Consumers' increased interest in both trucks and SUV’s over sedans is a shift the industry will have to wrestle with even more this year, says John Rickel, senior vice president and chief financial officer of Group 1 Automotive.
“The overall industry, if you go back two years ago, had a 50/50 split between cars and trucks. Last year it got to 60/40 and this year could be 65/35 — that is a massive, massive shift in consumer preference,” Rickel said during Group 1’s presentation at the Bank of America Merrill Lynch 2017 Auto Summit in New York last week, a webcast of which AuSM viewed.
“Trucks and SUV’s are continuing to go from strength to strength. There’s a lot of customer demand there.”
He points to lower and affordable gas prices as the primary driver of the shift.
“If you can have the optionality of a bigger package — basically what a truck or SUV offers of you — most consumers are opting for that and the industry is struggling to catch up with that switch,” he said.
During the presentation, Rickel said his group’s top source for used-cars are customers’ trade-ins.
“When we’re under pressure on the new vehicle sales, we’re not selling as many units — we’re not getting as many trades, and we have to go out to auction to supplement,” he said.
One downside, Rickel said, is that going to the auction to buy inventory can be more costly over time, after factoring in all of the added expenditures dealers incur.
“You’re going to pay a little bit more, you’re bidding against other dealers, you pay an auction fee and you’ve got transportation costs,” he said.
Residual trends in segments
In regards to sedans, within the used-car market in particular, there’s currently some pressure on residuals, according to Rickel.
“A lot of leases were written three years ago and that’s were a lot of volume is coming back,” he said. “We’re seeing a number of our OEM partners that have had to warn on residuals. You’re seeing them pull back somewhat on leasing.”
Rickel said he isn’t too strained about the residual values of trucks and SUVs.
Compared to sedans, trucks have a longer life and a number of consumers of have second order uses for them, he said.
In his 30 years of experience and the lease cycle he has seen, it has been rare that “you get a big, big falloff in truck residuals, so I’m less concerned about that,” Rickel said.
Specifically, if the rebound of the housing industry continues, he said it’s likely that construction workers use of trucks will increasingly secure their current standing in the market.
Rickel also added that if an infrastructure program comes from the Trump administration, it will presumably solidify truck sales as well.