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New vs replacement demand
What it is
Whether a product is bought to equip something for the first time or to replace a worn one. New demand tracks the sales of the host product; replacement demand tracks the installed base already in use, its usage intensity and its wear cycle
Tyres, batteries, lubricants, filters, bearings, roofing sheet and building materials all sell into both, and the two behave completely differently through a cycle
Impact on industries
- Replacement demand follows the installed base rather than new sales, so it holds up when the underlying capital cycle turns down
- Replacement is brand-driven and carries materially better realisation than fitment to an original equipment maker, which is contracted and price-negotiated
- Original equipment customers extract contracted annual price reductions, so a supplier must remove cost every year simply to hold margin
- Counterfeit and grey-market product attacks replacement margins, particularly on older assets out of warranty