Better Consumer Targeting and Rising SUV Sales Should Lead To Greater Profitability For Honda
U.S. light vehicle sales rose by 6% in the month of October compared to October, 2013. However, the more striking data point to emerge from the October auto sales was that consumer spending rose by 8% in the month, according to figures reported by J.D. Power. [1] The rise in revenue outpaced the gains made in volumes as consumers have been shifting from lower priced sedans to expensive SUVs and crossovers. For the first ten months of the year, total consumer spending on new vehicles was $334 billion, putting the figure on course to surpass $400 billion for the first time ever. [1] Even though, total vehicle unit sales are still lower than those of five years ago or before the recession, and even compared to ten years ago, a trend towards larger and more expensive cars is driving the auto market.
Falling gas prices and aggressive year-end promotions by car manufacturers have nudged American consumers into buying more SUVs and crossovers. Sales of mid-size SUVs grew by 13% in November, while luxury SUV sales jumped by 17%. [2] On a year-to-date basis, sales of SUVs and crossovers have grown by close to 12%. It is into this sales environment that the fourth generation version of Honda’s CR-V entered in October. Strong sales of CR-V came as a huge sigh of relief for Honda, which had struggled in the first half of the year. North America is Honda’s largest market, making up more than half of Honda’s total car sales in a year. Consequently, Honda really needs its most important cars to do well in this market.
Improved Consumer Targeting
Ever since the car was launched in 1997, the CR-V has found buyers in the U.S. The compact SUV was one of the first cars to offer a combination of a four-cylinder engine, fuel-efficiency and sedan-like comfort. The fourth generation version of the CR-V retains those features but has been remodeled in several key ways to make it more attractive to the consumer demographic that represents its largest target audience. The new version is sleeker and more trendier looking but it also retains its utilitarian appeal making it attractive to young buyers, small families, and mothers. The 2015 version offers a number of features that attract these buyers, like wide doors, easily collapsible rear seats, conversation mirrors, adaptive cruise control, strong braking, and lane assist system. Fuel efficiency has increased by about 12%, allowing the car to run 27 miles per gallon on city roads and 34 on the highway. This puts consumers at ease because even though oil prices are low for the time being, they may not stay low forever.
CR-V Provides Sales Boost
In the month of October, Honda, along with Fiat Chrysler, contributed nearly 41% of the total gains made in overall revenues made by the auto industry. For Honda’s America division, the CR-V was the highest selling vehicle for the first time in over two years. The company delivered over 5,100 more CR-Vs than Civics in the month of October. The average price of a CR-V is 25,729 compared to Civic’s 19,597, therefore the higher presence of CR-V in its overall sales mix should boost the company’s margin. [3]
The year did not start nearly as well for Honda. In addition to car recalls that hurt the company’s brand image, falling sales put a dent in investor expectations for the company. Even so, the company did not cut its guidance of 1.8 million sales for the year. The guided figure would imply a 3% growth for the fiscal year and sales had fallen by 3% in the first half of fiscal 2015. The company was banking on several strategies to lift its sales and the CR-V refresh was just one of these. Previously, the CR-V has made up about one-fifth of the total car sales in the U.S. Through November, Honda had sold about 302,000 CR-Vs, comprising 24% of its total sales in the U.S. In October and November, CR-V sales grew by 30% and 38% compared with year-ago levels. Considering that the U.S. auto industry sales are expected to surpass 17 million units in 2015 and the SUV/compact crossover segment is still growing, the CR-V sales momentum could continue well into the next year. Additionally, considering the slightly higher pricing of the CR-V, rising sales could add a significant amount to the company’s bottom line. If we assume the base price of the CR-V LX model is $24,150, the November sales boom alone would add more than $200 million to Honda’s bottom line.
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- Sales are up and the mix is rich, Automotive News, November 2014 [↩] [↩]
- Auto Sales, WSJ Market Data Center [↩]
- Sales are up and the mix is rich, Automotive News, November 2014 [↩]