The Shift to Smaller Cars May Finally Be Here
By Brendan Moore
The old saying is that if you keep predicting something long enough, sooner or later you’ll be right. We may finally be at that point in terms of consumers moving to smaller vehicles.
As we pointed out last week, the new vehicle sales in March took a beating, falling 12%, with pretty much everybody taking their lumps, and with full-size trucks and SUVs really taking a beating. But, small car sales looked great for the most part.
Here’s a great one: the sales champion Ford F-150, a wonderful full-size pickup truck, saw its sales fall 23.8% last month. The Ford Focus, Ford’s small car that is neither pretty or new (or for that matter, exciting), but is a thrifty four-cylinder, saw its sales go up 24%, almost the mirror image of F-150 sales.
Sales of four-cylinder cars are going up steadily every month, and sales of big ‘ol SUVs and pickups are going down. It would appear that many of those consumers that “needed” a two-ton, 7-passenger AWD SUV that got 12 mpg have reevaluated their “needs” in the face of rising retail prices of gasoline. More importantly, unlike previous moments like this, many consumers now seem to believe that gasoline prices will not come down again, that there are only more price increases in store for them in the future. Those consumers are buying something smaller than whatever they had before, whether that means moving from a full-size SUV to a crossover, or moving from a Toyota Camry to a Ford Focus or a Honda Fit.
Sales of small cars jumped up 3.6% in the first quarter, which may not seem like a lot if you don’t follow the numbers regularly, but it is a lot – that is considerable movement for a single quarter. The small car segment is now 17.8% of total new vehicle sales, which is a 2.1% increase.
As we pointed out last week, it’s looking more and more likely that last month (March) is going to be the template for the rest of the year.
Again: “The retail auto industry is getting hammered by a confluence of forces that are conspiring to make life difficult for almost every manufacturer.
Consumer credit has tightened considerably, with even higher credit requirements on the way. A credit underwriter I spoke with at an auto finance corporation told me yesterday that “our credit guidelines have been screwed down so tight they squeak”. It doesn’t matter to a consumer if interest rates are low if you can’’t get approved.
The mortgage fiasco and the subsequent foreclosure panic are not making anyone feel better, either. Even if you’re in good shape personally in terms of your finances, it certainly gives you pause when you look around at all the havoc in the economy. It makes everyone a little nervous.
And, finally, the rising price of gasoline is doing two things: it’s taking money out of household budgets that could be used for a down payment on a new car and putting it into gasoline purchases, and it’s absolutely killing sales of trucks and SUVs since at least some percentage of the United States has now decided that gasoline will not be going down in price anytime soon, if ever, and are buying accordingly. Small, fuel-efficient cars were just about the only bright spot in the March sales results, and the automakers that had that type of vehicle in their lineup, and conversely didn’t have a lot of trucks in their lineup to drag down their overall results, did well in March.”
Okay, so you might say to yourself, well, just what is the problem? If we go by your example, Ford sold 23.8% less pickups, but they sold 24% more Focus four-cylinders, so where’s the problem? They’re making up their losses with gains in other parts of their lineup, right?
The numbers may look kind of okay from a unit perspective, but Ford makes a lot more profit every time a F-150 goes over the curb at dealerships across the nation than they do when a Focus goes over the same curb. Just as Toyota makes far more money on the sale of a Tundra than a Yaris. The auto manufacturers are not only going to sell less vehicles overall this year, but the ones they do sell in the rest of 2008 are far less profitable on a per-unit basis than the ones they’ve been selling for the past few years. This combination could wreak considerable havoc in balance sheets across the industry in 2008.
The domestics are particularly vulnerable in this scenario, but everybody’s going to get hurt if the rest of the year looks like March.
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