted the market in 2001 and 2002); and
• manufacturing overcapacity, which has contributed to price deflation, particularly with respect to lower specification cycles, leading to greater accessibility to the market for new consumer entrants. Competition at the low specification end of the new cycle market comes from supermarkets, such as Tesco and Asda, and large retailers such as JJB Sports and Toys R Us. Higher specification cycles are also available from these large retailers, but the principal competition in the premium end of the market comes from small independent retailers.