Polk Research Shows Vehicle Leasing Growth Slowing May Soon Peak
8 October 1998
Has Leasing Peaked? Polk Research Shows Vehicle Leasing Growth Slowing, May Soon Peak DETROIT, Oct. 8 -- The leasing share of the motor vehicle
market may have peaked, or will soon do so, according to vehicle registration
analysis conducted recently by The Polk Company. Through the first six months
of 1998, the leasing share was 25.3%, slightly behind the rate for the whole
year in 1997. Has leasing peaked?
The answer could have far-reaching implications for vehicle manufacturers,
vehicle lessors, auctions, and new- and used-car retailers. Leasing growth
affects the frequency in which consumers return to market for a new vehicle,
supporting new-vehicle sales. It also impacts the availability of late-model,
low-mileage used vehicles, which have proven to be extremely popular in the
used-car market. Finally, these vehicles are viewed as one of the key reasons
for the growth in auction volumes.
Polk statitics show leasing increased from 13.8% of all new-vehicle
registrations in 1993, to 25.3% through June 1998, an increase of 11.5 share
points. Most of the shift to leasing has come from "personal" -- or outright
purchase -- registrations, which have dropped 11.9 share points since 1993
(Chart A). Still, leasing's share of the market has been growing at a slower
pace since 1994, and had failed to increase through June 1998.
"The growth in the popularity of leasing is understandable," said Richard
Spitzer, director of industry analysis for Polk. "Leasing generally involves
significantly lower monthly payments than loans, and often requires less of a
downpayment as well. This makes the slowing growth in leasing somewhat
puzzling, particularly in light of the aggressive marketing by vehicle
manufacturers last Spring."
Despite record-level incentives, the "retail" market showed
uncharacteristic weakness through June of 1998. Retail registrations, which
historically account for approximately 81% of all registrations, had dropped
1.6 share points through June 1998 -- the exact drop in "personal"
registrations from year-end 1997 through June 1998 (Chart B).
"This apparent decrease in retail registrations would seem to indicate the
automobile industry is facing an increasingly more difficult market," said
Spitzer. "In fact, if we use personal and lease-personal registrations as an
indication of the consumer market, their market share dropped steadily from
73.5% in 1994 to 70.3% through the first half of 1998."
Historically, changes in registration share reflect change in the relative
out-of-pocket cost between options: purchase versus lease, and if leased, a
lease through manufacturers' captive finance arms versus banks or other
independent finance companies. More attractive offers generally result in
larger share.
Registration records show that manufacturer-sponsored leases (MSL) have
been substantially more popular than those from other sources and represent
the driving force for the growth in leasing. However, MSL share of the retail
lease market peaked at 79.8% in 1994. It declined steadily to 67.4% from 1994
to 1997, and rebounded slightly to 70.8% through June 1998. The improvement
year-to-date may be evidence of the more aggressive marketing efforts in the
Spring.
Despite aggressive marketing, there is additional evidence that it is
becoming more difficult to increase retail lease share. In fact, the data
through June of 1998 shows an actual decline in retail lease penetration when
compared to 1997 (Chart C). The likely reason is that the rate of growth in
manufacturer-sponsored retail leasing has been declining since 1994, from 3.8%
that year to 0.4% through June 1998. Other retail leasing organizations show
a similar decline since 1996.
"The moderating growth in leasing may be partly due to the fact that there
has been a marked shift in registrations between various vehicle segments,"
added Spitzer. "Registrations of large, midsize, basic economy and entry-
level cars are down, but every light truck and most of the top-end entries in
the 'luxury' or 'prestige' segment have shown gains."
The growing popularity of new light truck offerings with consumers --
particularly full-size SUVs, compact SUVs, mini SUVs, and compact pickups --
has also led to a change in the way these vehicles are financed. Retail
leasing in these segments has grown 2 to 6 times larger over the last five
years, far outpacing the average 1.73 times growth for cars (Chart D).
The implication is that the growth in leasing the last few years has been
driven primarily by the hot-selling truck segment. If these vehicles require
less marketing support, it could explain the changing relative share between
manufacturer and non-manufacturer leases. Many independent leasing companies
pursue leasing business on a product-by-product basis, concentrating on
individual models without factory lease incentives. Without these incentives,
manufacturer and non-manufacturer leases would look similar in the eyes of the
consumer. It would also tend to decrease the bias to leasing (often referred
to as "subventing") in the buy/lease choices offered to consumers.
Accordingly, given the evidence in the registration records, a case can be
made that the rate of growth in leasing has primarily been driven by
manufacturers' marketing strategies.
Based on the data, leasing growth is slowing. Manufacturers still account
for most of the growth, but their contribution to leasing growth is now
substantially less than it was in 1994. As manufacturers' leasing growth has
slowed, consumer share of leasing has slowed even more dramatically.
"Part of the reason may be the shift in consumer demand to more popular
truck-like vehicles, which require less aggressive marketing support," said
Spitzer. "It is possible that leasing's slowing rate of growth may reflect
consumers' changing perceptions of the value of leasing versus buying. With
less marketing support, the differences in payment between leasing and buying
have stabilized, causing lease share growth to slow and, potentially, peak."
Clearly, more buyers could be attracted to leasing by changing the
buy/lease equation: by offering better incentives for lease than for purchase,
for example. But this can get expensive, especially given the impact these
kinds of incentives have on used car prices in general, and off-lease vehicle
residuals in particular.
As the data shows, whether leasing will continue to grow at its prior pace
depends to a great extent on manufacturers' marketing strategies. By and
large, these strategies will be driven by the underlying strength of the
market and the continued popularity of truck-like vehicles. With nothing but
good news on both fronts, look for leasing share to peak soon.
Polk provides multi-dimensional intelligence information solutions to
companies as a statistician for the motor vehicle industry; as a
direct-marketing resource; as a supplier of demographic and lifestyle data and
database-marketing services; as a publisher of city directories; and as a data
enabler for geographic information systems. Polk is a privately held firm
with facilities around the world, including the United States, Canada,
England, Germany, and Costa Rica.
Has Leasing Peaked?
CHART A
NEW VEHICLE
REGISTRATIONS SHARE
1993 1994 1995 1996 1997 JUN98
Units 13,940,626 15,257,126 15,219,319 15,486,087 15,416,677 7,898,314
Personal 64.9% 61.3% 59.1% 56.0% 54.6% 53.0%
Lease 13.8% 18.3% 20.6% 24.1% 25.5% 25.3%
Rental 11.7% 11.1% 10.6% 10.6% 10.5% 11.9%
Other 9.5% 9.3% 9.6% 9.2% 9.5% 9.8%
Total 100% 100% 100% 100% 100% 100%
Source: Polk
CHART B
REGISTRATIONS
Retail 1994 1995 1996 1997 JUN98
Personal 61.3% 59.1% 56.0% 54.6% 53.0%
Lease - Personal 12.2% 14.1% 16.2% 17.4% 17.3%
Firm 4.4% 4.3% 4.1% 4.1% 4.3%
Lease - Firm 1.1% 1.2% 1.2% 1.4% 1.3%
Other 1.7% 2.0% 3.3% 3.4% 3.3%
Total 80.8% 80.8% 80.9% 80.8% 79.2%
Source: Polk
CHART C
Retail Registrations Y-O-Y Change
Lease Share Growth 1994 1995 1996 1997 JUN98
MSL 3.8% 0.9% 1.4% 0.6% 0.4%
Banks/Financial Inst. 0.5% 1.2% 1.7% 0.7% -0.5%
Independent 0.2% 0.1% 0.3% 0.2% -0.3%
Total 4.5% 2.3% 3.5% 1.4% -0.4%
Source: Polk
CHART D
ALL LEASE REGISTRATIONS SHARE OF SEGMENT
Segment 1993 1994 1995 1996 1997 JUN98
Fullsize Utility 9.7% 14.5% 17.4% 27.5% 41.7% 40.3%
Sport Utility 16.6% 25.0% 31.3% 39.3% 40.0% 35.6%
Compact Pickup 7.5% 10.0% 10.1% 18.2% 20.5% 25.6%
Mini Sport Utility 3.7% 6.6% 7.8% 19.1% 21.5% 23.7%
Total Cars 12.0% 16.8% 18.4% 20.5% 21.2% 20.8%
Total Light Trucks 8.7% 13.0% 16.6% 22.3% 24.8% 24.1%
Total Industry 10.7% 15.3% 17.7% 21.3% 22.8% 22.3%
Note: Numbers include passenger cars and light-duty trucks (GVW 1 & 2)
only.
Source: Polk