US light vehicle sales have steadily improved since bottoming out in 2009 at 10.6 million units. 2013 sales reached 15.6 million light vehicles, their highest since 2007 (16.1 million) through still below 16.5+ million in the middle of that decade. However, many of those levels were the result of the industry over-producing and then being forced to use high incentives to clear excess inventories. There was also rich use of fleet sales in some cases. In contrast, in 2013 automakers better aligned production with demand, meaning that recent gains have been “healthier,” and that’s driving optimism for the industry in general. But what can we expect in 2014? If the market continues to improve can we approach 17 million? Let’s see what it would take to reach that level.
Millward Brown Digital used its automotive behavioral analytics to evaluate 2014 sales using two core elements: demand and conversion. Demand is represented by the number of in-market lower-funnel shoppers; this proprietary measure is based on observed, lower-funnel activity across multiple automotive websites and leverages a patented data-gathering and normalization processes. A key benefit of this approach is that it recognizes and leverages the fact that consumers shop on multiple sites and rarely complete all their automotive research in one session, yet few submit leads. A second benefit is that we avoid false positives by avoiding double-counting. The second metric, conversion, represents an automaker’s success at turning shoppers into buyers and is similar to a close rate.
The auto industry’s sales resurgence has come on a recovery of both demand and conversion. Industry demand—like sales—bottomed out in 2009; conversion continued to decline until 2011.
Average monthly new vehicle demand improved dramatically in 2010 (+18%) and again in 2011 (+17%); growth continued in 2012 and 2013 but at a slower rate. The slower growth may represent the end of gains from so-called pent-up demand. Conversion began rebounding in 2012 (+13% y-o-y on average by month) and continued into 2013 (+6%). Gains in each helped drive the increase in sales—from less than a million per month in 2009 and 2010 to nearly 1.3 million per month in 2013. Both demand and conversion continue to trail pre-recession highs suggesting there’s still room to grow.
The current resurgence reflects a rebound in the same economic factors that drove the industry to the brink 5 years ago. Consumer confidence is up from its depths of 2009, unemployment is expected to trend below 7% in 2014 versus 10% in 2009 and inflation and oil prices have stabilized from past fluctuations. At the same time, the recession made consumers postpone purchases creating pent-up demand (household fleets are the oldest ever—over 11 years old according to Polk). The consensus is that these economic drivers will remain stable or improve this year, cultivating a favorable sales environment.
Vehicle Segment Growth
A variety of segments added shoppers in 2013, primarily luxury, pickups and small SUVs, and added shoppers faster than did the market overall (so gained a greater share of all shoppers). Strong new model introductions (Mercedes CLA, Lexus IS, Acura MDX, Infiniti re-branding) helped the luxury segment capture a period-high 25% share of all shoppers in Q4. In addition the pickup segment reached 11% in Q4 on the heels of new introductions (i.e., Silverado & Sierra) and likely replacement demand tied to more housing starts and other positive business drivers. Small SUV demand share also improved in 2013 on the strength of the new RAV4 and competitive responses among rivals. The flatness of Compact segment SMI is somewhat surprising given the launch of the new Corolla and Mazda3 (meaning that those launches did not increase overall segment demand).
2014 and 17 Million
There is certainly nothing economically in the near-term that suggests growth will end, and certainly the F-150 launch on the heels of the new Silverado/Sierra will help (those three accounted for nearly 10% of all sales in 2013). So the question becomes how much will sales grow in 2014?
Sales levels can be reverse-engineered using combinations of demand and conversion. Modest increases of 5% in monthly averages for both (consistent with monthly average gains over the past 2 years) would yield an average 1.43 million sales per month, which totals 17.14 million per year. And even then, monthly demand and conversion averages would be below pre-recession highs.
While 17 million is possible, is that level good for the industry? If gains are all demand-driven (healthier) it would be good. Conversion-driven gains, depending on the reason, could be good also. If driven by continued confident consumers, for example, it’s a win. If driven by higher incentives to clear excess stocks (if OEMs over-confidently over-produce), not a win. That would mean a return to the bad habits the industry has struggled so hard to shed. Ditto if driven by forcing low-margin fleet sales.
Summing It All Up
Most analysts agree that 2014 will be another banner sales year for the US auto industry. Where it nets out is the net result of multiple variables and a lot can happen by the end of the year. But one thing is certain: evaluating both demand and conversion is critical for a brand to understand its retail sales potential, and how well it converts that potential into sales. And understanding that in the context of the market, segments and competitors is the only way to ensure marketing plans reach their goals, production stays in line with actual consumer demand and incentives—if needed—are applied scientifically and efficiently.
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 Excluding commercial vehicles that are technically “light vehicles” based on GVW.
Dennis Bulgarelli is a Client Services Director at Compete. At Compete Dennis is responsible for advising auto clients on trends in consumer online shopping behavior. Before Dennis joined the Compete team he did research and planning at most of the large ad agencies. Dennis hopes to one day, drive cross- country on the blue highways. Follow Dennis on Twitter @dennisbul or connect with him on LinkedIn at http://www.linkedin.com/in/dennisbulgarelli.