Report: Abandoning Small Car Segment Could Be a Big Mistake

Matt Posky
by Matt Posky
report abandoning small car segment could be a big mistake

A new report from Edmunds tries to make a case against Ford and General Motors placing their small- and medium-sized cars on an iceberg and setting it adrift. We don’t even need to see the metrics to agree. Ditching cars for higher-margin crossovers and SUVs always seemed a little short-sighted. Without entry-level models, you’re likely to get fewer entry-level (i.e. new) customers, and several of the models axed from North American lineups happened to be the most enjoyable to drive.

Selfishly, we like to see plenty of variety among mainstream brands.

Edmunds’ concern isn’t so much about Ford and GM losing money; rather, it’s more about the automakers setting themselves up for failure further down the line. The analysis revealed that 42 percent of Cruze and Focus owners are choosing to stay in the passenger car segment, rather than spending a little (or lot) more to purchase crossovers and SUVs. Meanwhile, 23 percent of Cruze owners and 31 percent of Focus owners who traded in their car in 2019 ended up buying something similar from a competing automaker.

While that doesn’t underpin a fast-approaching doom, Edmunds suggests that domestic manufacturers are sacrificing favorable market positioning to free up cash for other products (electrification, connectivity, autonomy, etc.) and pad their bottom line. The proof, it claims, is the degradation of brand loyalty among customers seeking small, inexpensive automobiles. Many of those shoppers are now getting their modestly sized car fix from Asian manufacturers.

Does anyone remember if this has ever happened before?

“Ford and GM made a strategic decision to prioritize profit at the expense of market share,” said Edmunds Executive Director of Insights Jessica Caldwell. “While this may set them up better in the long run so they have the cash they need to fund electrification and autonomy, there’s no question that decision is giving their competitors an edge now.”

From Edmunds:

The brand loyalty of former Cruze and Focus owners has been steadily declining in the last three years. The percentage of Focus owners trading in their vehicle and buying another Ford has declined from 40 [percent] in 2016 to 33 [percent] through September of this year. The drop in brand loyalty is more pronounced among former Cruze owners: 45 [percent] elected to trade in their Cruze for another Chevrolet vehicle so far this year, compared to 57 [percent] in 2016.

Many former Cruze and Focus owners are going into direct competitive equivalents such as the Honda Civic and Toyota Corolla, but other brands are proving attractive as well. The number of Focus and Cruze owners trading their vehicles in and buying a small Jeep (Compass or Renegade), Hyundai Kona or Elantra, Kia Forte or Subaru Crosstrek have all risen in the last three years.

However, there is a contingent of loyal Ford and GM customers who elected to stay with the brands and go upmarket, buying an SUV/crossover, but they’re losing ground to the people who simply skipped town to find love in the arms of another. Through 2019, only 21 percent of Cruze owners purchased a Chevrolet SUV while 18 percent of Focus owners swapped into an SUV from Ford.

With average automotive transaction prices reaching ever-greater heights, the outlet doesn’t anticipate the situation improving. Crossovers and SUVs typically possess MSRPs many thousands of dollars dearer than a similarly sized/equipped passenger car (Edmunds estimates the gap at $4,000-8,000). That means more profit per vehicle for the manufacturer, but fewer sales overall. It also leaves cash-strapped youngsters with little recourse but to look elsewhere as these smaller domestics gradually disappear from dealer lots.

“The catch is, if Ford and GM don’t have affordable options for shoppers who are buying their first or second new car, it could be much harder to win them over later,” Caldwell continued. “Catching consumers early and keeping them in the family has been a basic tenet of automotive brand strategy for decades. But it feels like we’re in the midst of a transformative time for the industry where automakers are being forced to rethink everything. Time will tell if it will end up the right call in the long run.”

While Edmunds’ data may not be sufficient to actually predict the future, it certainly underlines the trend of domestic automakers willingly giving away a piece of the market. Right now, that piece is anemic and weak and, to be sure, it was actually causing headaches for both automakers. However, the segment still has a relatively loyal customer base that Ford and GM are choosing to turn their backs on in order to gamble with electrification. The overall plan sounds a little dicey, as it relies on accurately predicting customer preferences years in advance. That said, the industry is changing rather rapidly and unpredictably.

Perhaps Ford and GM have already thrown their eggs into the correct basket and it’s simply too early to tell.

[Image: General Motors]

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  • Superdessucke Superdessucke on Nov 16, 2019

    I've been saying this for awhile and I'm not a brilliant industry insider. I try not to think about the kind of idiots we have running the Big 3. I think we're ok for now. CUV and SUV sales are strong. Strong like bull. I see that continuing over the next few years, particularly if Trump wins reelection and the economy continues to flourish. But I predict the ground will start shifting in about 5 years. Not long after that (6-7 years from now maybe), the automakers will be back in front of us with hat in hand, as they struggle to stave off bankruptcy and require a big infusion of our money to adjust to the "new and changing" market that everyone with an IQ over 75 can see coming towards us now with all the stealth of a charging freight train. People are staying with small cars for a reason. Millennials do not have the same salaries, priorities, financial stability, or overall wealth that Boomers do. That's the only reason I really care about this. As far as I'm concerned, people can drive (and build) what they want. But this shortsightednes is going to end up costing us U.S. taxpayers big time, either through the big cash infusion they're going to need or the lost jobs if we let them fail, or probably a combination of both. Just saying.

    • See 2 previous
    • Superdessucke Superdessucke on Nov 17, 2019

      @Superdessucke I mean look, all sarcasm aside, the truth is money can be made with good small cars. Otherwise, the Japanese and Korean makes wouldn't be building them. Now, I believe you can make more money with less creativity on CUVs and SUVs. And that is what our automakers have chosen to do. And as I said, that's fine in and of itself. You will seldom see me come on here and b**** about these vehicles anymore. It is what it is. But don't come asking me for money later to bail you out because you couldn't walk and chew gum at the same time. That's where my issue comes in. I really hope I'm wrong on this.

  • Jeff S Jeff S on Nov 16, 2019

    That's my take on the Detroit 2 1/2 that in a few years they will be asking for another bailout. Wouldn't surprise me to see GM become foreign owned even by the Chinese. Agree also that many Millennials will not be able to afford the larger more expensive vehicles.

    • See 3 previous
    • Dan Dan on Nov 18, 2019

      @Superdessucke "the German government did not have to bailout its automakers, nor did the Japanese government need to bail its out." Nor were their automakers directly paying the pension and healthcare costs of 900,000 retirees.

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