Why car leasing is still broken

Hey, everyone. What a week it’s been here at Car Dealership Guy HQ. My family welcomed a happy, healthy little Car Dealership Baby Sunday morning, and we’re feeling really lucky. At least now I’ll be losing sleep for a different reason than the auto affordability crisis, right? Thanks for all the love and support. ❤️

P.S. This is my last normal edition of the CDG newsletter for 2023. I’ll be back in your inbox with something special next week, and I’ll see you back here for more insights and analysis into what’s driving the automotive industry in the new year.

—CDG

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Today’s Biggest News

Can Leasing Trends Predict the Auto Industry’s Future?

The recovery of new car leasing to pre-pandemic market penetration is taking longer than expected. But…? There’s more here than meets the eye. Let’s unpack what’s going on in the leasing space.

First, the numbers:

• Pre-pandemic, new car leasing accounted for 25–30% of all retail transactions. In fact, market penetration was as high as 53% in the luxury sector.

• But the pandemic brought a slowdown in new leases to as low as 17%. And the recovery has taken its time—recent data from S&P Global Mobility and TransUnion suggests that leasing penetration has barely recovered from its pandemic low at just 20% for CYTD 2023 through September.

• And get this: Nearly half of lease returnees opted to lease again in 2019. But that share dropped to 28% in 2022 thanks to a lack of significant difference in payments between leased and owned vehicles, qualification difficulties, and unpredictable residual values caused by market volatility.

So what happened to leasing? A lack of incentives and rising interest rates certainly played a part, but a lot of it boils down to the inventory crisis of 2021 (there’s a story I’ll tell the kid some day). Think about this chain reaction →

1. New vehicle inventories dropped sharply following supply chain issues and a global chip shortage.

2. Inventory mark-ups rose across the board while consumer incentives disappeared. After all, manufacturers and dealers preferred a profitable purchase instead of a signed lease for the little inventory they had to offer.

3. Consumers weren’t in the best position to negotiate, meaning relatively few saw leasing options at dealerships. Leasing became an afterthought. 

And that brings us to today.

Why this matters: Because lessees, especially first-time lessees, offer long-term value to dealerships—they have a ton of potential to become returning customers for everything from new leases to certified pre-owned (CPO) sales. FYI—typically, nearly two-thirds of lease households return to market within 36 months (compared to 51% of purchase households).

Translation? Both dealers and manufacturers need to pay attention to leasing trends…because they’re shifting.

As inventories stay steady, strike impacts and supply chains normalize, and consumers regain their footing at the negotiating table, leasing is potentially poised for a comeback. One key element to that increase in leasing momentum, though? Manufacturers.

“Leasing will be in vogue again when manufacturers want it to be, because leasing and lending incentives are determined by inventories,” Satyan Merchant, senior vice president for the automotive line of business at TransUnion, told S&P Mobility. “It's like the iPhone: People want a new vehicle every few years and they can get that through auto leasing.”

Enter: Honda, which just announced a certified pre-owned leasing program aimed at young buyers. The details:

• U.S. customers can choose CPO vehicles from 2018 to the current model year.

• Honda is billing this as a cost-effective alternative to buying/financing a new vehicle, especially given the current affordability crisis. Keep in mind: The average monthly lease payment in Q2 of this year was $586—the average monthly loan payment was $729, according to Experian.

So are leases expected to skyrocket? Hard to say.

On one hand: Experian predicts retail leasing returns will rise to 1.1 million in Q2 of 2024…but then fall to only 640,000 by the end of that year. Their POV is that the decline will continue through 2025, mostly because we’ll be at the three-year mark of the 2021 inventory glut (and most leases last three years—so holdovers from that drop in leases 36 months ago could still impact the market into 2025).

On the other hand: Leasing could increase gradually, especially if interest rates decline and pricing volatility goes away (that would allow residual values to be more accurately predicted). And for what it’s worth, it’s possible that manufacturers ramping up production face pressure to get rid of any overproduced units…meaning a potential increase in incentives (and leases) for those models.

Also worth noting: There are plenty of really smart people who think the future of mobility is shared and flexible-access models—think pay-per-use setups or monthly subscriptions. Leasing could be one way to inch closer to that Jetsons reality without totally upending generations of private vehicle ownership. Could that change in mobility needs increase the share of drivers who choose to lease? Hard to say, but certainly worth keeping an eye on.

This Week’s Episode of the CDG Podcast

Want an absolute car business masterclass? Listen to this episode of the CDG Podcast with Darryl Kenningham, CEO at Group 1 Automotive. With 205 dealerships worldwide, Darryl has built a $4+ billion business. And he spills it all, from making millions on parts & service to the economic concerns he’s really paying attention to. You don’t want to miss this one.

Listen to the episode here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts. And thank you to Cars Commerce and Dealer Image Pro for making this episode possible.

Important: What Newsletter Content Do You Want?

This is your chance to influence the content of this newsletter for 2024 (yes, really). If you haven’t already, click here to tell me what you’d like to see in future editions. Takes <30 seconds.

In Other News

What will 2024 bring for the automotive industry? I read through the biggest, boldest reports so you don’t have to. Here are the major trends that lots of people are thinking about:

2024 is about tech. We’re talking personalized driver experiences, more over-the-air updates, and improved digital tools for the buying experience, too (did you know: 59% of car buyers prefer using digital tools provided by dealerships).

Tech will take hold at the manufacturer level, too. Already, more than 70% of the manufacturing CEOs who have implemented AI have seen a “significant return on investment” in areas such as supply chain management and procurement, according to Xometry’s Q4 CEO Sentiment Survey.

The theme for EVs is more. Here’s what Cox had to say about 2024:

• “The industry will fully come to terms with the fact that the average consumer has to be sold on the merits of going electric, and many won’t be easily convinced.”

• “But with more models, more incentives, more discounting, more advertising, and more sales muscle, we still believe more sales will follow, with EV sales in the U.S. in 2024 topping the more than 1-million-unit record set in 2023 and accounting for more than 10% of total sales.”

And because I know you’re curious: Cox thinks Tesla will keep growing volume…but lose overall market share.

The end of the seller’s market is near. There are lots of factors driving this one—inventories are back up, interest rates are likely either holding steady or coming down, and pricing pressure could give way to more incentives.

While that’s great news for potential buyers, it’s tough for dealers—earnings are expected to dip in 2024 as the normalization from recent highs continues to tip scales in favor of consumers.

I’m curious: What are you expecting for 2024? Hit reply and tell me what you think the big themes will be.

Overheard at the Dealership

This just in via my DMs: 

My take: As I stated in my recent post, I believe dealership employee turnover will rise to the highest level in four years over the next 90 days. The message I received above is a prime example of how people over-extended their lifestyles over the past couple of years, and are now having to readjust back to reality.

The Backlot

• December started with new vehicle inventory at the highest level since early spring of 2021. Supply surpassed 2.5 million units and 71 days for the first time in two years.

• Ford will cut output of the electric F-150 Lightning pickup in half next year because of "changing market demand.”

• CEO Mary Barra said GM still plans on moving to all-electric vehicle sales by 2035.

• Is anti-drunk-driving technology really coming to new models? It’s a possibility.

• Tesla has the highest accident rate of any automotive brand, according to new data from LendingTree.

Thanks for reading. And if you’re still looking for the perfect Christmas gift for that special someone in your life…Hagerty just released its list of the 10 best collector cars to buy right now.

You’re welcome.

—CarDealershipGuy

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