Spring 2017 Key Advisor Dealer news and tips
Executive Outlook U.S. auto and light truck sales recorded a record annual high in 2016, marking the seventh straight year of increased sales. Should dealers be planning for another good year or is the auto market due for a setback? And what impact if any will the new administration have on sales? The lead story in this quarter s newsletter focuses on the outlook for car sales in the coming year. Brett Hoselton, CFA, Managing Director and Senior Automotive Equity Research Analyst at KeyBanc Capital Markets Inc., believes the signs are positive that 2017 will be another solid year for auto and light truck sales in the U.S. Strength in four major drivers of the market a healthy domestic economy, significant pent-up demand for new autos, solid retail auto financing availability, and a favorable environment for leasing indicate that sales can remain at the 17- million-plus level, even in an uncertain political environment. Also in this quarter s newsletter is an article on how dealerships can build an appealing and personalized benefits platform to support employee recruitment and retention efforts. Many dealers across the country report that it s a challenge to keep positions filled, especially those in critical auto technician and customer service roles. From lost car sales to substandard customer service, the shortage of skilled talent and high turnover rates can do real damage to the bottom line. The article explores ways dealers can maximize the value of benefits to employees while meeting cost objectives. Craig Stickney Retail Services National Director Paul Cronin Commercial Services National Director 2
Leveraging Benefits to Attract and Retain Talent For Jeff Baca, finding talented people can be a challenge. We have to recruit aggressively to keep up with demand for auto technician jobs, the owner-operator of Boulder Hyundai says. My dealership has had to go outside Colorado to bring in qualified people, including hires from New York, Florida, and Illinois. Many dealers across the country report difficulties in keeping positions filled. According to the most recent NADA Dealership Workforce Study, annual auto dealership employee turnover runs at 40%, with turnover of millennials adults under the age of 35 reaching 52%. High recruiting and training expenses, lack of continuity with customers, lost vehicle sales dealers pay a steep price for high turnover and the shortage of talent, says Bill Hartz, Benefits Consulting Practice Leader at KeyBank Insurance and Benefits Services. Since healthcare insurance consistently ranks as the benefit most highly valued by employees, it s no surprise that dealers are exploring ways to maximize the value of employee benefits plans to attract and keep skilled people. High-deductible Plans and Voluntary Benefits Dealers who offer high-deductible health plans to their staff have been able to reduce their healthcare spending while providing a valuable employee benefit. Highdeductible plans are on the rise in employer offerings as either the single plan available or as one of two or more choices. Providing employees with the opportunity to save money on premiums and reduce the bite taken out of their paychecks, these plans appeal to a number of employees, especially those who are young and healthy or have savings available for unexpected costs. Paid completely or mostly by employees, voluntary benefits can be a cost-effective way to augment the total benefits package, KeyBank s Hartz notes. Some of the more popular policies provide insurance for accidents, short-term disability income, critical illness, vision and dental care. Policies complement high-deductible plans because benefits are paid directly to policyholders, allowing them to use the money for out-of-pocket expenses. Bill Hartz Benefits Consulting Practice Leader KeyBank Insurance and Benefits Services 3
Continued from page 3 Leveraging Benefits to Attract and Retain Talent Making a Difference with Benefits We try to provide benefits that really make a difference to our employees, says Jeff Davis of Davis Auto Group, which operates BMW, Jaguar, and Land Rover locations in the Cleveland metropolitan area. We offer core medical coverage with a traditional deductible and a high-deductible alternative, along with group life insurance benefits to our employees. In addition, we provide access to voluntary benefits. Most of our employees appreciate the supplemental benefits of vision and dental coverage we have a high take rate with these policies and we also offer voluntary disability and life insurance. I believe it s essential to provide health benefits through the dealership rather than send people to the Affordable Care Act exchanges, Boulder Hyundai s Baca remarks. Since the cost of living in our area is high, it s important to our employees to keep monthly premiums low. We offer a high-deductible insurance plan along with voluntary disability and dental insurance policies. Participation in our core insurance plan is weighted toward our older employees some workers are young enough to still be on their parents policies. Marlin Knight of Ron Bouchard Auto Stores which sells Acura, Honda, Chrysler, Dodge, Ram, Kia, and Nissan autos in five locations in Massachusetts believes that providing a competitive benefits plan helps the organization meet its staffing needs. We have an insurance package that includes medical with a traditional deductible, dental, life, accidental life, and short- and long-term disability, says the chief operating officer. We also provide access to voluntary benefits like cancer policies, which can be purchased by employees at discounted rates. From good benefits to ongoing training, we want to demonstrate to our people that we re committed to them. Exploring All the Options Finding new ways to manage costs can enable dealers to pass savings along to workers in the form of enhanced benefits or lower premiums. More and more employers are assessing self-insurance as an alternative to traditional insurance. By assuming the role of insurer, the dealer has the potential to save on premium costs while gaining the benefit of flexibility and control of plan design. Catastrophic claims can be mitigated by stop-loss coverage. A dealer may also join a captive program to share risks with other employers and achieve similar benefits. Dealers have a number of cost-effective options available to construct attractive benefits packages to attract and retain top talent. Exploring alternatives with a seasoned insurance and benefits specialist can help you find the right solutions for your circumstances. 4
Another Solid Year Ahead for Auto Sales Sales of new autos and light trucks in the U.S. hit a record high of 17.55 million in 2016, marking the seventh straight year of rising sales. It was a good twelve months, and Brett Hoselton, CFA, Managing Director and Senior Automotive Equity Research Analyst at KeyBanc Capital Markets Inc., is optimistic that auto sales will continue to be at the 17-million-plus level in 2017. Brett Hoselton, CFA Managing Director, Senior Automotive Equity Research Analyst I believe that the U.S. auto industry remains well positioned and is heading toward another solid year, says Hoselton. My outlook is based on four major drivers of the market: a growing domestic economy, significant pent-up demand for new autos, positive developments in retail auto financing availability, and a favorable environment for leasing. While the newly inaugurated national leadership presents us with some unknowns in terms of policies, the net effect of any new measures shouldn t alter the fundamentally positive prospects for sales. A Growing Economy A growing economy spurs strengthening in the labor market, which in turn helps generate demand for autos, Hoselton says. U.S. gross domestic product (GDP) continued to expand in the second half of 2016, with much of the momentum coming from strong consumer spending propelled by wage gains, increases in employment and a more robust housing market. The labor market is an especially important factor in auto sales. There s a strong inverse correlation between initial unemployment claims trends and future economic growth, and the improved employment picture bodes well for a good sales year in 2017. Consensus forecasts point to a domestic economy that will continue to grow moderately this year. The Federal Reserve projects that the nation s GDP will expand 2.1% in 2017, while the Congressional Budget Office (CBO) expects that the economy will be up 2.3%. The employment picture remains rosy: The Federal Reserve projects that the unemployment rate will remain at a low 4.5% for the next three years. In addition, the Conference Board s U.S. Leading Economic Index indicates modest growth for the year, and consumer optimism is on the upswing. The final release of U.S. Sector PMI (Purchasing Manager Index) data from Market for 2016 reported a strong economic upturn in December an encouraging sign for 2017. And while the Federal Reserve raised rates in December 2016 and announced plans to lift them further, interest rates remain low by historical standards. It s widely expected that the central bank will proceed cautiously with any future rate hikes to avoid choking off moderate growth. Pent-up Demand Hoselton anticipates that pent-up demand for light vehicles will be a shot in the arm to sales over the next several years. Research tells us that normalized yearly U.S. auto and light truck demand today is approximately 16 million units, he notes. When unemployment was high in the aftermath of the Great Recession, people held on to their old cars and sales fell well below this level. We re still recapturing this unrealized demand as these delayed car purchases have only recently been coming back to the market. As we enter 2017, there are approximately 8 million vehicles in pent-up demand that will buttress normalized annual demand of 16 million vehicles through 2021. Hoselton notes that other positive factors could help push sales above the trendline. Trade-in values remain at or near record highs, he says. And affordability, as measured in terms of weeks of median family earnings to purchase an auto, has improved even as the average transaction price has increased. 5
Continued from page 5 Another Solid Year Ahead for Auto Sales Favorable Auto Credit Conditions Financing availability continues to improve as a stronger economy has enabled lenders to feel more comfortable about loosening credit standards for car loans. As a result, credit has become more readily available to borrowers especially subprime customers and auto loan originations have progressed at a brisk pace over the past few years. Subprime borrowers (<620 FICO score) are playing an important role in the expansion of new car sales, Hoselton observes. History has shown that auto loans are the most resilient consumer credit segment following an economic downturn. Subprime lending declined in the early part of this decade, and now with a steadily growing economy and more robust labor markets volumes are returning to pre-recession levels. The quality of lending has improved as today s subprime consumer is more reliable; according to a study by Equifax, deep subprime consumers (<550 FICO score) who have obtained an auto loan improved their scores by more than 50 points on average over a threeyear period. As a result, their potential credit risk relative to the interest rate they are paying was lowered. An improving economic and employment picture has led to a healthy credit quality environment. The New York Federal Reserve s Quarterly Report on Household Debt and Credit (November 2016) shows that the overall 90-plus day auto loan delinquency rate at the end of September 2016 was 3.6%, well below the level of 5.1% in first quarter 2011. Unemployment rates play a major role in auto loan delinquencies, and the two are closely connected, notes Hoselton. When unemployment rates fall, auto delinquencies decline. I believe delinquency rates should remain at or around current levels as a result of improving unemployment rates and a positive economic growth outlook. 6
Continued from page 6 Another Solid Year Ahead for Auto Sales Lease Expirations and Penetration Increasing lease expirations and lease penetration are a tailwind to both new and used vehicle sales. Lease expirations are projected to increase 56% from 2.5 million in 2015 to 3.9 million by 2018. Since monthly payments for a lease are below those financed with a traditional loan, more than 80% of returning lessees will lease a new vehicle, providing solid support for new vehicle demand. Lease Expirations 2015 2018 projected In addition, according to Experian, the lease penetration rate for new car acquisitions has been increasing, rising from 16.1% in 2009 to nearly 30% as of the third quarter in 2016. This tailwind will be partially offset by rising new vehicle monthly payments and diversion to used vehicles, as used vehicle prices will likely decline, resulting in lower lease residuals, lower trade-in values, and a wider spread between new and used vehicle sale prices. 2009 2016 3rd Quarter 2.5 million 16.1% 3.9 million Lease Penetration Rate 30% Impact of the New Administration The surge in the stock market following Donald Trump s November 8 election victory reflected a dramatic rise in optimism about the economy and jobs. Some observers had been worried that the post-recession recovery was running out of steam, Hoselton remarks. Every indication is that the new administration and a GOP-controlled Congress intend to pursue pro-business policies that will keep the economy moving forward. Trump s stated plan to spark growth is based on tax cuts, regulatory reform, infrastructure spending, and a new focus on export-led trade. We ve grown at such a slow rate that the U.S. economy shows no signs of overheating, and new policies may help us pull the expansion along even further. In addition, the mood is upbeat now. Confidence is riding high, and that can be a powerful stimulus for continued GDP growth and auto sales. Trump has publicly challenged the auto industry, with his attacks centered on prodding auto makers to invest in domestic facilities and keep production and jobs in the U.S. Trump has talked about a wide range of protectionist measures that, if implemented, could affect costs for autos and light trucks and potentially affect sales, says Hoselton. But no specific proposals are set in stone now, and the final mix of policies is unknown. Plus, the immediate impact of policy changes on domestic auto manufacturers is likely to be low. It takes years to move from concept to implementation on major production decisions, and no manufacturer is making significant changes to capital expenditure plans now. Frankly, much of what s going on in the public space is political theater, and I believe a lot of the conciliatory announcements and remarks made by auto makers are primarily for public consumption. From my perspective, these front-page conversations between the administration and auto manufacturers aren t likely to have any real impact on a dealership s strategies and plans for 2017. In summary, 2017 is shaping up to be a good year. While auto sales would be adversely affected if the economy tanks and unemployment rises significantly, the risks of a recession appear low at this time. The signals today indicate that the economy is on track to expand at a moderate pace, unemployment should stay low, and conditions for auto credit and lease financing remain favorable. All in all, a pretty good environment for new auto and light truck sales as we start the year. As a service to our clients, KeyBank is providing this brief overview to raise client awareness. KeyBank does not make any warranties regarding the results obtained from the use of this information. The information and recommendations contained herein is compiled from sources deemed reliable but is not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent, broker, advisor, or fiduciary, or is offering any tax, accounting, or legal advice regarding these instruments or transactions. 2017 KeyCorp. KeyBank is Member FDIC. All credit products are subject to credit approval. 170224-198886 7