Drop in lease returns threatens brand loyalty
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A drop in returning lease customers, reflecting a drop in lease originations during the recession, is a headwind for captive finance companies and dealers trying to rebuild leasing and the brand loyalty that goes with it.
"It's harder to prospect because it's harder to predict when a retail [loan] customer will be in the market," says Shaun Bugbee, vice president of sales and marketing for BMW Group Financial Services.
He says the captive's lease customers stay with the BMW brand 44 percent of the time, vs. 25 percent for loan customers.
Among customers, "90 to 95 percent go to the end of the scheduled lease," he told Automotive News in a phone interview. BMW of North America, its captive finance company and BMW dealers can precisely target their marketing messages, and dealers can count on those customers to show up with their lease returns.
Leases preferred
Bill Underriner, chairman of the National Automobile Dealers Association, said earlier that he prefers leases to loans because lease customers are so loyal and because they turn over vehicles more frequently.
Underriner even owns his own leasing company. He is the general manager for Underriner Motors in Billings, Mont., which sells Buick, Honda, Hyundai and Volvo vehicles.
Statistically, it's relatively easy to get a returning lease customer into another lease. It's harder to get someone who purchased his or her last car to purchase or lease a new one from the same brand, according to Maritz Research of Fenton, Mo.
For the industry, brand loyalty for returning lease customers going into another lease was 63 percent for October through December 2011, the first three months of the 2012 model year, data from Maritz show. (See table, right.)
In contrast, customers who purchased their last vehicle then purchased another one from the same brand 39 percent of the time. Only 31 percent of purchasers later leased a vehicle from the same brand, Maritz said. Purchases include cash customers and customers who got a loan, the research firm said.
Ripple effect
The drop in returning lease customers today is a direct reflection of the earlier drop in lease originations. Leasing initially fell in mid-2008 when gasoline prices spiked and the resale value of off-lease trucks fell through the floor. Alarmed by unexpected losses and uncertain about future residual values, finance companies fled the automotive leasing market.
The remaining lease volume dropped along with the rest of the market during the economic downturn in the last half of 2008 and 2009. Lease penetration has since recovered, but the fall-off in lease returns persists.
The former Chrysler Financial quit leasing entirely in August 2008. Ford Motor Credit Co. and the former GMAC Financial Services cut back on leasing, too. According to Maritz, lease penetration bottomed out at only 10 percent of retail volume for the 2009 model year, down from 17 percent of U.S. retail volume the model year before.
Naturally, that meant fewer lease returns down the road. Bugbee said BMW Group Financial Services expects about 85,000 scheduled lease terminations this year. That's roughly even with 2011 but down from more than 150,000 in 2010. He said lease returns should pick up in 2013 and increase again in 2014.
Prestige vs. mass-market brands
Leasing is more critical for prestige brands with a high lease penetration, such as BMW. Bugbee said the captive finance company accounts for about 75 percent of the BMW brand's total volume, with leases outnumbering loans about 2-to-1 so far this year.
According to Experian Automotive, leasing accounted for 76 percent of new-vehicle volume for Mercedes-Benz Financial in the first quarter.
Mass-market brands are less dependent on leasing.
Ford Credit is OK with its present lease penetration, which is "on track with our plan," a spokeswoman said. The captive doesn't usually report its lease penetration. According to Experian Automotive, 31 percent of Ford Credit's new-vehicle originations in the first quarter of 2012 were leases, vs. an industry average of 24 percent.
Ford Credit said it expects about 117,000 lease terminations in 2012, down from 246,000 in 2011 and 408,000 in 2010.
GM wants more
On the other hand, General Motors has said it would like to increase its lease penetration. Part of GM's motivation in buying the former AmeriCredit Corp. in 2010 was to boost leasing, but that's off to a slow start. In the first quarter, GM said its U.S. lease penetration was 13 percent, down from 17 percent a year earlier. Not counting its own leases, GM says the industry average was 22 percent for the first quarter.
Ally Financial, the preferred lender for GM, Chrysler Group and others, said leasing for GM and Chrysler accounted for 17 percent of its U.S. originations in the first quarter, including new and used vehicles. That was down from 19 percent a year earlier.
It's taking time for leasing to recover, but it will be worth it for the automakers, said Chris Travell, vice president of strategic consulting for the Automotive Research Group of Maritz Research, based in its Mississauga, Ontario, office. Said Travell: "Leases result in higher loyalty, full stop."
You can reach Jim Henry at autonews@crain.com.
