Auto Focus

Hard Times Ahead for the Compact SUV Segment?

The hottest segment today is facing a glut of models and volume in tomorrow’s wholesale market.

The 2018 Mitsubishi Eclipse Cross, among many new entrants in small SUV segment, debuted at the LA Auto Show in November. (Photo by Paul Lim.)
The 2018 Mitsubishi Eclipse Cross, among many new entrants in small SUV segment, debuted at the LA Auto Show in November. (Photo by Paul Lim.)
If it’s okay to equate “love affair” with an automotive segment, then let’s talk compact crossovers/SUVs — the hottest, best-looking, most-desired segment in the automotive world for the past half-decade.

The segment that didn’t exist 20 years ago is now the largest, in both models and volume. And just like a hit sitcom, it’s even spawned two new sub-segments, luxury compact crossovers and subcompact crossovers.

The tipping point was near the end of 2014, when crossover sales crested car sales and never looked back. Last year, the segment grew by 4.6% in sales year-over-year to a whopping 3.16 million units. That’s even more incredible understanding that overall U.S. new vehicle sales declined in 2017 for the first time in seven years. 
As a result, fleet buyers have migrated to this new segment for all the reasons consumers have, and for their residual value retention.

But the automotive industry has historical ebbs and flows. The first large SUV obsession of the late 1990’s and early 2000’s ultimately gave way to the small car craze brought on by the spike in fuel prices and the Recession. You couldn’t give a pickup away in 2008, but five years later it was sedan sales that were plunging.

It’s hard to see the end of a trend when you’re in the middle of one. (Just ask real estate speculators a decade ago.) With this in mind, it’s always tricky for automakers to plan future models and production runs to meet future demand just right. There are some moving parts here to keep an eye on.

So could the love affair with small crossover segment turn sour in the wholesale market of tomorrow?

The residual risk assessors at RVI Analytical Services predict an increase in off-lease supply for small SUVs will cause a 9% decline in wholesale prices for the segment by 2020. “There is a glut of supply coming back of subcompact and compact crossovers,” says Wayne Westring, manager for RVI.

“We’ve seen historic highs for overall lease penetration over the last eight quarters,” Westring continues. “Demand is still there, but used supply has been increasing. That will put downward pressure on (pricing for) those vehicles.”

Tom Kontos, Adesa’s chief economist, concurs. “So many of these vehicles (new compact crossovers/SUVs) have been sold in recent years they will be face supply pressure, maybe even starting this year,” he says.

Overall, RVI expects overall wholesale prices in 2018 to decline about 3% from current levels, and the decline will increase to almost 8% in 2019, Westring says, based on growing supply. The price decrease for the small crossover segment is predicted to be greater than the overall average.

Black Book predicts that the compact crossover/SUV segment will decline in two-year retention from a high of 57% in 2015 to 50% in 2020. That’s the second largest drop in any of the largest segments.

Westring cautions that in the face of an overall shrinking SAAR, a glut of small SUV models and production could cause manufacturers to incentivize new sales with rebates, which would further weaken wholesale pricing in the segment.

Then should fleet buyers flee the small SUV in favor of the next rock star segment?  

RVI’s analysis predicts that subcompact and compact cars will decline 8% by 2020 — slightly better, but not substantially, than the value decline for small SUVs. RVI also predicts full-size pickups and midsize and large sedans will perform better than the average market decline.

Black Book’s predicted 50% retention rate in 2020 for compact SUVs still beats retentions for the subcompact (38%), compact (46%), midsize (46%), and full-size (45%) car segments. (Meanwhile, midsize crossover/SUVs should retain 56% of their value, and full-size crossover/SUVs 60%.)

Automotive prognosticators aren’t seeing a drastic shift in consumer preference. Americans love the high ride, utility, roominess, and relatively good fuel economy of the crossover classes. Fuel prices are expected to remain low.

So no, small SUVs won’t become the Beanie Babies or Cabbage Patch Kids of 2020. But fleet buyers and consignors do need to be aware that the small crossover/SUV segment won’t be buoying overall fleet holding costs as much as they have in the past.

Comments

  1. Solomon Cramer [ January 26, 2018 @ 05:57AM ]

    This shouldn’t have been hard to see...this is the replacement for the midsize sedan of yesteryear. When you see everyone heading in one direction, it’s tome to go elsewhere. Anyone who has fleeted Small SUVs and similar for years has seen the rapid declines in values over the last 1-2 years...from a near zero depreciation at the beginning of the decade to a rate above many repurchase offerings.

  2. James [ January 29, 2018 @ 07:04AM ]

    These mid size suv's are simply station wagons of yesteryears! Is anyone even making station wagons anymore?

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Author Bio

Chris Brown

Executive Editor

Chris is the executive editor of Business Fleet Magazine and Auto Rental News. He covers all aspects of the fleet world.

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