Wednesday, March 28, 2012 | Edited by Daniel Moores
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Automotive Recovery Hits Red-Hot Stage 2 Strong March Sales Show Surge Has Gone Beyond 'Need to Replace' Crowd This year's faster-than-expected sales recovery has entered a key new phase: "Want" buyers are joining the "need to replace" buyers who have been carrying the market. With the strong February selling rate continuing into March, optimistic carmakers and analysts are boosting full-year industry sales forecasts. Last week, Volkswagen Group of America CEO Jonathan Browning said the company has increased its industrywide outlook to 14.0 million from 13.7 million. Executives, dealers and analysts say pent-up demand has been unleashed, and lenders are making it easier for shoppers to do deals. "Customers are having no trouble getting financed," said Nissan Division sales boss Al Castignetti. But in a new development, they say consumers who simply want a slick new ride are turning up in showrooms, not just buyers who are trading in high-mileage vehicles. "We're getting some 'want to buys' now," TrueCar.com analyst Jesse Toprak said. "The 'need to buys' are 13 million (a year) at best, so the industry needs those 'want' buyers." Toprak is among those who have revised 2012 sales forecasts upward this year, in his case to 14.0 million from 13.8 million. He's considering a second 200,000-unit bump upward but will wait until March sales are reported April 3. Dealers across the country sound confident, especially at high-flying brands such as Hyundai. "Sales are tracking better than our best month ever," said Andrew DiFeo, CEO of Hyundai of St. Augustine in Florida. "The automotive market is really coming back." March volume may not match February's 15.1 million selling pace. This month has no extra leap day, and the freakishly warm weather and stock market rally lack the surprise pop they had last month. But most analysts expect a seasonally adjusted annual sales rate in the mid-to-high 14 millions, matching or exceeding January's 14.2 million SAAR. Between August and February, the light-vehicle SAAR jumped 3 million units, "increasing our level of conviction for a continued recovery in demand," said Sterne Agee analyst Michael Ward. Still, at least one potential cloud is on the horizon: rising fuel prices that Ward believes will hit household disposable income and consumer confidence enough to limit the March-to-May SAAR to 14.5 million. But IHS Automotive analyst Rebecca Lindland says high fuel prices may drive auto sales because buyers want more fuel-efficient rides. "Whatever they are trading in, it doesn't get nearly as good mileage as what they can replace it with," she said. Hot brands are trying to ride the sales momentum. If Chrysler dealers either matched their total January sales by March 23 or sold half of their March target by March 15, Chrysler will increase their monthly volume bonus by 25 percent, said one dealer who asked not to be named. The dealer said he's on pace for his best sales month in five years. "The early March trend is through the roof," he said. What's driving the surge? The improving economy, increased credit availability, a flurry of new products, and the aging vehicle population are all factors, analysts say. Vehicle owners can't delay replacement purchases any longer. Noting the average U.S. vehicle is a record 10.8 years old, Morgan Stanley analyst Adam Jonas described the current U.S. fleet as "not just old, but creaky" with many vehicles having more than 100,000 miles. Dealer principal Steve Landers of RLJ-McLarty-Landers Automotive of Little Rock, Ark., agrees. "Lots of our trade-ins can't make it to the dealership driveway," he said. "We send the tow truck to their houses." Kjell Bergh, chairman of Borton Volvo in Minneapolis, said he noticed a shift in buyer attitudes at the Twin Cities auto show this month. "This year, people were going to the show because they intend to buy a new vehicle," he said. "We're moving out of the 'buy to replace' crowd to people with the confidence to vote with their dollars. "Before, car owners were spooked. But now they are saying 'I don't have to replace my car but I want something new.'" Jeff Schuster, top forecaster for the Americas at LMC Automotive, said: "Buyers are starting to loosen up a bit, finally. It's normally a fine line between 'want' and a 'need to replace but don't have to.' But we're seeing consumers much more willing to make a big purchase." Overall, consumers are becoming less sensitive to bad news, many say. "The mind-set is: 'It's OK to buy a car,'" Toprak said. Consumer confidence has been rising, though it dipped slightly this month, which chief economist Scott Brown of Raymond James & Associates attributed to the pocketbook pinch of fuel prices. Credit availability is much wider, and subprime lenders are expanding. Because Exeter Finance Corp. could securitize $200 million in auto loans, the subprime specialist is expanding to all 50 states this year from 13 states a year ago, CEO Mark Floyd said. "It's a pretty competitive market," he added. Also, attractive new models are reaching the market, said Kelley Blue Book analyst Alec Gutierrez. "Subcompact car sales will be especially strong," he said. "Not only are they cost effective, but (they) are of significantly higher quality than just a few years ago." Two analysts have increased their North American production outlook. Sterne Agee's Ward raised his production forecast by 400,000 to 15.2 million units, including heavy trucks. Citing a 23 percent output increase in the first two months this year, LMC's Schuster hiked his light-vehicle forecast by 200,000 to 14.2 million. Toprak said vehicle buyers are not spending beyond their means in 2012. "This sales level seems to be sustainable and not a blip," he said. "The industry is healing its wounds on its own." (Source: Automotive News, 03/26/12) |
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2011 Was a Record Year for Dealership Profits Average dealership profits in 2011 were the highest since the National Automobile Dealers Association began tracking the data in 1970. The average dealership made a record $785,855 in net pretax profit in 2011. Net pretax profit as a percentage of total sales was 2.3 percent, a level not seen since at least 1978, said Paul Taylor, NADA's chief economist. It's such a good time to be a dealer that dealerships even made money on new cars last year. The average retail net profit for a new vehicle was $23 in 2011 vs. a loss of $180 in 2010. "It's normally a loss," Taylor said. He credited the turnaround to an improving economy, fewer dealerships in competition with one another and historically low interest rates. With those trends continuing this year and probably through 2013, dealers could see a golden era of profitability if they stay disciplined, experts said. "'Make hay while the sun shines' is the operative phrase here," Taylor said. In 2011, interest rates alone made for the difference between a profit and loss on each new-vehicle sale. Because of the low rates and manufacturer incentives, the average dealership had a floorplan credit of $48 last year instead of the $200 expense typical in a growth year, Taylor said. Used-car net profit is up slightly, he said. It went from $252 per vehicle in 2010 to $269 in 2011. Sales in the new-vehicle department rose by 15.6 percent; in the used-vehicle department, by 9.8 percent; and in the service and parts department, by 5.7 percent. On a per-vehicle basis, advertising and rent expenses fell last year. Service and parts absorption -- the department's gross profit as a percentage of total fixed overhead expense -- dropped from 59.6 percent in 2010 to 57.8 percent in 2011. That's to be expected, Taylor said: Fixed costs go up when vehicle sales rise, and service and parts sales weren't increasing as fast. The overall rosy profit picture makes for a lot of happy dealers and those who advise them. "It's a lot more fun to work with our dealers than it was three years ago," said Dan Thompson, a Pennsylvania dealer accountant. "I think they're going to have a good run." Dealers continue to prosper from the lessons learned during the industry downturn, Thompson said. In particular, they sharpened their focus on used vehicles and the parts and service business. In 2010, dealers generated as much gross as three years earlier on sharply lower vehicle sales volume, Thompson said. In 2011, dealers continued to perform at those higher levels while enjoying the benefit on incremental vehicle sales. Going forward, dealers are challenged by how much payroll to add to the dealership. "Our experience has been dealers have asked less people to do more, primarily because they are not all that confident that sales increases are here to stay," Thompson said. "At some point, personnel will need to be added -- knowing when, how many and what cost is the key." Dick Heider, a Colorado dealer accountant, also is keeping an eye on expense control. "Everyone learned a lesson in expense control over the last few years, and I think this will not be forgotten soon," Heider said. "Dealers are smarter and more focused on efficiency within their stores now than in the past." Dealers should analyze employee productivity and look for process efficiencies. "In what is now more of growth market, this may mean using the same number of people to accomplish a greater volume of work," he said. Money also can be saved in other areas, such as computer vendor and utility expense, Heider said. Much better software is now available from computer vendors outside the Big 2 providers, he said. "While not fully equal to the Big 2, the strides second-tier vendors have made is providing very capable software and is worth a second look," Heider said. While the payoff is longer term, he said, dealers also can cut utility bills by installing more efficient lighting, including lot lighting. (Source: Automotive News, 03/23/12) |
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Domestic Brands Score Well in Total Value Volkswagen, Hyundai and Ford are leaders in Strategic Vision's newest Total Value Index study. But for the first time in over a decade, American manufacturers paced the number of Total Value winners in vehicle categories, with 11 segment leaders. Another big change: four alternative fueled vehicles -- Chevrolet Volt, Honda Civic Hybrid, Nissan Leaf and Lincoln MKZ Hybrid -- led their respective segments. The firm says that in the past, alternative-powertrain vehicles didn't lead because simply offering better fuel economy did not provide enough overall value to make a difference. The Tustin, Calif.-based market research firm says the change implies a watershed moment for acceptance and desirability of hybrids. "Even though the median price of a Chevy Volt was $43,000, owners believe that for every dollar spent, they got more than did buyers of other vehicles," said Alexander Edwards, president of the company. "Customers had tremendous value appreciation for (the vehicle's) technical innovation, warranty, standard equipment and certainly fuel economy." In Strategic Vision's study, Volt not only had the highest Total Value score in the Mid-Size Car Segment, but also the highest score of any vehicle in the entire study. Owners may have a predilection to love cutting-edge technology, as they had a median annual income of $133,000, with 37% having post-doctorate degrees, putting them solidly in the early-adopter category. Another alternative-engine vehicle, the all-electric Nissan Leaf, won in its segment for technical innovation and standard equipment. But Edwards -- giving a nod to the fact that such vehicles still make up only a couple percent of the U.S. auto market -- said cost benefits, not emotions, will be what drives broad acceptance and larger volumes. "A word of caution to manufacturers is to realize potential buyers are smarter and more empowered with information than ever before. A hybrid needs to make sense for larger sales volumes to occur. Hybrid ownership is still primarily 'statement'-driven, but things are changing." General Motors also had segment winners with Cadillac CTS Sedan and CTS Coupe, Chevrolet Corvette Coupe and the GMC Yukon. Honda had several winners as well, with the Honda Civic Hybrid, Accord Coupe, Odyssey, Ridgeline and Acura TSX Wagon. Hyundai continued its winning streak because of design, features and mileage from models like Tucson. Ford's segment leaders included the Lincoln MKZ Hybrid, Mustang Convertible, Flex, and the F-Series trucks. Dodge Durango was another winner, and Volvo won because of strong product and comprehensive warranty with several of its vehicles. MINI Cooper won for the seventh year in the Specialty Coupe segment, per the study. Strategic Vision says the Total Value ranking is a combination of subjective owner statements on 442 attributes combined with what the firm characterizes as immediate and long-term economic factors like warranty, technical innovation, standard equipment, and vehicle mileage ratings. The survey side of the study gets into political party affiliation, personal media habits and hobbies, and any ethnicity they claim. "The way you become a value leader in this economy is to create an exceptional product that is affordable. Price alone will not determine value," said Darrel Edwards, founder and executive director of Strategic Vision. (Source: Marketing Daily, 03/16/12) |
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