Halfords principally operates in two broad markets: motoring and cycling. Around 70% of Group sales are generated from products that are principally motoring related with the remaining 30% coming from cycling. At a profit level, the contribution of motoring is even greater.
The motoring market
Within motoring, the Halfords Group operates in two segments:
- Car parts, accessories, consumables and technology, with a total market worth up to an estimated £7bn. This element of the motoring market has grown by around 3% per annum in the last few years. Halfords Retail competes in a portion of this market worth circa £4bn, holding around a 15% market share.
- Car servicing and aftercare, with a total market worth around £9bn. This element of the market has grown by around 2% per annum in the last few years and is where Autocentres competes, holding around 1.5% share of a highly fragmented market.
Going forward we anticipate the motoring market to continue to grow at an average rate of 2-3% per annum over the medium term. The number of cars on the road is rising and the mileage being driven is increasing. The volume of new drivers in 2014 was at its highest for three years and the number of new car registrations for the ten months to the end of October 2015 was the biggest on record. The average age of cars in the UK is steady at around 7.5 years.
Cars are also becoming more complex, with greater variety of models and enhanced technology making it more difficult or even impossible for people to “Do it Yourself”. For example, replacing a stop-start battery requires connection with the on-board computer – something that Halfords stores and colleagues are equipped to do, but is not possible for an individual. This complexity, combined with a change in needs from increasingly time-poor consumers, is driving the “Do It For Me” trend.
The cycling market
The cycling market is not particularly well documented, with data difficult to come by, which is reflective of the fragmented nature of the operators within it. As such, over the summer of 2015 we conducted our own extensive, bespoke customer and market research, some of which we have included below.
The cycling market had been growing at a compound annual growth rate of around 6-8% over the three years prior to 2015, with 2014 showing particularly strong growth. Our performance, driven by the sale of bikes, has by far exceeded this. PACs sales have grown broadly in line with the market.
The market for bikes is estimated to be around £800m and for PACs around £750m. In recent years we have gained share in bikes, now standing at around 26% of the market. Our share of the parts, accessories and clothing market has remained steady at around 16%. In Cycle Repair, a market of around £100m, our investments in equipment and people have resulted in strong growth, and we believe we have been taking share over the past 12 months.
Our Cycling sales were particularly strong over 2013 and 2014 due to a combination of factors:
- The economic conditions have been favourable with true disposable income recovering to drive big ticket purchases.
- There has been plenty of positive media coverage driving awareness around cycling – the fantastic achievements of Team GB at the London Olympics, the Tour de France starting in Yorkshire and more amateur cycling and triathlon events.
- The government has continued to invest in infrastructure and safety, particularly in London.
- Whilst the Cycle to Work initiative has been in place for some time now, awareness and participation grew significantly over the past two years.
- Finally, we saw consistently warm and sunny summers in 2013 and 2014.
New cyclists look for entry level bicycles around the £200-300 mark and our fantastic Apollo and Carrera ranges meant Halfords was better positioned than most to benefit from this.
Looking forward we have confidence in the long-term growth potential of the cycling market, based on our understanding of the customer and macro factors, both economic and social.
Our research has identified cyclists by how they use their bike and how often they use it, and although there are many subtleties in the segmentation, we broadly see three types of customers:
- Those who use their bike for leisure – cycling with family and friends for light exercise
- Those who commute
- Those who are cycling for fitness and potentially entering competitions and cycling with clubs.
The fitness cyclists are not the only set who cycle frequently and are engaged or enthusiastic about cycling. Our research has revealed that many of the leisure cyclists are cycling just as often and are just as engaged.
Reflecting on the different customers, we know that we over-index in our share of cyclists riding for leisure purposes and conversely under-index with those who cycle for fitness or cycle in clubs. We know these groups behave and therefore spend differently, so we have a dual offering in cycling with Halfords and now Cycle Republic.
The total pool of people now cycling has increased and they are cycling more often and more miles than previously. We have confidence that those who are currently cycling will continue to do so. Our research shows that these more frequent cyclists replace their bikes more often - a large proportion of frequent cyclists plan to replace their bikes within the next year. Fitness cyclists are more likely to increase their bike spend the most – sometimes doubling it. They are also the group that buy more PACs.
Our research also looked at those not cycling today and we were very encouraged by the proportion of them that intended to buy a bike within 12 months.
In addition to understanding the customer we’ve also looked at future market drivers. We know that participation in the UK is still low and there is large scope for new entrants as well as increased spend from existing cyclists. Also, female participation is particularly low, but growing. This presents an opportunity for us because we know that an increase in female cyclists will also drive an increase in families and children taking up cycling. Furthermore, there is significant government support in London and in many other cities. For example, there are now four cycle super-highways in London and five more to come.
Based on our assessment of the growth potential, we anticipate cycling market growth of 3-5% per annum on average over the medium term, driven by both new entrants into the market as well as existing participants replacing and upgrading their bikes and accessories.