The Value – Issue #17: Do you have gas price pains?

Welcome to Canadian Black Book’s – The Value. Our goal is to provide our clients and partners with news, event updates, new initiatives and opinions from Canada’s trusted source for vehicle values and automotive insights. In this edition we cover:

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By: Brian Murphy, VP Research and Editorial

Do you have gas price pains?

Have you noticed something a tiny bit different at your local fuel pumps?  You may have observed that some of those per liter prices have been tragically supersized, most likely to your disappointment.  If you can think back to Valentines Day, not so long ago, gas prices nationally were at almost exactly $1 per litre for regular grade fuel.  As of this moment gas prices are at a national average of $1.30 with the people of British Columbia unfortunately “winning it” with prices about $0.30 higher than that.  Ouch, our Canadian gas price holiday has ended quite rudely.

A thirty percent increase in gasoline prices over such a short period of time is unusual, but it is not the first time.  Similar increases occurred in 2011 and 2014.  Don’t panic, however now is an ideal time to consider what this increase means for automotive consumers; and for many of us in the industry to contemplate how it affects our business strategy and how we should adjust plans accordingly.

In my opinion, consumers can easily overreact when it comes to higher fuel prices.  According to our recent Canadian Black Book (CBB) IPSOS poll, we conclude 98 percent of Canadians don’t understand what the largest cost of vehicle ownership is, it’s not gas or insurance, but rather it’s deprecation.  It’s quite important for consumers to keep this in mind and not act rashly.

For a consumer to trade in a less fuel efficient nearly new vehicle and purchase a new more fuel-efficient one is a very poor plan, economically speaking.  For example, a three-year-old vehicle will have typically lost 40 per cent of its value, due to depreciation.  For a $40,000 vehicle that would be a loss of $16,000 in value.  This recent spike in gas prices would typically cost the average consumer just a little over $700 more per year.  To restart the depreciation drip on a new car, just to save some money on gas is not wise.  In my example, if the consumer was to find a vehicle that was 30 per cent more fuel efficient it would take them well over 20 years to save enough fuel to undo the depreciation hit they would take for the switch.

Each year, Canadian Black Book surveys Canadian consumers together with IPSOS, regarding attitudes and understandings in the vehicle market.  Back in late December 2018 we asked consumers what their response would be to a “fictitious” $0.25 rise in the price of fuel and how they would change their buying behavior.  The graphic shows the results, and you’ll see buying a hybrid was the most popular response at 31 per cent and buying a similar but slightly smaller vehicle was in second place at 28 per cent.  It’s worth nothing that 27 per cent indicated it would not affect their decision at all, and only 14 per cent say they would consider not replacing their vehicle at all.  One quarter of respondents said they would consider an all-electric vehicle.

(CLICK FOR FULL SIZED GRAPHIC)

Surprisingly, we at CBB have not yet seen a largeimpact of dramatically higher gas prices on wholesale vehicle prices in Canada, at least not yet.  Since the low gas prices of February, the Compact car price index has only risen by 2 percentage points and sub compact has risen by nearly 3 points.  They are up in value, but not dramatically.  The industry retained value average, by comparison, is flat during that the same time.

If we look at more fuel-thirsty vehicles, full-size pick-up trucks and full-size sport utility vehicles have not lost significant value in that time.  If fuel prices hold this high level over a longer duration, I would expect that we will see compact and subcompact cars rise in value and some of the less fuel-efficient SUVs fall in value.  Given that most used vehicle inventories take more than two months to turn, this effect may take a while to materialize.

For retailers this is a good time to consider how increased fuel prices can affect your own strategy on the showroom floor and your sourcing and ordering of both new and vehicles.  There are a few aspects of this era of higher pump prices to consider.  Are your own people ready to deal with this key change in the market environment? Are your sales people fully fuel economy literate?  Specifically, do they know how the products they sell compare to competitors?  Is it a competitive advantage?  If so, this is a great time to promote that advantage.  Does a given vehicle require premium fuel, or is it only recommended?

Questions like these will likely come up more frequently for certain market segments.  Given the spike in gas prices, fuel related questions are going to be a bit closer to the top of the list of consumers.  To be able to converse confidently with customers about their fuel economy concerns and objections is much more important than it was just a few months earlier.

From a sales strategy standpoint have you looked at your own sales based on fuel economy?  Are more fuel-efficient vehicles earning a larger profit?  Are they turning faster?  Trends like these can help a store tweak their strategy.  Based on an understanding of the trend in your area market, an adjustment in your product mix might be in order.

It is of course difficult to tell if this is the new normal or there will be some relief in prices on the horizon.  Some of the forecasts suggest that there will be fuel price relief coming, but with another big increase in 2020.  In the mean time you should be able to spot me on the highway, I’ll be the guy coasting down the hills to save a few nickels!

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