2012 Special Analysis: Luxury Brand Trends and Used

2012 Special Analysis:
Luxury Brand Trends and
Used Price Forecast
At a Glance
How luxury brand demand in the new market is
affecting used prices
Which luxury brands have seen used prices
improve the most
A used luxury price forecast through 2012
Predictions for used luxury supply through 2014
An assessment of luxury brand incentive spending and
new vehicle demand
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
Introduction
Both the new and used vehicle markets have steadily recovered from the abyss
that was 2009. New vehicle sales have grown by an average of 11 percent every
year since then, and used vehicle prices have appreciated by a total of 19 percent
over that period.
While conditions and sales results have improved for the market as a whole, luxury
brand progress has lagged behind that of its mainstream counterparts. From 2009
to 2011, for example, new vehicle sales grew 23 percent for mainstream brands
and 20 percent for luxury brands. And last year, mainstream and luxury brand
sales grew by 11 and 4 percent, respectively, compared to 2010.
The slower recovery rate for luxury sales is not surprising, considering the $6.7
trillion loss in household and nonprofit net worth since 2007 and the resulting shift
in consumer demand away from unsustainable exuberance. Throw in ownership
changes (Jaguar, Land Rover, Volvo), bankruptcies (Hummer, Saab) and natural
disasters (Acura, Infiniti, Lexus), and one could argue that luxury brands have
suffered more than others these past few years.
Despite these challenges, or perhaps because of them, a select few brands have
naturally cultivated consumer demand and experienced growth in used vehicle
prices and new market share. Other brands have had a tougher time keeping up
because of product-related deficiencies in the areas of availability, broad-based
appeal and advanced age.
In this special report, NADA analyzes used vehicle price trends as they relate to
recent luxury brand performance, and what to expect going forward.
USED VEHICLE MARKET
Used Price Trends
Used vehicle prices have risen over the past couple of years, due to economic
conditions that lowered supply and strengthened demand. In the luxury sector
alone, used prices grew by nearly 22 percent from 2009 to 2011, with appreciation
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
across brands ranging from a
low of 14.7 percent for Volvo,
to a high of 29 percent for
Mercedes-Benz.
Luxury Brand Used Price
Movement 2009–2011
Vehicles up to 5 years in age
Acura
We’ve also seen a convergence
in prices over the past few
years, due to increased parity
in new vehicle quality, design
and, ultimately, consumer
demand. While this trend is
common across segments,
we’ll use the competitive
luxury compact car segment
to illustrate it.
Audi
BMW
Cadillac
Infiniti
Lexus
Lincoln
Mercedes-Benz
Volvo
Luxury Sector
0
5
10
15
20
25
30
Percent Change
Prices grew by nearly 22 percent from 2009 to 2011.
Source: NADA
Luxury Compact Sedan Price
Compression
Annual trend in Average Wholesale
Price: Compact Luxury Cars
By making adjustments to mileage and
mix in the underlying data, we're able
to view prices in an “apples-to-apples”
fashion. This way, the price differences
we see are more reflective of market
demand and not of changes in model
mix, average mileage and so on.
Vehicles up to 5 years in age. Mileage & mix adjusted.
Acura TL
Audi A4
BMW 3 Series
Mercedes C Class
Infiniti G
Volvo S60
Lexus ES
Lexus IS
Lincoln MKZ
Segment Avg
$26,000
$25,000
Adjusted Average Price
$24,000
$23,000
$22,000
$21,000
$20,000
$19,000
$18,000
$17,000
$16,000
$15,000
$14,000
2009
2010
2011
2012
Year
Most prices have become more compressed over time.
Source: NADA
As shown in the chart, the annual
increase in prices for the majority
of models is immediately apparent.
Upon closer review, we also see
that most prices have become
more compressed over time; this is
especially noticeable when we remove
2010
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
NADA New Vehicle Demand Indices
Audi, Lexus and Lincoln
Audi
Lexus
Lincoln
220
200
Demand Index (2010 =100)
180
160
140
120
100
80
60
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Month
Audi is in high demand in a luxury segment that is showing both positive and
negative momentum.
Source: NADA
2011's natural disaster results. And
the compression makes sense,
considering trends in the new vehicle
market. For brands in high demand,
such as Audi, used prices have come
closer to those of segment leader
Lexus, while the position of lowerdemand brands such as Lincoln
and Volvo has weakened. We can
clearly see the pronounced rise in
demand for Audi and the steep drop
in demand for Lexus and Lincoln
in the chart showing NADA’s new
vehicle demand indices. In essence,
momentum — both positive and
negative — is carrying over from the
new market into the used market.
2012 Used Price Forecast and Supply Expectations
NADA predicts that used luxury prices will rise again over the course of the
year, but that growth will be substantially less than 2011’s 9 percent increase.
Specifically, NADA predicts that luxury sector prices will appreciate by a mild
1.9 percent on an annual basis and that the majority of this growth will come
from a 13 percent drop in overall used luxury supply.
NADA’s brand-level forecasts — ranging from a drop of 3.1 percent for Volvo, to
a 4.8 percent increase for Acura — are based on assumptions for new vehicle
prices, gasoline prices and other economic factors, as well as the influence of
both brand and market-level supply.
This means that brands exposed to segments of extreme supply scarcity will
experience more price support than they would solely from falling brand supply.
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
2012 NADA Used price
forecast: luxury brand
Year-over-Year change in used luxury brand prices. Vehicles up to
five years in age.
6.0%
4.8%
5.0%
Percent Change From 2011
4.0%
3.3%
2.6%
3.0%
2.0%
1.5%
1.0%
1.9%
1.6%
0.7%
0.5%
0.0%
-0.2%
-1.0%
NADA projects that
supply will fall by 13
and 5% in 2012 and
2013, respectively,
before increasing by
7% in 2014.
For example, Cadillac prices will receive added
help from falling supply because the brand’s
product mix is heavily skewed toward large cars
Brand
and trucks — two segments where market
Forecasts are based on assumptions for new vehicle prices, gasoline
supply is projected to be particularly scarce.
prices and other economic factors, as well as the influence of both
Conversely, price growth will be tempered for
brand and market-level supply.
brands with significant compact car and compact crossover
Source: NADA
exposure (e.g., BMW and Mercedes). This is especially true
for the latter segment because it is one of only two whose
NADA Used Supply Forecast:
Luxury brands
supply is projected to grow over the coming year (subcompact
Vehicles up to 5 years in age
cars being the other).
-2.0%
-3.0%
-3.1%
vt
ACURA
AUDI
BMW
CADILLAC
INFINITI
LEXUS
Brand
CY 2012
CY 2013
Acura
-20%
-8%
4%
Audi
3%
13%
15%
BMW
-8%
-3%
7%
Cadillac
-16%
-7%
14%
Infiniti
-10%
0%
10%
Jaguar
-15%
-3%
8%
Land Rover
-24%
1%
20%
Lexus
-16%
-12%
2%
Lincoln
-20%
-11%
-1%
LINCOLN
MERCEDESBENZ
VOLVO
LUXURY
SECTOR
CY 2014
Mercedes-Benz
-5%
0%
9%
Porsche
-14%
-9%
14%
Volvo
-21%
-10%
13%
Luxury Sector
-13%
-5%
7%
Predictions for Used Luxury Supply
NADA anticipates another year and a half of losses before
used luxury supply swings back up again. Specifically, NADA
projects that supply will fall by 13 and 5 percent in 2012
and 2013, respectively, before increasing by 7 percent
in 2014. NADA also expects that Audi will be the lone
brand to see supply lift in 2012, and that only three other
brands — Infiniti, Land Rover and Mercedes-Benz — will
see supply grow or go unchanged in 2013.
NADA anticipates another year and a half of losses
before used luxury supply swings back up again.
Source: NADA
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
Although
NADA predicts
another
year of mild
appreciation in
2012, there is
downside risk
heading into
2013.
Although the upturn in overall supply is still
some ways off, shorter-term off-lease supply
is set to improve much sooner. In fact, NADA
estimates that 36-month off-lease supply is
already on the rise, and that supply for these
units will be 9 percent higher in the second
half of the year than it was in the first.
Although NADA predicts another year of mild
appreciation in 2012, there is downside risk
heading into 2013 because the rate of growth
for short-term off-lease supply will pick up
appreciably. In addition, the level of risk will
increase in the latter half of 2013 and early
2014, as overall used supply is expected to
reach a trough and begin to rise again.
NADA Used Supply forecast: luxury Brands
Total supply and off-lease supply projections for 24–48 mo. lease term
24
36
48
Total Supply
20
145
18
140
14
135
12
130
10
8
125
6
4
Total Supply
(Number of Units)
Off-lease Supply (Thousands)
16
120
2
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Return Month
Shorter-term off-lease supply is set to improve much sooner than overall supply.
Source: NADA
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
Once supply begins to grow,
used prices —currently at
historically high levels for
the majority of brands — will
likely give back a portion of
the gains realized over the
past few years. That said, the
gradual increase in supply will
most likely translate into an
orderly retreat in prices rather
than a sharp, precipitous drop.
NADA USED PRICE INDEX: LUXURY BRANDS
Vehicles up to five years in age, seasonally adjusted
Audi
BMW
Cadillac
Lexus
Mercedes
Luxury
Sector
Lincoln
Mainstream
Sector
140
Index Value (January 2010 =100)
130
120
110
100
90
80
70
60
NEW VEHICLE MARKET
50
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New Vehicle Sales
Last year’s natural disasters
in Japan radically influenced
Used prices are at historically high levels for most brands.
overall market performance
Source: NADA
for all manufacturers, as stymied Japanese production presented an opportunity
for unaffected brands to disproportionately increase sales and market share.
This year’s market is arguably a better barometer by which to gauge consumer
demand for new luxury vehicles overall, as well as demand for particular luxury
brand products.
Return Month
At a market level, overall luxury sales through
April grew by 5 percent, relative to the same
period of time last year. Sales improved by 16
to 24 percent for BMW, Audi, Jaguar, MercedesBenz and Land Rover, in that order, while sales
for Porsche and Lexus grew by 4 and 3 percent.
Sales for Acura, Lincoln, Volvo and Infiniti
have either remained flat or decreased by as
much as 4 percent, while Cadillac’s losses far
outpace the rest of the field at 24 percent.
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Overall luxury
sales through
April grew by
5% in 2012.
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
In terms of market share, the big
German brands continue to add to
their overall market exposure, while
U.S. brands and Volvo have all seen
their shares diminish.
Luxury Brand Market Share
2011
2012 YTD
% Change
20.0%
1.0%
18.0%
0.5%
Luxury Market Share
0.0%
14.0%
ACURA
AUDI
BMW
CADILLAC
INFINITI
JAGUAR
LAND
ROVER
LEXUS
LINCOLN
MERCEDES- PORSCHE
BENZ
Year-Over-Year Percent Change
While many factors have affected
luxury brand success so far this
12.0%
-0.5%
year, the primary influence is
10.0%
-0.1%
8.0%
the combination of new product,
6.0%
-1.5%
appealing design and perceived
4.0%
-2.0%
brand excellence. Perhaps no luxury
2.0%
-2.5%
0.0%
manufacturer better demonstrates
the positive impact of design
Brand
than Audi. From cars to trucks,
the brand’s design language and
The big German brands continue to add to their overall market exposure, while
interior appointments conjure
adjectives such as “aspirational”
U.S. brands and Volvo have all seen their shares diminish .
Source: NADA, Global Insight
and “premium.” And, as mentioned
earlier, demand for the brand’s product is growing at an impressive rate. This is
further evidenced by the fact that Audi is the only luxury brand to have increased
market share in each of the past seven years.
16.0%
VOLVO
Conversely, most brands that have generally underperformed could use a new
product infusion. This includes Cadillac and Lincoln, each of whom can’t get
planned new product (e.g., Cadillac ATS, Lincoln MKZ) to market fast enough.
Trends in Luxury Leasing
Historically, luxury manufacturers have been particularly reliant on leasing, in
large part because it satisfies the driver’s preference for a shorter replacement
cycle.
In the three years leading up to 2009, luxury brand lease penetration — or
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
the share of new vehicle leases as a percentage of total retail registrations —
averaged 46 percent, per R.L. Polk data. This means that lease originations
accounted for nearly half of all new vehicle transactions for luxury brands over
this period. The market turmoil of 2009 abruptly changed things, however, and
the lease rate fell nine points from the previous three-year average to 39 percent.
Lease Penetration Rates
New vehicle leases as a percentage of total retail sales through March 2012
2008
2009
2010
2011
2012 (YTD)
70%
Lease Penetration Rate
60%
50%
40%
30%
20%
10%
0%
ACURA
AUDI
BMW
CADILLAC
INFINITI
JAGUAR
LAND
ROVER
LEXUS
LINCOLN
MERCEDES- PORSCHE
BENZ
VOLVO
LUXURY
SECTOR
Brand
Lease penetration has risen back to pre-recession levels.
Source: NADA, R.L. Polk
Since then, lease penetration has risen back to pre-recession levels. Last year
the lease rate hit 45 percent, and the rate stood at 44 percent through the first
quarter of this year. Clearly improving economic conditions and strong used
prices have made the future risk associated with end-of-term residuals more
palatable for manufacturers.
When looking across brands, certain trends stand out, including the relative
consistency in lease penetration for BMW, Lexus and Mercedes, as well as the
decline in penetration for Audi. The rise in leasing for Infiniti is also noticeable,
as is the brand’s current luxury sector-topping rate of 60 percent.
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
While leasing at reasonable levels can be profitable for manufacturers and
provide dealers with much-needed used inventory, as we’ve seen in the past,
an over-dependence on leasing can have a detrimental impact on used value
retention — because prices become depressed when a glut of supply hits the
market. At a market level, current penetration rates don’t cause much concern
over future used price performance. But the distinct spikes at the brand level
portend softer used prices when the models responsible for the increases hit
the secondary market in large quantities three years down the road.
Incentive Spending
While mainstream brands have chipped away at profit-eroding incentives over the
past few years, the same can’t exactly be said of their luxury counterparts. Per
Autodata, mainstream and luxury brands reduced average incentive spending
by 9.4 and 7.5 percent, respectively, from 2008 to 2011 — but when we look at
monthly incentive spending, we see that luxury brands changed course over the
second half of 2011, while mainstream spending continued to trend downward.
Average incentive spending
Luxury v. mainstream brands
Luxury
Mainstream
$5,000
$4,500
Average Incentive Amount
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
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$1,000
Month
Luxury brands changed course over the second half of 2011, while mainstream spending
continued to trend downward.
Source: Autodata
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
Luxury brand incentives
Average dollar amount and percent change from prior year*
Total Incentive Spending
Brand
2011 Average $
2012 Average $
2011 v. 2012
Acura
$2,384
$3,028
27.0%
Audi
$2,685
$2,932
9.2%
BMW
$3,371
$3,630
7.7%
Cadillac
$4,934
$3,949
-20.1%
Infiniti
$3,825
$4,596
20.2%
Jaguar
$4,046
$4,757
27.2%
Land Rover
$1,076
$982
-8.8%
Lexus
$1,899
$2,867
51.0%
Lincoln
$4,120
$5,048
22.5%
Mercedes-Benz
$3,353
$3,580
6.8%
Porsche
$1,508
$2,703
79.2%
Volvo
$2,125
$2,018
-5.0%
Luxury Sector Avg
$3,283
$3,500
6.6%
*Through April
Nine of the 12 brands tracked have increased incentives year-to-date.
Source: NADA, Autodata
So far the growth in luxury brand spending
has carried over into this year. Nine of
the 12 brands tracked have increased
incentives year-to-date and, as a result,
overall spending is up by 6.6 percent. By
comparison, mainstream brands have
reduced spending by 1 percent.
When reviewing incentives at the brand
level, we see that Japanese brands Acura
and Lexus are ratcheting up spiffs after
years of under-spending by the market as
a whole. Infiniti, too, has pushed spending
higher, and the brand’s $4,600 year-to-date
average is third highest among luxury brands.
The growth in Japanese brand spending
is understandable, considering the sales
lost last year and because market leaders
BMW and Mercedes, and ascending Audi,
continue to carve out larger portions of the
sales pie.
Lease subvention has long been the most widely employed form of incentive for
luxury brands, and this year is no different. In fact, with a year-to-date increase
of 23 percent to an average of nearly $6,350 per unit, luxury brands are relying
more on lease subvention this year than they have since 2008. As alluded to
in the previous section, leasing is taking on an increasingly prominent role in
luxury brand strategy.
Lease allocation aside, the growth in total incentive spending has been offset
by rising MSRPs, which means that incentives are not artificially boosting
volume (i.e., sales) because net prices are either holding steady or increasing.
This is clearly evident when we combine NADA’s new vehicle demand index
with new vehicle sales and incentive data. Remember that NADA’s demand
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
indices measures shifts in demand across time by reflecting the number of
units consumers were willing and able to purchase, had the price remained
constant. In simpler terms, these indices remove the influence of price changes
— including incentives — on sales so we can better determine the actual
direction of demand.
In the final figure, we see that prior to 2010, new luxury demand lagged actual
sales because lower prices — i.e., static or falling MSRPs, combined with high
incentives — supported sales. Beginning in 2010, however, we see that sales
and demand converge into more of a balanced state, which is a trend that has
carried through to today.
In short, demand for luxury vehicles in general continues to legitimately improve,
and the boost in incentives isn’t masking an underlying softness.
NADA New Vehicle Demand index
New luxury sales, demand and total luxury incentive spending. Six month rolling average.
200
$4,750
Luxury Sales
Total Lux Incentive
175
$4,250
150
$3,750
125
$3,250
100
$2,750
Total Incentive Spending
Demand & Sales Indicies (January 2010 =100)
Luxury Demand
Turning Point: Q3, 2013
Incentives are up, but so is demand.
75
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$2,250
Month
The 2010 convergence of sales and demand carries through to today.
Source: NADA, Autodata
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
SUMMARY
Although the year is only halfway over, recent luxury brand trends in the used
and new vehicle markets yield several key points:
The heightened level of competition in the new vehicle market is transferring
over to the used market, and each redesign and new model introduction
narrows the degree of separation between models within a competitive set.
Luxury manufacturers have turned back to incentives to protect or promote
new market share, but we’ve yet to see new demand and actual sales move
out of alignment because of it.
Lease subvention is on the rise, but at this point it’s too early to tell if future
used retention is unduly threatened because of it.
Falling used supply will help raise used luxury prices again this year, but
overall appreciation will be mild by recent standards.
For the first time in years, downside price risk is on the horizon — due to
off-lease growth in 2013 and total used supply growth in 2014.
Regarding the last point, the questions of primary importance are just how much,
and how quickly, used prices will fall. We’ve already expressed the opinion that
the anticipated growth in used supply will see used market prices gradually fall,
and we can generate forecasts to validate this assumption. But as we’ve seen,
product competition in the luxury market is more ardent today than it has been
at any other time in recent memory, and this intensity will only increase with
each new model or redesign brought to market. As a result, consumer demand
will continue to be more dispersed across brands, and manufacturer reaction
to promote growth or protect share will play a critical role in determining the
degree of used price change.
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2012 Special Analysis: Luxury Brand Trends and Used Price Forecast
Unreasonable production targets or excessive subvention will add weight to
expanding used supply and increase the pitch of depreciation, while a more
disciplined new market approach will better preserve the price gains realized
over the past few years. As of this time, it appears that the luxury sector is on
the cusp of determining which direction it will take.
Contact the NADA consulting team at 866.975.6232 to get a
customized report.
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About NADA
NADA’s Demand Indices
NADA’s demand indices measure shifts in demand across time by reflecting the number of
units consumers were willing and able to purchase, had the price remained constant over time
and through different economic environments. The demand index is based on an estimate of
the shape of the demand curve — the price elasticity of demand — and an estimate of the
position of that curve based on the equilibrium price. A constant price is then utilized to solve
the demand equation. NADA calculates demand indices for both the new and used vehicle
market, down to the model level.
NADA’s Used Price Forecast
NADA’s used vehicle price forecast is based on expectations for changes to key market drivers,
combined with coefficients that estimate how each of these impacts used vehicle prices.
Expectations for changes to macroeconomic drivers are based on a consensus view from
professional forecasting organizations with adjustments made by NADA economists. Endogenous
depreciation, seasonal patterns and expectations for new vehicle prices and incentives are
estimated by NADA economists and the editorial team. Relationship coefficients are estimated
by NADA’s proprietary statistical model.
NADA’s Used Supply Forecast
NADA’s used supply forecast is an estimate of the number of vehicles expected to be offered
for sale in the future. NADA calculates used supply volume as the pool of potential vehicles
which could return to the market — as represented by all new vehicle sales — and the probability that a vehicle will return from a particular source (i.e., rental, consumer lease, consumer
purchase, etc.) after a predicted use period. For example, vehicles sold to rental car companies
and consumers each have a specific probability curve associated with the historical likelihood
to return to the used market after a given use period. The product of the vehicle pool and the
return probability is the expected value of the volume of returned vehicles, which is aggregated
to create the used supply volume. NADA calculates used vehicle supply down to the vehicle level.
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