The Shift to Smaller Cars May Finally Be Here

By Brendan Moore

04.07.2008

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.

Example?

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?

Nope.

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.

COPYRIGHT Autosavant.net – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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9 Comments

  1. The new 2009 F-150 production hasn’t started yet. Ford is still selling the old F-150. It could partially explain the drop in sales.

  2. You mixed up the F150 and the Focus. The all new F-150 doesn’t come out until Autumn 2008, so the current F-150 is a very old vehicle within 6 months of the end of its life cycle. The Focus, while not all new, just underwent a significant update.

    While I agree that American’s will migrate to more economical vehicles if fuel prices stay high, I disagree that compacts, and especially subcompacts will ever gain significant market share in the US. Compacts and smaller cars are just too small and unsafe, especially when 4 cylinder midsize cars get mileage nearly as good as compacts but have a lot more utility. Frankly, most compacts, and to a lesser extent subcompacts, have disappointing fuel economy considering how much space, utility and safety you give up to drive one. Maybe that’s why crossover SUV’s of all kinds are the fastest growing segment in the US auto market. You gain some fuel economy improvement over traditional SUV’s while maintaining space, utility and more safety than a compact or subcompact car.

  3. I needed more coffee this morning – yes, I realize the 2009 Ford F-150 is not on sale yet. Somehow, it got down in print that the new one took the sales hit. I have fixed that, and my apologies.

    I didn’t, however, get mixed up on the Focus. It got a sheetmetal update, and some minot revisions. It not only is NOT substantially new, it is a previous-generation Focus that has not been sold in Europe for sometime. The Focus we get here in the U.S. currently is more or less a lame duck model that has been spruced up to look a little different in an effort to spur sales.

  4. I am in college and I would like to tell the auto companies that for college age people, it’s not the cost of gasoline. It is the belief that you should buy the smallest car you possibly can that will serve your needs. It is an extension of my generation’s wish to use as few resources as possible, unlike previous motorists. It doesn’t matter if gas goes down, we’re still not going to buy something big unless we absolutely cannot do without it. Smaller is better. It’s better for the environment, it’s better for quality of life, it’s better in terms of resources (energy) used, etc., etc.

  5. It’s a bit ironic when Yesterday’s small cars like the Corolla and Civic had growed “bigger, longer and larger”, will history repeat? 😉 and how much smaller are we ready to go with the 18-wheels trucks on the road?

    It could also been interested to see the impact of the next wave of diesel engines, Ford plans a V8 4.4L derivated from the V6 “Lion” created with Peugeot-Citroen coming for the F-150, Dodge might have a new V6 and V8 diesels from Cummins (they haven’t chosed yet between the V6 and V8) and GM works on a 4.5L Duramax engine. Audi, BMW will also bring their diesel engines as well according to this article from Diesel Power magazine. These folks even dreamed of a Mitsubishi Evolution X Cummins or Ford Mustang GT-500 Lion with the upcoming 4.4L CDI V8 stroked to 5.0L. The most frustrating thing is the Chrysler 300C have a diesel engine available in Europe since it inception >_< and that impact might influence the decision of consumers who could find a way to have their cake and eating it too with a mid-size (or even full-size) vehicule with a diesel engine. I almost forgot to mention the coming of cellulosic ethanol, who’s a more interesting alternative then the ethanol from corn but that’s another story.

    Then there a new category coming or should I said the revival of a category who’s almost disseapeared: “the low-cost” car revived in Europe with the Logan from Renault but this success will be short with new opponents who wants to enter this fray. Toyota, Fiat want to enter in this section and it’s one of the rare times then Toyota had been caught pants down by Renault.

  6. Anonymous above is just plain wrong. Today’s smaller cars are far safer than those of the past and I would not feel ‘unsafe’ driving one. Mini Coopers, Honda Fit’s, Toyota various small models like the Yaris and Prius etc., are all fine, safe vehicles. Here in Chicago, you can really notice the numbers of small, subcompact cars are steadily increasing. Mini’s and Priuses (Priii?) and Yaris hatchbacks are driving all over the place. I have even spotted four Smart Cars over the past three months.

    Gas is pushing $4/gal here and by summer it will have topped it. Thank the damn Chinese, but finally, people are switching to more efficient cars.

    Now if only US automakers will actually offer them anywhere else but Europe….

  7. Kevin F is saying it all. It’s about not taking more than you need. It is so incredibly uncool to drive around in an SUV for college kids. And high school, too, in most places. The shift to smaller cars is hapening even faster than the car companies know, because the shift has occurred largely in a demographic that for the most part is not yet buying new cars. But they will buy one very, very soon.

  8. From an AP article today

    NEW YORK – The souring job market and rising costs of the usual teenage indulgences — a slice of pizza, a drive to the mall, the hottest new jeans — are causing teens to do something they rarely do: be thrifty.

    It’s a far cry from the freewheeling spending of recent years, when teens splurged on $100 Coach wristlet handbags, $60 Juicy Couture T-shirts and $80 skinny jeans from Abercrombie & Fitch.

    Now jobs for teens are less plentiful, and parents who supply the allowances are feeling the economic pinch themselves.

    The stalwart retailers of teen apparel, such as Abercrombie and American Eagle Outfitters Inc., are reporting sluggish sales, defying the myth that teen spending is recession-proof: It holds up longer, but can eventually fold.

    It’s even becoming cool to be frugal.

  9. I ran across this and it describes my friends and myself just about perfectly:

    The AP (4/30, Nieves) profiles the “Yawns,” otherwise known as Gen Xers and Ys, but a smaller subset that is “Young and Wealthy but Normal.” The “Yawns sound dull, but they are the new movers and shakers, their dreams big and bold.” Their habits, also, are different from their parents: “They drive hybrid cars, if they drive at all, shop at local stores, if they shop at all, and pay off their credit cards every month, if they use them at all.” Notably, the Yawns “may have disposable income,” but they are likely to “live below their means, in a conscious effort to tread lightly on the earth.” The acronym was created by The Sunday Telegraph of London to describe “an increasing number of rich, young Britons” who are “socially aware, concerned about the environment, and given less to consuming than to giving money to charity.” A Stanford University socialist, David Grusky, says that no one should be surprised by the emergence of the Yawns. Various factors, including “major climate change and a concern with terrorism” could “push us decisively toward an extreme form of post-materialism.” An example of the trend is “freecycling,” the practice of trading items for free.

    The car companies are NOT going to be selling anything big and wasteful to us. Small and efficient, with as little adverse effect on the environment as possible. That is the new high-status vehicle. Just giving you fair warning.

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