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Automakers Could Turn to Fleet if Retail Stalls, Warns CNW

July 19, 2011

Consumers were back on the sidelines for the first 15 days of July, according to CNW Research, as car buyers continued to wait for the expected increase in incentives after the summer months. If consumers don't come back, automakers could once again turn to fleet sales to drive up their sales numbers.

Car-buying experts and vehicle research sites have been recommending that consumers wait until after the summer for carmakers to pick up their incentive spending. The thought is that Japanese brands, which are expected to return to full production by the end of the summer, will be rolling out huge incentives in order to regain lost market share following the March 11 earthquake and tsunami in Japan.

Despite a 74 percent increase in the number of consumers who said they plan on buying a new vehicle this year, the absence of incentives on new cars drove down closing ratios 15 percent compared to the year ago period and eight percent vs. June. The industry also is seeing fewer loan approvals, which helped to keep consumers out of showrooms. The good news is in-market consumers remain in a buying mood.

“The Pent Up Demand figures are somewhat encouraging,” wrote CNW’s Art Spinella, as consumers are waiting an average of five months to purchase new cars vs. the eight-month average recorded last year.

Floor traffic did increase by 1.23 percent over 2010, but the 1.33 percent month-over-month drop in the first 10 days of July was not a good sign, Spinella added.

CNW’s Jitter Index, which measures concerns about home-centric issues ranging from gap prices and job stability to food prices, was down .37 percent from the year-ago period but was up 1.4 from June. This marks the third consecutive monthly increase and the highest level of the year, according to the report.

Month-over-month sales for the industry declined 1.1 percent, though a number of brands saw monthly increases, including Ford (1 percent), Toyota car (8.5 percent), Mercedes car (8.2 percent) and Hyundai truck (13.5 percent).

Other brands were far below the industry average, Spinella wrote, as Lexus car (-13 percent), Scion (-26.4 percent), Hyundai car (-3.4 percent), Kia car (-2.3 percent) and Kia truck (-13.1 percent) all experienced decreases.

“July’s retail sales took a dive in the opening weeks of the month for most automakers,” wrote Spinella. “Even some luxury brands turned to their fleet departments for a little boost in overall deliveries. Exceptions [were the] Detroit 3, as early July data shows retail for GM, Ford and Chrysler to be up.”

Data from the first few weeks of July also showed some tightening on the lending side. Subprime approvals, which are tracking 11.2 percent ahead of last year, fell 3.22 percent from June. Prime and nearprime approvals also dropped as a share of applications.

Additionally, average FICO scores increased for the second consecutive month, which Spinella attributed to younger and lower-scoring consumers pulling out of the new-car market. The increase could put the pinch on used-vehicle operations.

“More critical, however, is the rise in average FICO scores among used-car buyers,” wrote Spinella. “For Detroit, which tends to cater to more lower income and credit consumers, any credit squeeze on lower FICO shoppers can hurt this dealers’ used-retail sales.”

On the upside, captive finance companies continued to reclaim their stake of the market, accounting for 39.4 percent of all financed vehicles — up from 38.37 percent in 2010. Contracts approved by the lending segment are valued at more than $73 billion, according to CNW, up from $61.4 billion last year.

Another bright spot is the used-vehicle market, which continued its strong performance during the first 15 days of July. Sales of used vehicles are on track to reach 4.4 million units by month’s end, Spinella wrote. “Retail sales units are showing significant underlying strength and returning to a pace that could mean near 40 million units in 2011,” wrote Spinella.

Overall supply in the used-vehicle segment is at 42 days, the lowest level since CNW began tracking days-supply in 1997. Combined, Ford, GM and Chrysler claimed a 41 days-supply, while the Asian and European makes were tracking at 43 and 50 days.

“When it comes to supply and demand, Detroit brands are having a field day,” Spinella wrote.

Commenting on overall market conditions, Spinella said automakers could turn to their fleet department if they see a serious downturn in overall sales rates over the next three month.

“That would once again shove the “sales by dealers” downward,” wrote Spinella. “Should that occur, expect profit margins at dealership to take a hit. This is especially true for large mega-dealers an public auto sales companies.”

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