While light-vehicle sales have been strong in the first quarter of 2012, rising gasoline prices, averaging $3.92 nationwide at the end of March, moved the model mix of vehicles sold toward smaller vehicles.
Through the first two months of the year, auto sales of sub-compact and compact passenger cars have accounted for approximately 25% of all retail sales. Sales of sub-compact vehicles have increased the most, up more than 35%, compared to the same period in 2011.
“Higher vehicle sales are obviously welcome news for the U.S. automotive industry and general economy,” said John Humphrey, senior vice president of global automotive operations at J.D. Power and Associates. “However, automakers are going to have to closely monitor shifts in segment demand and build accordingly.”
The credit markets are changing as well with an increase in 72-month loans, which has resulted in a new group of less affluent buyers in the new-vehicle market. According to Power data for the first two months of 2012, new-vehicle buyers with FICO scores in the “C” tier (scores ranging from 625-649) grew by 19%, compared with the same period in 2011, while buyers with FICO scores in the D tier (ranging from 0-624) grew by 23% during the same period. Due to this increase in C/D-tier buyers, the two segments combined accounted for 15% of all retail sales in the first two months of 2012.
By comparison, the proportions of consumers with credit ratings in the A+-tier (720-999), A-tier (680-719) and B-tier (650-679) grew by rates of 7%, 11%, and 15%, respectively, during the same period. As a result, the average national FICO score of new-vehicle buyers has declined from a peak of 737 at the end of 2009 to 725 in the first two months of 2012.
One potentially negative result because of the downsizing and easier credit trends is declining profits at automakers. The shift to smaller vehicles — in addition to the increase in financially less-qualified new–vehicle buyers, who tend to be younger and with less money to spend – means the average transaction price for new vehicles has dropped substantially in the recent quarter.
According to Power data, the average retail transaction price of a new vehicle in the fourth quarter of 2011 was $29,223, an all-time high. However, through the first two months of 2012, the average transaction price fell to $27,953, which was still well above historical levels, but lower than the peak at the end of 2009.
“Lower average transaction prices can clearly cut into vehicle profit margins,” said Humphrey. “But given the production rationalization the industry underwent during the recent financial crisis, most automakers and dealers are much more flexible and better prepared to adapt to quick changes in market demand.”
