As the U.S. economic environment continues to improve and consumers emerge out of the recent period of uncertainty, there are multiple underlying trends automotive companies are facing and should continue to address.
U.S. automotive executives should heed the wisdom of Andy Grove, Intel co-founder and former chairman: “Business success contains the seeds of its own destruction. Only the paranoid survive.” Given the recent strong performances by each of the Big Three, they should be absolutely terrified.
After several years of sustained decline, the U.S. auto market has started showing strong signs of recovery. Bloomberg recently reported U.S. car sales are the strongest in four years – since before the Great Recession. Sales for 2011 reached nearly $13 billion, according to the Automotive News Data Center, up from $10.4 billion, in 2009, a recent low. Still, domestic brands comprise less than 50 percent of total cars sold: General Motors leads the Big Three with 18 percent of total U.S. sales, followed by Ford and Chrysler at 16 percent and 11 percent, respectively.
We have identified three underlying business trends influencing domestic automobile maker’s ability to re-win the hearts and wallets of consumers:
- Consumers are adopting a “new normal” in their car purchase decision process;
- The branded ownership experience has significantly increased in value;
- The dealer sales model is undergoing a structural shift.
The new normal
U.S. consumers are balancing social concerns, family needs and economic uncertainty in making “new normal” transportation decisions.
We’re all seeing it – gas prices continue to yo-yo but always seeming to end up slightly higher than before. Fuel economy is the second most important consideration in new-car purchases, just behind price, but ahead of comfort and performance. Rising gas prices and economic uncertainty have placed a renewed focus on the total cost of car ownership.
Green technologies are appealing, but not at current price premium levels. While price premiums for hybrid cars over comparable models is typically $5,000 to $10,000, only 3 percent of U.S. consumers are willing to pay an additional $5,000 for that luxury. In contrast, nearly 50 percent are willing to pay up to $3,000, making price the number one barrier to purchase. Perhaps the rise in fuel costs will bring these numbers closer together, but it’s not likely. Edmunds.com has reported the payback from fuel savings is seven to 10 years, which is longer than most people are willing to wait.
To manage the family financial realities, consumers are increasingly buying smaller vehicles, but not necessarily small and midsize models. Families still value space and are increasingly compromising with crossovers. Small, midsize and crossovers represent nearly two-thirds of the consumer vehicles sold in the U.S. and crossovers may soon emerge as the favored size format, with 9 percent growth last year to comprise nearly a fifth of the total.
Some people are looking beyond ownership. The number of registered vehicles are declining as families choose to manage fewer vehicles and are taking advantage of alternative transportation and access models. New-car registrations declined five of six years between 2004 and 2009, resulting in four million fewer cars on the road in 2009 vs. 2008. While this trend has stabilized, average cars per household have decreased since 2008. Relatively new entrants, such as Zipcar and Hertz On Demand, are providing new options for urban consumers and those who don’t need their own vehicle on a day-to-day basis.
Ownership experience mattering more now
Managing value within the total ownership experience, especially the digitally driven experience, is emerging as a new core competitive battleground.
Consumers are delaying new purchases, holding onto their current vehicles or buying used cars in a way that keeps vehicles on the road 2.7 years longer than those driven more than a quarter century ago. In 1984, average vehicle age was 8.4 years for light vehicles. Today, the average age of passenger vehicles on the road is just over 11 years. This extended useful life and potentially longer owner engagement periods are requiring the performance expectations of the car, as well as its branded components, to last even longer than previous designs.
Experiences of others, especially family and friends, are an impactful influence on brand purchase decisions, especially for younger buyers. Word-of-mouth recommendations – both online and off – are second only to your own past personal experience influencing your considerations. Family and friends are now considered trusted advisors for automobile purchases, ranking alongside independent sources, such as Consumer Reports.
Dealers’ sales model shift
Dealers will increasingly look to build long-term trust and become a valued advisor in developing relationships with customers.
The dealer market is consolidating. The number of dealerships selling new cars has fallen 26 percent since 1990, and 11 percent since 2008, to less than 20,000 nationwide. This is driven by both GM and Chrysler downsizing and an unwinnable challenge for small-volume dealerships to compete with larger dealer/retail groups.
Most new cars are now purchased at larger, sometimes regional dealerships. Significant investments by large dealer brands to develop highly curated environments attempt to provide higher quality buying experiences that resemble one part premium shopping mall, one part spa. Spaciousness, kids play zones and low-pressure ambiance contributes to a better experience and longer dwell times.
Dealers still need to continue shaking the historically negative “car salesman” image. Honesty and price transparency are becoming even more important as consumers have access to resources for both research and comparison. It’s gotten much harder for dealers to price discriminate on the basis of anything other than credit and payment method without significant risk of driving sentiment. Automotive websites with real-time market data and pricing, such as TRUECar.com, and mobile-optimized sites from competitor dealerships often provide all the information a customer needs to negotiate their best possible deal.
Services and maintenance contracts are growing in importance to dealership revenue. They provide a mechanism for regular owner engagement across lengthening car lifespans and, as owners continue coming back, that interaction provides opportunities for additional sales.
In-vehicle technology also plays an important role here. Products such as Ford SYNC, Hyundai Blue Link and NexTouch provide post-purchase connectivity between buyers and dealerships aiding vehicle diagnostic and servicing. Several systems also integrate with dealer CRM functions to provide alerts and triggered consumer communication to remind about service schedules and manufacturer news.
Underlying forces of change will continue to evolve
As the environment continues to improve and pent-up demand is satiated, the underlying forces of change will continue to evolve how and why cars are bought. Automotive leaders need to establish an understanding of how these forces will impact their near and long-term business activities – from the tradeoffs consumers are willing to make, to the expectations of the digital aspects of ownership experiences to shifts in the actual dealership business models. Executives should embrace the drivers of paranoia in each of these as motivation to avoid complacency, and perhaps sources of new competitive advantage.
- Only the Paranoid Survive; Andy Grove, 3.16.99
- Spark in Sales of Cars and Trucks Drives U.S. Economy; Bloomberg, 05.13.12
- 2008-2012 Global Recession; Wikipedia
- Automotive News Data Center
- Car Buying-US-January 2011 report; Mintel
- Historical Gasoline Price Charts; GasBuddy.com
- New Cars-US-July 2011; Mintel
- Hybrid and Electric Automobiles-US-September 2011; Mintel
- Cars Online 11/12; Capgemini
- Do hybrids really save you money on gas?: abc7news.com, 3.27.12
- Auto Sales Overview Charts; WSJ Market Data Center
- The U.S. Automotive Market and Industry in 2025 [pdf]: Center for Automotive Research (CAR), June 2011
- U.S. Auto Fleet Older than Ever; The Detroit Bureau, 1.18.12
- Research into the influence of various media on large-ticket purchases by S. Radoff Associates (via Brand Values Yield Clues to Social Media Influence; eMarketer, 1.27.11)