WHILE NEW VEHICLE SALES ARE SHOWING ENCOURAGING GAINS, THE LONGER TERM PICTURE LOOKS A LITTLE LESS CERTAIN
After a slow start to 2013 with new vehicle sales growth in negative territory for each of the first three months of the year, April’s huge surge was enough to bring the whole year into the black with almost ten per cent growth for the month. As of this writing it’s still too early to tell if this was a one-month blip or the start of a trend towards stronger new vehicle sales in Canada, but no matter how the rest of the second quarter plays out, we can say with confidence that the retail auto industry is a relative bright spot in an economic picture that is, at best, sluggish to start 2013.
Nevertheless, we have to be careful of a few worrying signs on the horizon for the industry over the medium term.
First, the good news. Consider the numbers: April saw near-record demand for new cars across Canada and posted 8.9 per cent growth over demand in April 2012. This brought the year as a whole into positive growth for new car sales after negative growth from January to March. And this is on top of an already-solid result from 2012: 5.7 per cent growth in our industry’s single most important indicator with an unbelievable 9.5 per cent growth in car (versus truck) sales last year.
LOW GROWTH
Total retail revenues at car dealerships last year topped $85 billion, a five per cent jump on 2011. This number represents close to five per cent of Canada’s GDP. In the context of general economic growth that’s been sluggish at best in recent years, these numbers are indicative of an industry in great shape. Though the recession is well behind us, since the recovery has started, we haven’t managed to achieve much more than a low level of growth in Canada the past several years. This is typical of what was a “balance sheet recession,” brought about largely by a decades-long buildup of debt.
Consumers and governments are still in the process of paying down the debts incurred in the boom times, hence the sluggish nature of the recovery.
And this is where we must pause to wonder whether or not brisk sales — the likes of which we’ve gotten used to in the past two or three years — can sustain themselves over the medium term. Over the very long term, population growth and immigration fundamentals should be supportive of a trend towards solidly-growing new car demand in the decades to come. But over the shorter horizon, there are some causes for concern.
NARROWING GAP BETWEEN NEW AND USED
First of all, consumers are differentiating less and less between new and nearly-new vehicles. This is a function of the quality of today’s new cars, which is very positive. But the result is that today, those in the business of selling new cars have to compete with other brands but also with older versions of the same brands. Whereas a generation ago, a customer was either a new car buyer or a used car buyer, today’s consumer differentiates less and less between brand new and, say, a two-year old vehicle coming off a lease.
This is excellent news for the consumer, as greater product choice is always a good thing. But in future years, much of the gains in new car sales at dealers’ stores may come at the expense of used operations, and vice-versa.
The other factor of concern is the evolution of financing over the past decade. While the vast majority of new and nearly-new car buyers require financing for at least a portion of their purchase, the degree to which this has been extended over more and more years is something that cannot continue forever, and that may come back to bite the industry in the future.
Customers paying off new vehicles for six, seven, even eight years, mean that more and more ownersare driving vehicles in which they have negative equity. If you’re financing a purchase over 96 months, there is no way to avoid negative equity in the early years of the term without a large down payment. Though there’s not much evidence to suggest that the proliferation of negative equity consumers has hurt sales in a major way just yet, the trend is troubling for business over the medium term, particularly if those ever-longer terms at zero-rates begin to shorten, or if rates start to creep up.
So while times are great right now, dealers too busy with the day-to-day running of their businesses to worry about longer term fundamentals are best advised to stop for a moment to consider a day — not too far down the road — when things could be very different from today.
