The New Norm
Consumers Change the Way They Purchase Cars
Jeff Sarat is understandably low-key about Ford’s EcoBoost engines, the new technology that allows for a six-cylinder engine to produce the power of an eight-cylinder one, with better fuel efficiency and reduced emissions.
It’s certainly an attractive feature, said Sarat, general sales manager of Sarat Ford in Agawam. But at the same time, he recognizes that business this year has not been as robust as last.
Still, features like the EcoBoost are slowly helping this family company, founded in 1929, approach the ‘tipping point’ of pre-recession levels for new- and used-car sales.
“Last year was a phenomenal year for us, and this year, we’re on pace; we’re this close,” he told BusinessWest, with his fingers curved in a one-inch pinch. “We’re hiring, and that’s a good sign. We’ve had some months we were just off by five cars or by 12 cars, and I have to ask myself, what will it take? Would one more salesperson do it? Would working an hour more a day work? Calling back a customer a bit quicker, would that help? We’re so very close.”
His restrained enthusiasm is similar to that of other new-car and auto-parts store owners who spoke with BusinessWest about the past few quarters of automobile sales health. Since the banking and automobile industry bailouts in 2008, the ledgers of any business involved in the auto industry have followed the dropping graph of shaky consumer confidence.
But their tracks have been different in some ways. Take, for example, the Cash for Clunkers experiment (officially known as the 2009 Car Allowance Rebate System). “Cash for Clunkers was terrible,” said Frank Palange, president of V&F Auto and V&F Auto Parts in Agawam. “It had some good points, but for independent repair and the parts business, it was terrible.”
Due to the recent recession and more education, Frank Palange says consumers are more cautious about purchasing a new car.
That’s because vehicles that just barely met the ‘Clunker test’ but could have been maintained (and would have needed new parts to remain on the road) were turned in for newer cars, and not necessarily by people who really needed the program’s help.
For most new car dealers, the program was a boon — but for some, demand for a dwindling supply became a huge issue, and was then followed by the devastating Japan earthquake and tsunami in March of 2011, which affected global operations for several foreign car dealers. Once the Clunker trial was over and supply was restored, the sales died down, and then the cost of gas rose to levels never before seen.
It’s been quite a roller-coaster ride. The past five years of government-manufactured highs and crushing lows have caused enough car sickness for a lifetime for all associated with the auto industry.
The current landscape is “better than last year, but by degrees,” said Michael Balise, vice president and owner of Balise Motor Sales. “People are still cautious; they are nervous, waiting for the other shoe to drop, and there may be some stagnation around election time.”
But once the election is over, has the long, devastating recession motivated customers to remain guarded, educated, and above all, patient, when it comes to new-car purchases? In other words, have behaviors changed for good?
“Absolutely,” said Palange. “Things have changed forever; this is the new norm.”
As the political landscape roils and gas continues to wobble above $3.75, BusinessWest takes a look at overall automobile sales, trends over the past year, and what local new car dealers think of the new norm as the 2013 models begin to roll off the trucks.
One of the better barometers of consumer confidence are how new-car sales are performing, and in early September, major automakers reported that sales grew 19.9% in August, despite higher gas prices during that month.
According to Balise, while numbers like this create deeper consumer confidence, it’s sort of a case of fuzzy math because those totals reflect fleet sales in the massive rental-car business, which normally tends to switch out cars after four to five months, but, due to the aforementioned vehicle shortages for several manufacturers over the past few years, has seen the average age of fleet cars balloon to 14 months or more. For instance, of a reported 40,000 sales in one month, Balise said 10% to 15% could represent fleet sales.
Michael Balise sees a smoothing out of the sales patterns of past years, with peaks not as high and troughs not as low.
“And I don’t see the economy really getting any better; there’s still a ton of pent-up demand,” he said. “In New England, through July, retail sales were virtually the same as the prior year.”
Explaining the improved sales nationwide, he points to increases in the areas hit worst in the cash crunch — specifically, California, Nevada, Florida, and Arizona — that have now come back. “And another big driver is that Chrysler, Ford, and General Motors are finally selling fleet cars to rental companies in big numbers again, and those are being counted in retail statistics.”
On Sept. 1 Balise had the highest amount of used cars in two years: 1,200 company-wide. But he said the total was not necessarily due to more sales, but because dealers have had to change their retail parameters to have more used cars to sell on the lots.
“We are reconditioning less-expensive cars that we wouldn’t have done in the past,” he said, “and we’re trading much more aggressively, because the cars you really want are not available at auction, and if they are, we’ll pay virtually retail for them.”
Meanwhile, the age of a car doesn’t seem to mean what it used to mean.
“Everything is better and lasts longer, and that’s a big factor in the repair and the new-car business,” Palange explained. “Twenty-five years ago, if a car had 75,000 miles on it, we’d tell people to start looking for a new car, but now, 100,000 miles is normal, and we sell used cars with 130,000 to 140,000 miles on them with no problem.”
In fact, Automotive News reports that the average age of a car on the road today is 10 years and one month, and Balise says that average has crept up over the past six to seven years, as consumers have been putting off new purchases.
But a new trend has emerged on both the repair and new car sides of business.
“Over the past eight to 10 years, we’ve been training consumers to maintain their vehicles instead of waiting till they break,” Palange said, adding that not only does that behavior keep a car on the road longer, but the service departments of new-car dealerships are more apt to push maintenance plans and warranties because the cost to fix highly technical parts is so much more expensive now.
“Twenty years ago,” Sarat said, “I worked in our service department, and I used to hate coming to work because there was a line out the door with people having problems with their cars. Nowadays, people come purely for maintenance.”
Bryce Piper, general manager of Lia Toyota of Wilbraham, agreed. He sees the lengthened equity actually supporting new-car sales and increasing his vitally important used-car selection.
“If our cars depreciated faster, we’d have more leases, but they don’t; some older trucks or cars still have equity at four and five years, and my trades lately have been retailable trades, not scrap [that would go to auction],” he said, adding that he’s built much of his used-car inventory on late-model (2008 to 2011) trades. “I still send the same amount of scrap to auction each week as last year, but from a percentage standpoint, I see more retailable cars to put on my front line, because we’re selling more.”
And the quality is not just from the foreign market. “The quality of cars, foreign or American, is much better … they’re not breaking as much,” said Palange. “People have a lot more confidence in American cars.”
He said that’s due to both cutting-edge technology and the fact that domestic car manufacturers finally realized that Americans had had just about enough of poorly performing cars. “They realized they better step it up, or they weren’t going to be in business anymore.”
Sarat added that he’s also seen a definite switch in consumers’ views regarding American car quality and reliability. “It’s interesting: we’ve taken in more foreign cars [for trade] than we ever have, and I think that’s because people have come to realize that American cars are better built than they ever were.”
Added Palange, “with the cars that went out [on the road] for the Cash for Clunkers program and extended warranties these days, and until the current fleet of vehicles on the road reaches the 100,000-mile mark, they’re not going to be breaking and coming to the independents. But eventually, it will happen.”
Sweetening the Deal
With longer-lasting cars on the road, manufacturers have had to keep the incentives coming to entice new car sales, but dealers now realize that the wild ride of the past five years has created a far more educated consumer, one who knows another deal is always just around the corner.
“My 0% deals on eight cars one month will be the same deal on six different models next month,” said Piper. “There are deals throughout the year, no question, and that’s never going to stop, because once you start, you can’t stop.”
Balise, who owns 17 new-car and three used-car dealerships, sees a “smoothing out” of the sales pattern. “The peaks aren’t what they used to be, and the troughs aren’t what they used to be. Customers don’t wait around for George Washington’s birthday because they’re smarter now. They don’t believe the hype; they are much more savvy.”
And that other sweet deal for all brands is the extended warranty. “They are big in this industry,” said Palange, who also has begun a three-year, 36,000-mile warranty on most repairs. He said that’s rare in the auto-repair business, but he aims to keep up with customer demand, based on what they’ve been getting from new-car and late-model used-car dealers.
In addition to those improved warranties, Balise and Piper also both credit the Internet, which has created transparency in the marketplace.
“A lot of people do their homework — literally, all their research — online, and they know exactly what they want when they come in here, and they just want to know what they can buy the car for,” Piper told BusinessWest. “It’s a completely different world than it used to be. It’s easier for the dealer if the consumer is educated, and with extended warranties and 0%, how can you not see the value?”
If deals and extended warranties are nudging the possibility of a new-car sale, just how much gas a car guzzles could make or break the final sale, Balise noted.
“Fuel efficiency is also becoming the new norm,” he said. “People have resigned themselves that gas will be $3.50 a gallon, so mpg is a huge driver in the decision-making process.” He added that, 24 to 36 months ago, the shock of gas prices caused customers to be “panicky, but now they’re just saying, ‘this is it; it’s the new norm.’”
Sarat sees a similar trend. “Some people are affected by it, and some people don’t care. But if some are getting 20 to 25 mph now, to get 25 to 30 might be enough to push them to a new car,” he said. “And interest rates are making it a lot easier for people to afford new cars.”
A Cautionary Tale
Add all these trends up, and what emerges is a sense of cautious optimism.
“I’ve heard it said that the auto industry is the last to go into a recession and the first to come out, so if what is going on in the auto industry last year and this year is any indication, the recession could, hopefully, be nearly over, in my opinion,” said Sarat.
But there is at least one more road bump this year.
All who BusinessWest spoke with are waiting patiently to see what the outcome of the November election will bring. Their sentiment is that if President Obama wins, then it’s status quo going forward; if Romney wins, maybe there’s a bit more hopeful excitement, but Balise feels that today’s consumer is not only Internet-educated, but too savvy to be swayed by elections.
“The election may have some small impact,” he said. “But nobody believes that the economy is going to bounce back tomorrow.”
Piper agreed. “Sales have always been about consumer confidence, so at the end of the day, it just depends on how confident our country is in the progression of moving forward and becoming a little bit more stable, economy-wise, jobs-wise … it’s a tough one to answer.”
Elizabeth Taras can be reached at firstname.lastname@example.org