29
Jan

How Will Current Economic Conditions and Manufacturers Influence Millennial Car Buyers?

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By: Dave Emig, Research Director; Anthony Crechiolo, Market Research Intern

The average price of gasoline in the U.S. has continued to fall the past two years. This past year in particular, the average price of gasoline has fallen from $3.36 per gallon to just $2.42. That’s just over a 38% drop in one year. With many analysts indicating gasoline prices are to remain low into 2017, many wonder what kind of effect this will have on future vehicle sales in the U.S. The answer may lie in how 2015 evolved.

2015 was a record year for automotive sales, coming in at 17.5 million vehicles sold, a 5.7% increase from 2014. Digging deeper, we actually see a drop of over 2% in car sales from 2014 to 2015, while sales of large vehicles were up over 23%. Only looking at these numbers, it seems that Americans have a positive outlook towards the future and are putting their savings at the pump towards a bigger vehicle. This statement may be correct for Americans as a whole, but does it hold true for the next generation of car buyers, Millennials, who are just now entering into the car buying market?

In order to answer this question, I think it is important to first look at how buying a car for Millennials is different than previous generations.

Buying a car used to be a rite of passage to freedom, a way to connect with friends and escape from the parents’ sphere of influence. A car used to give you access to find and define yourself as a young adult. Because of how technology has allowed Millennials to be connected to everything at all times, they tend to break away from their parents’ sphere of influence at a much younger age. However, unlike previous generations, Millennials are entering adulthood at a much later age. Buying their first car still represents this next step into adulthood, but the difference is that this generation has already developed their individual identities before venturing out on their own.

Most Millennials are not entering adulthood until they have completed their secondary education and have found an entry-level job. At that point, they are moving out of the house, figuring out their student loan payments, budgeting daily expenses, putting money away for retirement, and to top it off, looking for a new car. Most entry-level jobs do not provide the income to spend a lavish amount on a vehicle, so Millennials are often restricted to the small or compact car segments because of the limited amount of disposable income they have available.

However, Millennials who are looking to purchase a vehicle have two macro circumstances that make right now the opportune time to purchase a car: low gas prices and low interest rates. There is also the idea, stated earlier, that older consumers’ demand may be shifting away from cars to larger vehicles. This change in demand would keep mid and full size sedan prices low in the short term, but Millennials will likely need convincing to move up from their compact and small car segments.

It seems that Millennials don’t put the same emotion or value on their first car as previous generations have because it doesn’t give them the same type of freedom, as they are already aware of their unique identity. A vehicle to them is more of a machine that serves a functional need – getting them from point A to point B.

But with cars having more connective technology than ever before, will automotive manufacturers use their advertising prowess to convince these first-time consumers that cars can not only keep you connected, but have space for their friends to tag along, too?

Currently, there are hardly any advertisements targeting this group of first time buyers. You see it over and over again, commercials for a mid to full size sedan that emphasize re-kindling that childhood passion. If the idea that the older consumer is shifting from purchasing cars to a larger vehicle is true, it might be time for automotive manufacturers to increase advertising towards the next generation for these types of vehicles. If we see a shift in advertising affordable mid to full size sedans to first time buyers, the automotive industry could continue to boom.

As a result of the recent recession, Millennials feel an increased emphasis on not overextending themselves financially. As you move further along in life and become more financially secure, then you can push your financial boundaries. This trend can be noticed with most Americans; as they move up in their career, they also move up in vehicle class. If automotive manufacturers realize this and are able to persuade these first-time buyers into the purchase of a larger vehicle, they will make more money over time, since this type of buyer moves up the career path more quickly because of their higher starting point.

Will automotive manufacturers be able to persuade Millennials to spend the extra disposable income they have available on upgrading their first car purchase? Or will they just accept that first-time car buyers will come in at a lower vehicle segment and spend their extra dollars on other technology that will continue to make their lives more connected? The future of the automotive industry is in the hands of Millennials—the next generation of savvy consumers.