Volume 10, Issue 5 - September/October 2008
The Big Five Five Consumer Trends That
by Les Shaver
If nothing else, it seems like economic Armageddon. First, there were the credit markets collapse in the summer of 2007. And now, more than a year later, things haven’t gotten all that better. Don’t believe it? Try to buy a business, commercial office building or even a home. It’s not as easy as it used to be.
But that’s only the tip of the iceberg. The mortgage crisis that ignited the credit crisis still persists. In fact, it may be getting worse. As people’s mortgages have ballooned, they either haven’t been able to make their payments or have had to pump about all of their income into saving their homes. And, those who have retained their homes are seeing their values sapped, draining their home equity and leaving them with a shrinking pool of discretionary income.
But it doesn’t end there. Gas prices are rising, leaving people with even lower incomes. This, combined with the housing crisis, saps disposable income and slows purchasing even more. Even though we aren’t officially in a recession yet, it certainly feels like it.
These economic realities are leaving people to make some hard choices about where they live and how much they drive. Everyone seems to acknowledge this is happening, but so far, there’s not much of a consensus about how people are reacting, especially in reaction to rising gas prices.
“There are a lot of people trying to do a lot of different things,” says Mary-Beth Kellenberger, a consultant covering the automotive and transportation industriesfor Frost & Sullivan, a global consulting firm that analyzes new market opportunities for corporate growth. “There isn’t one answer for everyone … There are a lot of things people are doing to save costs and money.”
That said, economists and consultants who study how people work, play and live and what they drive say changes are afoot. And, some of them may be big, like consumers changing where they live in relation to work or shopping. While on the surface these trends may not mean much to automotive glass shops, once you dig deeper they could trigger cosmic shifts.
To top it off, after last year’s bridge collapse in Minnesota, governments became focused on that piece of infrastructure. “The governments don’t have as much money to fix roadways because now everyone is focusing on bridges because of the Minneapolis collapse,” says Mitch Becker, technical instructor for ABRA Auto Body & Glass, a chain of auto repair shops based in Brooklyn Park, Minnesota. “There’s less and less money for roadways and we’re going to see roadways degrading more than they used to.” And Becker thinks that will have an effect on cars. “It’s going to put a lot of structural pressure on cars,” he says. “On bigger vehicles, stress is handled by the frame. On the unibody, all of the stress is handled on the unibody. The flexing and structure stress is spread.” There’s another issue, too, though. Older roads, especially in the North, where they’re made of pavement or asphalt, degrade much easier because of the use of salt in the winter. “You will see degradation from salt,” Becker says. “Asphalt has less degradation from salt. It’s much easier to patch asphalt than cement. They start it with cement. When it gets bad, they’ll cap it with asphalt. In the north, when it’s cold rocks push upward. The ground pushes upward and breaks concrete.”That broken concrete means more rocks that can hit vehicles and crack windshields. However, in Detroit, the road quality is improving surprisingly (despite a shaky local economy) because of longterm plans put in place to fix roads that had been problematic.
“We’ve had a lot of construction, which initially messed up the roads,” says Paul Bradford, director of operations for Henderson Glass, a multi-location retail glass firm based in the Detroit suburb of Rochester Hills, Mich. “Now the roads are better and we’re getting less road and rock damage because there’s less gravel on the road and fewer potholes. That’s not helping us as a glass shop.”
1) Cars Last Longer
Then the state fell on hard times around 2000, losing 336,000 jobs between 2000 and 2006. It lost another 94,000 jobs this year. In May, the state’s unemployment rate was at 8.5 percent. In 2004 and 2005, Michigan was the lone blight on a rosy national economic picture. “Now, I’m seeing those beaters on the road, with no wheel covers, body damage, and no side mirrors,” Bradford says. “Unless they have to have it, people really aren’t getting new cars.”
As the economy turns in the rest of the country, Bradford fears that the nation will follow Detroit. The numbers back this up. “Higher gasoline prices and a weak domestic economy resulted in total vehicle sales in the United States falling by 2.5 percent to 16.15 million,” says Mark Ganz, senior industry analyst at research firm IBISWorld, a business information firm that follows more than 700 industries. “Total vehicle sales have fallen each year since 2005 and IBISWorld anticipates that total vehicle sales will fall by around four to five percent in 2008.”
That means the cars on the road are there much longer. “The average age of cars and light trucks in America was 9.2 years and 7.1 years respectively in 2007, both representing an increase year over year and the oldest age for ten years,” Ganz says.
The prevalence of older cars on the road does have some implications for the glass industry. These older vehicles could come in with more problems, says Mitch Becker, technical instructor for ABRA Auto Body & Glass, a chain of auto repair shops based in Brooklyn Park, Minnesota. “If you drive a car 200,000 miles, that’s 200,000 miles of road, salt, debris, vibration and everything else,” he says.
Specifically, Becker thinks as glass shops see older cars, they’ll also see a lot more rust on the pinchweld. That’s takes more energy to fix. And shops will need to be more focused on doing jobs correctly the first time. If they don’t, it could come back to haunt them.
“It used to be that if you put a windshield in a car, three or four years later they’d trade the car out,” Becker says. “The next person bought the problem. But you’re going to see installations that you did five, six, and seven years ago start coming back to you because they are going to hang onto their cars longer.”
2) Holding Off on Repairs
“For auto repairers, an older vehicle positively affects their business as wear and tear results in parts needing to be replaced,” Ganz says.
That should mean more trips to the shop, but unfortunately, those people holding onto their cars longer may not necessarily be bringing their old vehicles into your shop right away.
Kellenberger also says that people are even holding off longer on the basic maintenance. Frost & Sullivan’s numbers say that as a means of saving money, 34 percent of people are increasing the amount of time they wait between vehicle maintenance and 47 percent of consumers said gas prices will make them look to cut maintenance costs, especially with things like wiper blades.
“We have already seen that people change their behaviors,” Kellenberger says. “They will extend the intervals between maintenance. That has already started to happen and I think it will continue to.”
When consumers do come into the shop, it will be for immediate problems and they often don’t see glass repair and replacement as an acute need until a crack runs across their windshields and cuts into their lines of sight. “You can drive with a cracked windshield, but you can’t drive with a flat tire,” Bradford says.
That attitude may change if the crack spreads. “If it’s a little crack or chip, the consumer will say, ‘Let’s see what happens,’” Kellenberger says. “‘When it runs, I’ll deal with it at that time.’”
This trend toward deferring glass repair and replacement could definitely cause problems for the glass industry. That’s especially true in states that do not require periodic inspections. “Michigan has no inspection,” Bradford says. “The only time you have a problem is if you are pulled over. That’s not the focus of the police around here.”
Kellenberger thinks consumers are even more comfortable waiting until the last minute or until a crack spreads, because the glass industry has developed great service. In a way, it’s a victim of its own success.
“They [consumers] think they can call their insurance company and someone will be there in two hours,” Kellenberger says. “Or I can go to my office, tell the glass shop my car is in spot Z12, and they’ll fix it while I sit at my desk.”
3) The Shrinking Automobile
The numbers seem to back this up. Both Ford and GM officials say small-car sales could hit three million this year, according to USA Today. With no manufacturer is this trend more apparent than Ford, which has shifted its production mix from about 70 percent trucks and SUVs in 2004 to about 60 percent cars and crossovers. It’s little wonder that the automaker is making these kinds of shifts since it reported that sales of its trucks and SUVs fell 22.1 percent in July, while Ford, Lincoln and Mercury car sales gained 7.8 percent. Sales of its economical Focus are up 26 percent in sales since January.
“There has definitely been a shift toward smaller more fuel-efficient cars in many countries, the United States being probably the most obvious. From being a market that depended on its pick-ups and SUVs, the price of fuel means that the light truck segment is suffering the worst,” says Anna-Marie Baisden, an analyst with Business Monitor International, a print and online publisher of specialized business information on global emerging markets.
And, if you look at what consumers are searching about online, the trend continues. Cars.com reported in July that decade-old cars like the Geo Metro and Geo Prizm have seen consumer searches rise by more than 200 percent year over year. The number-one car searched on Cars.com in June was the Toyota Prius.
“It’s the first time a hybrid hit the top of the list,” Kellenberger says. “Whether they’re buying or investigating, consumers are considering more fuel-efficient cars.”
The trend is funneling down to resales as well, says Paul Taylor, chief economist for the National Automobile Dealers Association in McLean, Va. In January 2005, the mileage adjusted cost of an SUV was $16,418 and $16,175 for a large pickup. In June 2008, it was $12,592 for an SUV and $12,675 for a large pickup. In the same timeframe, the cost of a small car jumped from $7,591 to $9,933. “Gasoline at $4 a gallon has not been helpful to used truck values,” he says.
These trends in the new and used car markets will affect glass shops because the windshield will play an even bigger role in the car’s structural integrity. “When you have the full frame, you don’t hear much talk about the windshield damage and the vehicle structure because you have that big frame,” Becker says. “Now with more crossovers, that’s a lot more pressure being put on the installations of auto glass.”
4) Staying Off the Road John Burns, president of John Burns Real Estate Consulting, an Irvine, Calif.- based real estate consulting firm that collects and analyzes housing industry-related data, and his colleagues who follow housing trends, are seeing trends that many people in the auto industry don’t see yet: They think high gas prices, combined with road congestion, will pull more people back to the cities. That became especially true after gas prices reached an all-time high of $4.11 a gallon in July.
“We believe that there is going to be a tremendous shift back to urban areas, led by those who bought homes in the outlying areas who lose their homes to foreclosure,” Burns says. “They will choose to rent near work to save money.” And even for those who are buying, gas has an impact. “The high price of gas is playing a very important part in home buyer decisions,” Burns says. “The phrase ‘drive until you qualify’ has less meaning these days as each mile becomes more expensive.”
Even if people aren’t making drastic lifestyle changes such as moving, they definitely are staying off the road more. It’s been almost 30 years (1979 to be exact) since vehicle miles driven fell year over year. In June 2008, the Department of Transportation (DOT) reported that travel on all roads and streets fell 12.2 billion vehicle miles, which is a 4.7 percent drop from June 2007. For the year, DOT estimated that cumulative travel for 2008 fell by 42.1 billion vehicle miles, which is a 2.8 percent decline compared to 2007.
Instead of these drastic shifts, Bradford sees people reducing their time on the road in other ways in Detroit. “The reduction of mileage is coming discreetly from after-work driving,” he says. “They’re combining errands or doing everything on the weekend versus two or three days during week. If you go out in the evening after rush hour, the roads are pretty quiet.”
What Bradford is seeing on the road has changed too. He observes more motorcycles. Kellenberger thinks people trying to find inventive ways to get to work without adding the extra time that public transit often requires. “There’s an upswing in motorcycles and there’s a lot of interest in scooter-type vehicles,” she says. “Even in northern climates, where there’s snow and sleet, people will buy them to commute four or five months. They have free parking and you can get to work on the same schedule [as if they were driving.]”
In more urban areas—the ones Burns is talking about—there is also public transit. Public transit ridership is increasing in formerly gridlocked cities like Washington, D.C., and Los Angeles. For instance, in Los Angeles, Metrolink, the commuter rail system, reported that ridership hit a one-day high on June 17—a 15.6 percent increase over the same Tuesday the year before. “Now, with high gas prices, people are carpooling, using buses and avoiding unnecessary actions,” Kaul says.
Taken together these trends are bad for the glass industry. “Every fewer mile driven is fewer windshields I can replace,” Bradford says. “It’s good for cutting gas consumption, but bad for our industry.”
But he’s not too concerned for the right now, at least. “We are married to the automobile for the time being,” says the glass shop executive, whose business is based around Detroit.
5) Value Focus Back in the 1980s and 1990s “Buy America” used to be a patriotic battle cry as Americans were scared of losing jobs and economic might to foreign competition, particularly from Asian countries. But that didn’t stop retailers like Walmart from stocking their shelves with foreign-made products. And, consumers seem to be eating it up, especially, now—when money is tight.
“When Japanese brands first arrived in the United States they were viewed with suspicion, considered inferior. Now Toyota is the number-two brand in the country ahead of Ford and Chrysler,” Baisden says. “I think the same would probably be true if consumers knew parts were imported, there would be fewer stigmas today.”
And, even when there are scares, such as the Chinese toy scare of a couple of years ago, consumers do eventually come back to foreign products, according to Kellenberger. “There was a backlash from consumers because they were considered dangerous,” she says. “Toys in people’s houses were something that hit close to home. People were very careful, but the Chinese have done a lot to improve their quality perception.”
With gas prices rising and home equity shrinking, Americans may be even more likely to choose cheaper imports, especially those at the bottom end of the income spectrum.
“Gasoline prices affect lower income households materially more than higher income households, as expenditure on fuel for higher income households represents a smaller portion of their total household expenditure,” Ganz says.
That forces people to find lower cost alternatives, which leads to foreign options. “The primary factor driving glass imports is one of price,” Ganz says. “Consumers are largely indifferent when it comes to the origin of product inputs, as long as they are of equivalent quality. In today’s climate, consumers have been more willing to accept a minor reduction in quality for a larger reduction in price. Price remains king.”
Glass is no different in this trend. In fact, Ganz says glass and glass product imports increased by 4 percent in 2007 to $5.68 billion. But up until May, there was a mild decline in 2008. In the last five years imported glass has increased in the United States largely due to competitive pricing overseas, but the falling U.S. dollar has seen glass and glass product exports increase by 8.2 percent in 2007 to $4.36 billion and 7.7 percent in the five months to May 2008 (latest available), according to Ganz.
That’s the word from consumers, as well. “I’ve never given any thought to whether glass was made in the United States or not,” says William Prout, an Alexandria, Va., resident who drives ten miles to work each day in the notoriously gridlocked Washington, D.C., area. “If it is of the same quality as the U.S. product, I would choose the foreign-made product whether the economy was slow or not.”
Even in Detroit—where many consumers know to ask for a Carlite windshield by name—glass shops are carrying more foreign-made product.
“A lot of people … wouldn’t ask for original Carlite, but around here you get that,” Bradford says. “Because people generally work for car companies, they know what’s supposed to be in the car—but they care less than used to.”
With insurance, Bradford finds customers more likely to ask for OEM. Without insurance, when NAGS is used less and more of the glass prices come out of their pockets, they’re more likely to go with the lower-cost alternative. “Carlite will be higher,” Bradford says. “Given that, consumers may buy the lower-priced option. If they want to have something specific, they have to ask. Otherwise, I’ll put in what’s cost-effective.”
Further complicating the issue is that American manufacturers, such as PPG Industries in Pittsburgh, are actually making their glass in other countries. “Does anyone know where glass is coming from?” Becker asks. “Everything is blurred.”
In fact, Becker thinks consumers with high-end cars, even in a bad economy, care more about the logo—not the country of origin.
“With the economy the way it is, if
you were to buy a BMW, you’ll want
the BMW logo,” he says. “You don’t
care where the glass came from. I
think they’re more into brand awareness.
But as far as where it comes
from, they don’t care where it from.
They’re just worried about what’s supposed
to be in there.”