The Q&A from this month's Auto Brief, soon to published on our website:
Lease penetration rates on new vehicle sales continue to reach new highs. Some analysts have expressed concern and say that leasing is being used to artificially boost sales. Is there a “natural” lease penetration rate that, if exceeded, hurts future residuals?
Actually, I would say that lease penetration rates should be higher. I firmly believe that today there are more people in long-term retail contracts who should be in leases than there are people in leases who should be in retail contracts. Consider some of the factors that are incorrectly driving some people into a retail contract when a lease would be a better fit for them:
- The pullback from leasing during the financial collapse was severe. That means there are many salespeople today who don’t even offer the lease product because they are not used to, or are untrained, in selling it.
- Compensation packages (whether for upfront grosses, F&I products, salespeople, or general managers) will, for the short-term-oriented, often favor the retail contract over the lease.
- The dearth of off-lease returns (just now easing) has meant a significant reduction in the most logical lease customer – a returning lessee.
If you believe, as I do, that future new vehicle sales will continue to become increasingly skewed toward high-income households, then lease penetration rates should trend up over time. Because these are the very households that want to trade on a short and regular cycle. Putting this type of customer into a 72- or 84-month loan may garner near-term profits, but it will breed long-term customer dissatisfaction.
That said, the sheer volume of new lease originations (set to approach 3.2 million this year) could pose a challenge to remarketers. If not overly subvented at origination, a lease return is viewed by the lessor and grounding dealer as an opportunity to sell a satisfied customer another car. If overly subvented, however, that lease return means a downward spiral in both residual values and customer satisfaction.