10.16.13
Leases Overvaluing Future Residual Values; On Way to Huge Losses If Trend Con
30.00%
Lease Deal
perhaps foremost, lessees are more loyal to a brand than those who finance or pay cash for a new vehicle. By effectively forcing a customer to return to the selling dealership at the end-of-term (EOT), the chances of reselling (or re-leasing) the same brand more than double. That, in turn, reduces marketing expenses and virtually guarantees at least some production volume even if the economy turns sour. Second, since lease payments are significantly less or the term significantly shorter for a lease vs. finance, the pool of potential customers expands. Third, for dealers, there is a virtual guarantee that a certifiable used car will return at the EOT. CPO cars are a hot commodity and both the dealer and manufacturer can profit from this used-car option. (continued)
Industry Likely Residual Value vs. Contract RV 87.00%
25.00%
86.00% 85.00%
20.00%
84.00%
15.00%
83.00% 10.00%
82.00% 81.00%
5.00%
80.00%
0.00% Jan. Feb Mar Apr May June July Aug Sept Oct '13
Jan
Feb
Mar
Apr May June July
Aug Sept Oct
Page 2… CNW Research: Retail Automo
Incen
There are some in the industry who have been bragging the amount spent on incentives has diminished. But the reality is the share of vehicles carrying incentives has dramatically risen since 2007. Today, more than 95 percent of all vehicles sold are delivered under some form of incentive. That’s up from 60 percent just prior to the recession and even tops the 2002-2004 period of virtually unleashed incentives. Looking at all incentives including leasing’s residual value and money factor support, incentive spending has increased 17 percent vs. a year ago (See Back Page).
Undervaluing Residuals
There are effectively two popular ways to decrease a lease payment used by automakers including lower money factors (interest) and higher residual values. And herein lies the rub. While some overestimation of residual values can be justified because of the repeat business, lower marketing costs and other factors, if overdone it generates unacceptably high losses when off-lease vehicles are sold either through auction or to the leasing dealer. CNW estimates that a seven to ten percent residual overestimate can be justified, anything larger will become a financial burden.
Magic Numbers
As the graph on page 1 shows, the industry’s lease contracts have been overestimating residual values by roughly 14 percent this year with major increases in September and October ( 15 and 18 percent, respectively). Putting that into perspective, a vehicle with a $35,000 lease value carrying a 50 percent residual value should be worth $17,500 at EOT. Upping the residual to 55 percent results in a hoped for EOT value of $19,250. That $1,750 difference turns into a $5.25 billion overestimation if the industry leases 3,000,000 vehicles – which is likely this year.
% Sales w/ Incen
75.00%
j94 A J O J99 A J O J04 A J O J09 A July Oct
(continued from previous page) In fact, about a quarter of all new-car intenders say a lease deal was the primary reason for entering the new-car marketplace. (See Document 648 at CNWbyWEB.com for monthly details). Conversely, while still dominant, there has been a decline in the percentage of shoppers who say that a big discount was the primary motivator for getting into the newcar market.
Big Discount*
70.00% 65.00% Jan. Feb Mar Apr May June July Aug Sept Oct '13 But that’s not the end of it. Residual values have already been subsidized by at least three percentage points bringing the $35,000 vehicle to $16,450 at the end of three years. That’s what the lessor can get for the vehicle. Translation? With a 55 percent EOT residual and 3 million vehicles leased, the industry is facing a tab in excess of $8 billion. CONTEXT: Leasing has its place in the new-car arena. And the advantages are many. But the auto industry had to shell out more than $10 billion in 2000-2002 because of overestimating residual values and 0.0001 money factors. A repeat could be a devastating blow to a fragile auto industry comeback.
Page 3… CNW Research: Retail Automo
Government Slowdown Caused Spike in Pent-‐Up Demand, Increase in Purchase Postponements The government slow-down caused some serious reconsiderations of auto purchases. The short-term impact, now that the government is fully open again, is cloudy.
Pent Up Demand Swells
CNW measures Pent-Up Demand on a monthly basis (Document 140m on CNWbyWEB.com). As more Americans begin considering a new-vehicle acquisition, the number reported increases. That’s the normal condition of things. But the government slow-down was like putting a dam on a river causing PUD to swell to 128,600 from September’s 109,500. A year ago, the PUD was 102,500. Effectively, the indication is that the mess in Washington DC kept people on their couches instead of in showrooms.
What Impact On October Sales?
Here’s the question of the day. Will those who postponed come back to market immediately or wait until the desire flares up again?
One way to measure what will happen is to look at how long those who postponed a car acquisition intend to stay OUT of the market. Since February, the delay has declined in virtually every month from nearly four months to 2.89 months in September. But the slow-down pushed the delay to over 3.4 months. Simply translated, it means those people who put off a vehicle acquisition are now planning to wait until next year to re-enter the marketplace. Will that change because the government is fully operational now? To some degree. A quick survey conducted after the slow-down shows a slight decline to 3.38 months. But with the holiday season upon us, other financial considerations perk to the top of the budget demands. CONTEXT: As CNW mentioned in Retail Automotive Summary three years ago, while Americans at that time claimed they were going to save more in the “future,” the reality is the use of credit is skyrocketing. At least until the government shutdown. So the underlying condition is one of spending rather than saving. Auto sales should, if this holds, return to an upward movement in 2014.
Pent Up Demand '13
Avg. Delay Mo. '13
140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Jan Feb Mar '13
Apr May June
July Aug Sept
Oct
4.5 3.97 3.74 4 3.52 3.5 3 2.5 2 1.5 1 0.5 0 Jan Feb Mar '13
3.52
3.11 3.06
Apr May June
3.09 3.01
3.42 2.89
July Aug Sept
Oct
Page 4… CNW Research: Retail Automo
CPO Turnover Continues to Eclipse Non-CPO Sales, Even at Higher Price Certified Pre-Owned continue to be the most desired used vehicles in the market. Sales have grown dramatically. Dealers, and manufacturers ridding their books of off-lease models, have found CPO units move off of lots significantly faster than the same vehicles that are not certified. While non-CPOs take an average of 40 days to sell – about four days faster than the industry average for all used vehicles – CPOs take slightly less than three weeks. Add to the faster turnover the premium people are willing to pay for a CPO model and the extra expense of putting a car through the inspection process is well worth the cost. In September, the average CPO premium over non-CPO was $2,816 and the early October figure is nearly $2,900.
Daily Selling Rate: New / Used
60
September Turnover: Non-‐CPO: 39.94 days CPO: 20.64 days
50 40 30 20 10 0
Premium CPO $3,500 $3,000 $2,500
Daily Rate New Daily Rate Used
$2,000 $1,500 $1,000
Sept
Aug
July
June
May
Apr
Mar
Feb
$500 Jan-‐13
160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0
Non-‐CPO v CPO Turnover at Dealer Lots (Days)
Need something to worry about? There has been a decline in used-car daily selling rates since June. On the new-car side, September drew from August, but even adjusted, the daily rate was lower than August. Underlying weakness?
$0
September Premium: CPO: $2,816
Page 5… CNW Research: Retail Automo
October a Mess: Early Indica
industry could salvage the month if postponers come back to market more quickly than usual. If that continues, the month could be up a percentage point or two. Blending first and second half indicators, shows a slight decline of 3 percent which should be made up in November-December.
Pent Up Dmnd Pent Up Dmnd 12 v 11 Avg. Delay Avg. Delay Mo. '13 Mo. '12 Change Mo. '13 Mo. '12 % Change S
Closing Ra
-‐6.17%
New Floor Traffic
11.80%
Used Days Supply
-‐3.08%
Jitters Index!
0.03% vs. last month
Sub-‐Prime Approval v Last Month
-‐0.77% 0.28%
Sub-‐Prime Approv. v Last Yr.
-‐0.40%
Same Store Sales
1.34%
Page 6… CNW Research: Retail Automo
Trending Charts Page
JITTERS
Fed
Gas
Child’s
Job
Day to Day
Condi
Food
Local
Jikers
INDEX
Taxes
Prices
Edu
Stability
Needs
Investments
Prices
Taxes
Index
v Prev Mo 0.10% -0.11% -0.74%
0.26%
1.03%
-0.63%
0.00%
-0.20%
0.03%
v Mo. '12
-5.30%
0.77%
-12.36%
2.16%
0.00%
-0.36%
1.11% 5.13% 11.72%
Retail Rises on Back of Government Shut Down
The October retail-share of total sales jumped to 63.5 percent, but not because more consumers came to market. The reason: Government slowdown postponed both contract and delivery of federal government fleet purchases, tipping existing sales toward retail. Will fleet/business return to the 60 percent level now that the government is fully functioning? Probably not in October, but certainly expect retail deliveries to take a smaller share in November and December as fleet contracts are filled and new orders are processed.
Jikers Flat
Share Retail!
70.00%!
Oct Est: 63.48%
62.50%! 55.00%! 47.50%! 40.00%!
Americans remained effectively unaffected in opening days of October vs. September by the government slow-down.
Cash Sales Contract
As the stock market swelled, the number of new-car sales that were made using cash rather than financing or lease grew to near 6 percent earlier this year. But as the year progressed, many of those cash buyers moved to leasing, electing to use stock market gains for other big-ticket items. In September, cash sales declined to below 5 percent industrywide with cars slipping to 5.21 percent and trucks to 4.72 percent. Expect the trend to continue.
7.00% 6.00%
Cash Sales 5.88% 5.21%
5.00%
Jan. '13
Doc 1315
Sept. '13
Jan ‘13 Feb Mar Apr May June July Aug Sept Oct
5.44% 4.72%
5.67% 4.97%
Trucks
Total Ind.
4.00% 3.00% 2.00% 1.00% 0.00% Cars
Share Retail 59.83% 57.32% 59.22% 59.83% 60.78% 60.03% 60.11% 60.53% 61.16% 63.48%
Page 7… CNW Research: Retail Automo
An
Actual Oct cy12
% Chng 13v12
YTD cy2013
YTD cy2012
% Chng 13v12
Franchised Dealer Sales
1,186,706
1,181,742
0.4%
13,197,057
12,747,458
3.5%
Independent Dealer Sales
1,059,140
1,147,692
-‐7.7%
11,863,973
11,789,426
0.6%
842,926
712,915
18.2%
10,488,799
9,873,207
6.2%
3,088,772
3,042,349
1.5%
35,549,829
34,410,091
3.3%
Casual (Private) Sales Total Sales
October Casual Sales Keep Up Momentum The tepid used-car sales data for October can be partially blamed on the government slowdown. How so? Nearly a half million federally owned vehicles were slated for sale which was postponed until the government re-opened. That put a crimp in the overall used-car market which relied, instead, on a healthy 18 percent gain in private-party sales. New-car dealerships made a slight 0.4 percent gain while independents were off 7.7 percent.
Pent Up Demand Con
For the third straight month, the number of consumers who are saying they postponed a new vehicle purchase but still intend to buy within six months has increased. The September ‘13 figure is about 3.7 percent higher than the same month last year. Equally important, the number still planning to acquire a car or truck remains at 94.75 percent, the second highest of 2013. October is estimated to see another increase in the percentage of postponers who still plan to buy.
USED
Used-‐Car Leasing Increases
In September, nearly 107,000 used vehicles were leased rather t han financed or bought for cash. That’s a 4.5 percent increase over year ago marking the largest year-over-year gain of 2013 and the best unit volume since June of ‘09. The typical used-car lease is in the near-luxury and luxury segments including high-end SUVs with the Cap Cost steadily in the $40,000 to $41,000 range this year.
Pent Up Dmnd Pent Up Dmnd 12 v 11 Mo. '13
Mo. '12
Change
Avg. Delay Avg. Delay Mo. '13
Mo. '12
% Change Still Plan Acq
Jan '13
107,000
94,000 113.8%
2.67
2.41
10.8%
94.26%
Feb
105,200
83,500 126.0%
2.31
2.37
-2.5%
94.83%
Mar
101,500
83,000 122.3%
2.29
2.41
-5.0%
94.18%
Q1 13
313,700
260,500 120.4%
2.42
2.40
1.1%
94.42%
Apr
104,750
84,750 123.6%
2.21
2.53
-12.6%
93.58%
May
80,800
76,200 106.0%
2.28
2.43
-6.2%
93.81%
June
79,400 95.1%
2.19
2.57
-14.8%
94.06%
261,050
240,350 108.6%
2.23
2.51
-11.3%
93.82%
July
92,750
80,500 115.2%
2.22
2.79
-20.4%
94.25%
Aug
96,250
84,700 113.6%
2.19
2.93
-25.3%
94.73%
Sept
98,500
95,000 103.7%
2.16
2.96
-27.0%
94.75%
Q2 13
287,500
260,200 110.5%
2.19
2.89
-24.3%
94.58%
Oct
116,500
98,100 118.8%
2.39
2.96
-19.3%
95.08%
Q2 13
75,500
Page 8… CNW Research: Retail Automo
Jan. '13 Feb '13 Mar '13
Apr '13 May '13 June '13 July '13 Aug '13 Sept '13 Oct '13
Oct '12 Nov. 12 Dec. '12 Percent Change Yr over Yr Month Over Month Price
Franchised Asking Price $11,336 $11,321 $11,806 $11,716 $11,682 $11,597 $11,563 $11,592 $11,729 $11,482 $11,419 $11,583 $11,186 0.55% -2.11%
Independent Asking Price $9,867 $9,892 $10,276 $10,143 $10,127 $10,106 $10,101 $10,227 $10,437 $10,223 $9,872 $9,991 $10,148 3.56% -2.05%
Franchised Trans Price $10,558
$10,562 $11,112 $11,042 $11,020 $10,981
$11,010 $11,058 $11,193 $10,825 $10,553 $10,894
$10,654 2.58% -3.29%
Used Retail Prices Finally Up Over ‘12
Retail Used Car Prices actually surpassed October ‘12 – a virtual first for calendar year 2013. While franchised dealers were asking about a half-percent more than a year ago, they were able to squeeze out a 2.6 percent gain in transaction prices (excluding taxes, fees, aftermarket products, etc.). For Independent dealers, the year-over year gain was a comfortable 7.2 percent or about twice the increase seen in asking prices. The month-to-month differences still reflected downward pressure, but that’s not unexpected as the hotter summer season ends and backto-school volume shrinks. The government slowdown, however, was primarily responsible for the increase in used-vehicle days’ supply climbing to nearly 47 days as some business-to-business and government employee sales were lost.
Franchised % of Asking 93.14% 93.21% 94.12% 94.25% 94.33% 94.69% 95.22% 95.39% 95.43% 94.28% 92.42% 94.05% 95.24% 2.01% -1.21%
Independent Trans Price $9,158
$9,174 $9,640 $9,529 $9,444 $9,507
$9,527 $9,687 $9,903 $9,667 $9,019 $9,334
$9,452 7.18% -2.38%
Independent % of Asking 92.81% 92.74% 93.81% 93.95% 93.26% 94.07% 94.32% 94.72% 94.88% 94.56% 91.36% 93.42% 93.14% 3.50% -0.34%
Used Vehicle Days' Supply! 52! 50! 48! 46! 44! 42! 40!
October Es
Page 9… CNW Research: Retail Automo
Jean Halliday’s
Toyota Expands Tundra DIY Push
New Corolla Exterior ‘Spiffy’? Not So Much Toyota is trying some interesting ad tactics for three key 2014 models. Let's start with the refreshed 2014 Tunda pickup. Each of the trio of national TV spots shows how the Tundra can help its owners “build anything.” The commercials show backyard projects in progress. The hook from Toyota's ad agency, Saatchi & Saatchi Los Angeles is showing the video in reverse so that the spot actually starts with the finished product and shows how the Tundra helped get it done. And the sequences are fast forward, which actually translates to some compelling creative. Like any smart marketer these days, Toyota has an integrated blitz for the pickup. There's magazine print ads, online homepage takeovers and instructional online, how-to videos for the do-it-yourself folks. On Twitter, the Tundra will have live, in-race video content via a sponsorship with NASCAR. There's a slew of ride-and-drive events to get people behind the wheel. The stops include Bass Pro Shops, Supercross, country music festivals and military events. Where Toyota goes off the tracks is in explaining the strategy. Jack Hollis, VP-marketing of the Toyota brand, tells us the '14 model has a new target the automaker dubs the “Evolved Trucker.” He says the main priority of this evolved pickup owner “is enhancing the life of their entire family.” And naturally, the '14 Tundra lets owners “build anything.” Sorry, Toyota, but this is marketeering jargon. You gotta hope there's good research behind this claim. And not that Toyota and Saatchi just wanted to show the truck as the family hero, steering in a different direction than Detroit's better-selling models. Let's face it, ads for Detroit's rival pickups have traditionally shown their products working tough in owners' 9-to-5 weekday jobs. Even Toyota has used that ad strategy for the Tundra in the past. This one, though, seems a bit fluffy.
Toyota Tree House Onward to the Camry. The mid-size car was redone for the 2012 model year, but it's still such an important car for Toyota, which spent some $175 million launching back the all-new version. Toyota is trying to hammer away at improved, spiffy good looks across its lineup of cars, long more considered reliable, bulletproof appliances. If the cars' styling has truly been dialed up to sexy, people will take note and there should be no need for ads to keep telling people. Saatchi created a slew of TV ads and online videos for the Camry Continued next page
Page 10… CNW Research: Retail Automo
Toyota Thrill Ride
Toyota “Elevate” Dance Video shows young people with the car dancing to music of different eras over 5 decades. Saatchi developed the ad theme “Style Never Goes Out of Style.” Toyota might as well play off the car's long history in the USA. But this spot might be more fun for boomers, a sort of flashback to the music and clothes of their youth. And the final, present-day scene in the street reminds me of Ford's launch spot for the 2011 Fiesta launch with people dancing around the car and falling confetti. There is more competition in this segment and it's good to see Toyota raising the bar. The brand will still probably sell lots of Corollas in spite of the advertising.
CNW Research: Retail Automo
Back Page *Deliveries not sales
October 1-15
October 1-15
% Chng
Actual Sales
October '13
Full Mo
cy2013
cy2012
13 v 12
October '12
Sales
Change
New Cars
Extension
Detroit 3
158,234
161,904
-2.3%
155,300
151,780
-2.3%
Asian
159,372
172,626
-7.7%
315,513
291,288
-7.7%
European
30,178
33,467
-9.8%
84,809
76,474
-9.8%
Ttl Pass. Cars
347,784
367,997
-5.5%
555,622
519,542
-6.5%
219,848
222,647
-1.3%
330,876
326,716
-1.3%
0.2%
171,606
171,995
0.2%
35,633
0.6%
New Trucks Detroit 3 Asian
61,882
61,742
6,993
6,948
0.6%
35,404
Ttl Lt. Trucks
288,723
291,337
-0.9%
537,886
534,345
-0.7%
Ttl Industry
636,507
659,334
-3.5%
1,093,508
1,053,887
-3.6%
October 1-15
Full October
% Chng
Prev Mo
Prev Mo
% Chng
cy2013
cy2012
13 v 12
cy2013
cy2012
13 v 12
Lease Share
28.9%
28.5%
1.4%
28.3%
28.1%
0.7%
Floor Traffic - New (105m)
86.54
77.44
11.8%
92.15
77.96
18.2%
Floor Traffic - Used (105m)
91.74
84.42
8.7%
97.02
87.16
11.3%
October 1-15
Prev Yr
% Chng
% Chng
Pent Up Demand
Units
cy2013
cy2012
Same Mo '12
Prev Mo
October est. '13
128,616
Avg. New MSRP (101m)
$38,694
$37,349
3.60%
0.87%
October est. '12
102,500
Total Discounts
$5,773
$5,050
14.32%
2.52%
% Change
25.5%
Manufacturer Incentives
$4,381
$3,721
17.74%
3.24%
Dealer Incentives
$1,392
$1,329
4.74%
0.31%
Purchase Delay
Months
Core Transaction Price****
$32,921
$32,299
1.93%
0.58%
October est. '13
3.42
% Mfg Incentive of MSRP
11.32%
9.96%
13.6%
October est. '12
3.58
% Ttl Discounts of MSRP
14.92%
13.52%
10.3%
% Change
-4.5%
European
