According to the most recent industry data, vehicle leases accounted for 34% of all new car retail sales in March 2019, making it the highest rate ever. This sounds like good news for dealers, but what are the larger implications for the auto retail industry? On today’s show, we’re pleased to welcome back Matt DeLorenzo, Senior Managing Editor for Kelley Blue Book. Matt is here to discuss this leasing boom, what it means for your dealership, and what it means for the industry as a whole.
To hear all about this influx of leased vehicles and what it may hold for the future of the automotive industry check out the full interview above.
VIDEO TRANSCRIPT:
Jim Fitzpatrick:
Hi, everyone. Thanks very much for joining us on another edition of CBT News. According to the most recent industry data, vehicle leases accounted for 34% of all new car sales in March 2019, making it the highest rate ever. This sounds like good news for dealers, but what are the larger implications for the auto retail industry? On today’s show, we’re pleased to welcome back Matt DeLorenzo, senior managing editor for Kelley Blue Book. Matt is here to discuss the leasing boom, what it means for your dealership, and what it means for the industry as a whole. Welcome back to CBT News, Matt.
Matt DeLorenzo:
Great to be here.
Jim Fitzpatrick:
Great. So, let’s jump right in. Why is leasing on the rise?
Matt DeLorenzo:
Well, if you look, average transaction prices are reaching record levels. The average vehicle costs over $37,000. These more expensive vehicles mean that people are shopping monthly payments, and the one way to keep monthly payments in check is through leasing.
Jim Fitzpatrick:
Yeah, for sure. I don’t know where we’re going to go as an industry with a $37,000 average price of a car, right? It’s crazy.
Matt DeLorenzo:
Right, and we’ve seen it. Traditionally, leasing has been a province of luxury makes.
Jim Fitzpatrick:
Right.
Matt DeLorenzo:
Some makes that have over 70% leasing at the high-end, but now we’re seeing increasingly more mainstream vehicles, especially trucks, SUVs, crossovers. They’re getting more expensive. People are coming out of less expensive cars, and to make that move, a lot of them are switching from outright purchases to leases.
Jim Fitzpatrick:
Sure. Is this a good thing or a bad thing for the industry, overall? I remember as a dealer, I used to love putting my customers in leases because it gave me, both, a pretty decent gross profit on the front end when we’d lease a vehicle, or at least if it was a subvented-type lease, the manufacturer would let you make a little bit of money, not a whole lot, but I could be assured of one thing, and that was that customer is right back in my showroom looking for a vehicle in 36 months. Is that still the case?
Matt DeLorenzo:
Exactly. Yeah. You have a real opportunity to build consumer loyalty with leases, and then you also get help from the manufacturers. There are some pull ahead programs, or there may be some programs where the person likes the car, wants to stay in it a little bit longer, and you extend the lease. But more importantly, we’re seeing a lot of these vehicles as a tremendous source of lower mileage, late model, certified pre-owned vehicles. Those have turned out to be a terrific profit center for dealers. The best way to manufacture these are to get people in the short-term two and three year leases.
Jim Fitzpatrick:
That’s for sure. There was always, like, a used car lease out there floating around. It never seemed to take much traction or get much traction going, but today, with the technology in cars lasting so long and just incredibly durable, I wouldn’t feel bad about leasing a two-year-old vehicle. Does that seem to be out there today?
Matt DeLorenzo:
Well, some manufacturers are experimenting with it. I think Toyota has a program. I’ve seen some of these leases. I prefer to think that the model is changing a bit. The initial buyer of a vehicle may not… Most of them won’t purchase it. Most of them will lease it. Most of the people who really want to buy and own a car will buy a low mileage CPO car because if you think about the psychology of buying a car, you want to keep it five, six, seven years, you want to own it as an asset, and you may put on more miles a year than the lease gap. So, there’s still a big market for people who want to outright purchase vehicles. CPO is probably the way they’re going to go for that vehicle, if the prices continue to climb as they have.
Jim Fitzpatrick:
Much like the EV industry where everybody has this anxiety over the life of the battery. Am I going to get stuck 200 miles out? What’s that all about? I think the same holds true on allowable miles on a lease where somebody says, “Well, I already hit my number for the month, and it’s the 15th. I’m not going to drive my car because it’s going to be 25 cents a mile for every place that I go.” A, what can be the solution to that? Are we going to ever see a real lease that says, “Hey, you can drive 15-20,000 miles a year, or maybe 18,000 miles a year, and it’s built in the price of the vehicle?”
Matt DeLorenzo:
Well, you might see that, but I think that the pressure with CPO keeping the miles down and keeping the value in the car, that will always remain. I do see, though, the subscription model where you may pay a higher price, but you’ll have access to several vehicles, and then that mileage cap may be less of a problem there because you’re going to be driving a variety of vehicles. The dealer may want to manage those vehicles in that way, that they give that consumer that kind of choice and make them pay for it.
Jim Fitzpatrick:
Sure. We heard, back two-three years ago, I think it was 2016 that this study came out that there’s some four million vehicles coming off of lease, and everybody is going to be panicked about it, and how are we going to absorb that in the marketplace? What’s it going to do to used car prices? What’s it going to do to new car sales, because dealers will have all of these?
Matt DeLorenzo:
Right.
Jim Fitzpatrick:
That was kind of like an element that just kind of petered out. It was like, what’s going to happen when the clocks strike the year 2000? Y2K is what I was looking for, but it was just like…
Matt DeLorenzo:
Yeah, I think so.
Jim Fitzpatrick:
… nothing really seemed to-
Matt DeLorenzo:
I think the underlying strength of the economy… There’s still a lot more of used cars sold every year than new cars.
Jim Fitzpatrick:
Right.
Matt DeLorenzo:
Also, we went through a period in ’08 through ’10 where sales dropped 40%. That means that there were 40% fewer used cars of that vintage up there. So, the market is strong. A lot of this, excess vehicles now, have been absorbed by the market. Going forward, I don’t know. I can’t be that confident about it, but what I see for the manufacturers is that they’re very consciously working to try and manage these fleets out there so that they don’t get a glut on the market at the same time.
Jim Fitzpatrick:
Right.
Matt DeLorenzo:
Another interesting factor… I was talking to the people from Volvo. One of the things fueling their subscription plan is the fact that they can also manage their vehicles by having that one year turn in. Let’s say I’ve had the car. I got to commit to two years under the Volvo program.
Jim Fitzpatrick:
Right.
Matt DeLorenzo:
But after, I can say, “Well, I want to move from an XC40 to an S60.” They’ll let you do that. You got to commit for another two years, but now they have a one-year-old car that they retail as a CPO unit. So now, taking sort of a continuum from daily rental subscription, leasing, and purchasing. I think it’s a smart way to go in terms of managing the life of the vehicle.
Jim Fitzpatrick:
That’s right. Now we’ve got companies like Vroom and Carvana that are out there delivering late model used vehicles directly to one’s door through kind of a digital signature, if you will, and it really is amazing. I think the dealers that are out there, if they don’t take notice and jump on this digital retailing program, they’re going to be left behind in a big way. Would you agree?
Matt DeLorenzo:
Yeah, I think so. I think the thing is, the goal really shouldn’t be sell all cars digitally because I really believe that you do need that human interaction. Buying a car is still an emotional decision as much as it is a rational decision, and service is such a big part of the ownership experience.
Jim Fitzpatrick:
Sure.
Matt DeLorenzo:
I think that having that relationship with a dealer is going to become more important, rather than less important as time goes along because cars are getting a lot more complicated. Even just having somebody sit down and walk you through how your car works is a very important element of the ownership experience.
Jim Fitzpatrick:
Sure. We spoke to one dealer, large group, 15 stores in their group, and the father, which we interviewed on Tuesday, said that he’s 65-years-old and he still believes that the great majority of the buyers out there still want to come in to the pretty dealership, and kick the tires, and test drive the car, and experience what the dealership has to offer. So, he really wasn’t too concerned about digital retailing taking things over.
Jim Fitzpatrick:
The next day, we spoke to his 30-year-old son, who is a general sales manager, and unbeknownst to what dad said, he said, “Well, I really believe that in today’s buyer, they don’t want to come in to the dealership, and they don’t want to sit around, and they don’t want to experience some of the negativity that goes along with buying a car. They just want to pick up their phone, hit an app, say, ‘Yes, this is the car that I want,’ with a 10 day return policy. If they made a mistake and, like Amazon, have it delivered right to them.” I thought it was very interesting that you had father and son of two different generations, and they saw the issue before them in completely different goggles.
Matt DeLorenzo:
I see them as both being right. Excuse me.
Jim Fitzpatrick:
That’s a good point.
Matt DeLorenzo:
The whole internet part of it should smooth and speed the dealer experience. They’re not mutually exclusive.
Jim Fitzpatrick:
Yeah, you’re right.
Matt DeLorenzo:
I think the more information that you can get online before the person even steps into the store… The thing that people don’t talk about is getting the buyer’s expectations in line. Here at Kelley Blue Book, we do evaluations. Everybody thinks that their used car is worth more than what it actually is.
Jim Fitzpatrick:
Imagine that.
Matt DeLorenzo:
[crosstalk 00:09:59] the values with other cars, you get their expectations in line of what they can reasonably expect to get at the dealership. They can reasonably expect to pay… They’re not going to pay way under the dealer’s cost. I mean, the dealer has to make a buck. So, getting those expectations in line will smooth the process along, and it helps, both, the dealer and the customer. I tell people, “Dealers are happy and eager to work with people who have done their homework,” because they know they’re working with somebody who has their expectations in line.
Jim Fitzpatrick:
Well, Matt DeLorenzo, senior managing editor for Kelley Blue Book, I want to thank you so much for joining us on CBT News. This has been great and certainly something dealers need to pay attention to, is that leasing and where it’s going to affect their dealership and where we’re going to go in the future with this, right? Could be, one day, we turn around and we’re talking to you and it’s 50% of the market out there, right?
Matt DeLorenzo:
Never know.
Jim Fitzpatrick:
That’s right. Well, thanks again. I appreciate your time.
Matt DeLorenzo:
Thank you.
Announcer:
CBT Automotive Network, the number one most-watched network in retail automotive. This has been a JBF Business Media production.
