2018 Trends in Automotive: See Why Flat Auto Sales Are Driving the Market
BY: BRAD BOWERS
DEC. 13, 2017
Overall, 2017 was a pretty flat year for auto sales. Historically when we see this trend, automakers turn to their incentive strategies to help push new vehicles off the lot. However, according to incentive spending data, 2017 has already seen an 11% annual increase in incentive spending, costing an average of $3,624 per-vehicle through October. Despite ramping up incentive spending, in October we saw a 1.1% drop in overall sales.[i]
“There may not be an easy path to higher sales in 2018, but there are a few noticeable trends that the auto industry should be paying attention to in the new year.”
Incentive spending can only do so much. Automakers don’t want to keep eating at profit margins to push new auto sales. If they don’t sell the remaining vehicles before the year runs out, they’ll be forced to discount them further to make room for new models. The auto industry is stuck between a rock and a hard place as turbulence and changes ripple into sales. There may not be an easy path to higher sales in 2018, but there are a few noticeable trends that the auto industry should be paying attention to in the new year.
GAS PRICES ARE FLUCTUATING
In the past five years, the U.S. has enjoyed some relief at the gas pump with the average gas price breaking under $3.00 in November 2014. A recent report shows a drop in prices has spurred a 6% increase in SUVs’ and trucks’ market share since 2015.[ii] Additionally, with gas prices low, drivers feel more comfortable buying larger vehicles and the market share for sedans has decreased by 5%.[iii]
Despite the drop in gas prices, trends showed a major increase in September 2017, reaching an average of $2.76.[iv] With this, 2018 is looking like a rocky year for gas prices, and in turn, large vehicle sales. If gasoline prices continue to increase, the market share of SUVs and trucks may drop. Drivers looking to purchase a vehicle will also start weighing their options with used vehicles over newer models to save on costs. We recommend keeping a close eye on gas prices and planning accordingly.
OEMs ARE COMPETING IN A TIGHT MARKET
In recent years, OEMs for the U.S. automotive industry have enjoyed increasing returns after recovering from the market downturn in 2009. However, this success is greatly challenged by a highly competitive industry and weary investors.
According to the S&P 500, investors were seeing a 15.05% average annual rate of return across all major markets in the last 5 years.[v] Conversely, average automaker returns were only 5.5%.[vi] Since the OEM market downturn in 2009, the industry has shown positive signs of recovery, but is limited by the burden of major bankruptcies and increased global competition.[vii]
An in-depth look into OEM growth by McKinsey found global sales of automotive OEMs are projected to rise by nearly 50% by 2020—namely in Europe, Japan, and South Korea.[viii] The pressure to increase return rates will continue to grow as the U.S. OEMs look to diversify and compete in the global market.
CONTINUED INVESTMENT IN CUSTOMER SERVICE WILL PAY OFF
When a customer buys a vehicle, they’re also buying a bundle of components that will need to be maintained and inspected over time. Vehicle components with the shortest lifespan are tires, engine oil, drive belts, coolant, and batteries. There are many independent auto servicing locations competing with dealerships around the U.S. that specialize in maintenance and inspection. Auto dealerships need to focus on offering a greater customer service to keep the customer coming back to the brand.
Chris Sutton of J.D. Power says the “quality of work—doing the job right the first time—can noticeably affect customer satisfaction and loyalty.”[ix] Automotive dealerships have stepped up their customer service. While analyzing U.S. customer service, J.D. Power found the Service Quality score rose to 816 in 2016 from 802 in 2015.[x] Tending to the customer’s automotive needs is essential to customer retention, as services performed by the dealer strengthens the brand’s value and loyalty for future purchases. All of this to say, 2018 might be the year to invest in your customer service.
The future for the auto industry looks rough as gas prices increase and OEMs struggle to get over the past sales plateau. But, dealerships that invest in customer service are seeing exciting results in customer retention. The key for 2018 will be playing to these customer service strengths and building the relationship between auto dealers and drivers to keep them coming back for more.
[i] Michael W. “Year-end sales to test automaker restraint”. Automotive News. http://www.autonews.com/article/20171105/RETAIL01/171109880/&template=print
[ii] Cadie T. “Rising gas prices are a growing threat to the American way of life”. Business Insider. http://www.businessinsider.com/how-rising-gas-prices-impact-economy-2017-3
[iv] “18 Month Average Retail Price Chart”. GasBuddy. http://www.gasbuddy.com/Charts
[v] “S&P 500 Annual Total Return”. YCharts. https://ycharts.com/indicators/sandp_500_total_return_annual
[vi] Rich P. et al., “2017 Automotive Trends”. PwC. https://www.strategyand.pwc.com/trend/2017-automotive-industry-trends
[viii] Dr. Detlev Mohr. et al., “The road to 2020 and beyond”. McKinsey&Company. https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/the-road-to-2020-and-beyond-whats-driving-the-global-automotive-industry
[ix] Joseph D. “2017 U.S. Customer Service Index (CSI) Study”. J.D. Power. http://www.jdpower.com/cars/articles/jd-power-studies/2017-us-customer-service-index-study-results
ABOUT THE AUTHOR: Brad Bowers
Brad is inspired to change the way cars are bought, serviced, and sold. Having spent the last 30 years in the automotive industry, he’s adept at turning around automotive retail operations and solving dealer network challenges. With a unique blend of sales, finance, and operations expertise, Brad is charged with growing Square Root’s automotive footprint. Brad is a CPA who holds a MBA from Columbia University as well as a bachelor’s degree in accounting from the University of Illinois.