The millennials are coming
During the past decade, the rise in car-sharing services, urban living and college debt payments led to doubts about millennials' desire to ever own a vehicle.
Not anymore. Millennials make up the fastest growing segment among vehicle buyers and likely will represent about 40 percent of the U.S. new-vehicle market by 2020.
Last year, millennials -- also known as Generation Y -- purchased 4.1 million vehicles in the United States, accounting for 29 percent of the market, according to data from J.D Power and Associates' Power Information Network. They now drive changes in automotive marketing and product features and are likely to influence future automotive developments more than any generation before them, experts say.
Because of the Great Recession, millennials entered the market later than prior generations. As the U.S. economy hit the depths in 2008-09, millennials were having a difficult time finding jobs, and the cost of insurance was rising rapidly, said Mustafa Mohatarem, chief economist for General Motors.
But as the economy improved, millennials started buying cars, Mohatarem said: "What we see is the share of new vehicles being bought [by millennials] is increasing significantly."
Jeff Schuster, senior vice president of forecasting with LMC Automotive in Troy, Mich., says millennials have shaken off the effects of the recession.
"The millennial was the buyer that was first pushed out of the market with the recession," Schuster said. "They were late coming back, but they have come back. We are past that issue."
New-vehicle purchases by millennials -- the 75 million-plus group born in the United States between the early 1980s and late '90s -- are likely to grow at a faster rate than any other age group in the coming years. Since 2011, their share of U.S. retail new-vehicle sales rose nearly 9 percentage points, compared with baby boomers, whose share declined 6 percentage points during the same period, according to J.D Power.
"If you combine Gen Z and Gen Y, they are 30 percent now, a massive increase from just 20 percent in 2011," said Thomas King, vice president of PIN operations at J.D. Power. Gen Z is the post-millennial age group.
|Millennials are a growing part of the U.S. light-vehicle retail market.|
|Share of retail sales|
|Gen Y (millennial)||20%||22%||24%||26%||28%||29%|
|Retail sales (in millions)|
|Gen Y (millennial)||2||2.6||3||3.5||4||4.1|
|Source: J.D. Power PIN data|
Need, not want
Unlike their wealthier parents -- Gen X's born in the mid-'60s to late-'70s and baby boomers born after 1946 -- millennials are buying vehicles because of need rather than want, according to a study by the online shopping site Autotrader. They are graduating from college, landing jobs, buying homes, getting married, and some are starting families.
Between 2010 and 2015, the share of vehicle sales for buyers under 35 has grown about 3 percentage points for each point of growth in the market, said GM's Mohatarem: "So when you are talking about a market of 17.5 million, that is a big number."
The biggest buying segment is still 50- to 69-year-olds, who buy more than 35 percent of all vehicles -- but they have been purchasing fewer cars in the past five years, Mohatarem said.
Millennials are largely buying entry compacts and some SUVs and crossovers. "Because the buyers are younger, typically they have lower incomes and lower credit profiles. They tend to skew towards buying compact cars -- 18 percent compared to 14 percent for the industry in total," King said.
Mohatarem said that at GM, millennial sales rose to 19 percent of the giant automaker's sales in 2016, up from 14 percent in 2010.
Millennials purchase vehicles below the $34,000 average transaction price at GM, he said: "When you look at the vehicles in that market, our Chevy Spark is just under $15,000 to the Chevy Equinox that can stretch to $30,000 -- that seems to be the sweet spot."
But give them time. "They are shifting from cars towards SUVs," King said. "That makes sense because the older millennials are changing their lifestyles, and they are responding and making that shift rapidly."
According to AutoNation, the country's largest public dealership group, Toyota captured 19 percent of AutoNation's millennial sales through last September, followed by Honda with 15 percent and Ford with 14 percent. The Toyota Corolla, Honda Civic and Honda Accord were the top-selling vehicles, according to AutoNation.
Kim McCullough, vice president of marketing at Jaguar Land Rover North America, said millennials are moving into the premium segment. They accounted for about 18 percent of U.S. premium sales last year, up from 10 percent in 2011. In the U.S., 25 percent of all sales were premium vehicles, she said.
McCullough said conquesting buyers is the "lifeblood" for both Jaguar and Land Rover, and millennials are a crucial part of JLR's continued quest to become a top five luxury brand in the U.S.
Reaching out to millennials is important for all brands in the current sales plateau, experts say.
"Now in an environment where you don't see as much sales growth, you have to think about every opportunity that you have and potentially be aggressive to get those consumers," King said.
Jaguar and Land Rover are both trying to grow sales in the United States with more affordable, smaller and youthful vehicles. In the past year, Jaguar launched the compact XE sedan and its first crossover, the compact F-Pace. Land Rover's new smaller SUV, the Discovery, goes on sale in late spring.
Half of Land Rover and Range Rover buyers are between the ages of 20 and 48, McCullough said. With the launch of the XE, the number of buyers under 35 has "doubled for the brand as a whole."
Shopping used cars?
Used cars traditionally have been an alternative to new cars for entry buyers, but they have been scarce because of the dip in U.S. automotive sales during the recession -- and, with supply short, they're expensive.
But as more used vehicles enter the market this year, millennials may decide that perhaps a 3-year-old SUV is a good alternative to the new one they covet. Adding to the pressure is the rise in new-vehicle prices.
Rather than stretch the budget to buy a new SUV or crossover, now millennials "may find themselves in a vehicle that is a few years old with a warranty," King said.
He dismisses the notion that millennials are more interested in ride-sharing services such as Uber and Lyft than car ownership: "It is a hot topic. I think in respect to the interest level, the need for transportation is similar to what it has been in similar generations."
Michael Aron, senior manager of market intelligence for Nissan North America, agrees: "There is a lot of hype about millennials and interest in alternative mobility solutions and that the car market is dead because the future looks like shared car and taxi sharing like Uber and so forth.
"The main thing millennials are limited by, up to their 30s, is budget."
JLR's McCullough said some millennials even put off getting a driver's license. But she attributes that to a "generational thing." A baby boomer herself, McCullough recalled rushing off to get her driving permit "as soon I could" because it was "freedom, woo-hoo!"
"There were so many people saying millennials wouldn't be interested in buying cars -- the difference is they aren't interested in doing it right away," she said.
But they are different from the baby boomers, experts say.
"What is important to them is different because it is such a large generation and spanning quite a difference in age and life stage. There are a lot of subgroupings in that generation as well," said LMC's Schuster.
"It is important that the industry addresses all of those."
Price is probably the most important factor for millennials. Schuster said that, unlike their baby boomer parents, millennials measure vehicle affordability by the monthly payment rather than the total purchase price.
"The millennial is not worried about "If I spread it across 84 months, it could cost me a lot more interest,'" Schuster said.
GM also finds that more millennials buy rather than lease cars. "I think it is more that they make good cost calculations on what is a better option for them," Mohatarem said.
Subaru sees two distinct groups of millennials: younger buyers who are looking for their first new car and an older group that's starting a family and/or buying a home. Indeed, Subaru's marketing for the redesigned Impreza compact is to a group it calls "young matures, folks that are still early in life," said Dave Sullivan, the brand's marketing manager. "They are a bit more pragmatic than you might expect someone of that age to be."
Subaru forecasts half of the buyers of the new-generation Impreza that went on sale in December will be under 45 and a third will be millennials.
"One of the things that struck us talking to younger customers is they are looking for long-lasting cars, and in the family formation, they are focused on safety," Sullivan said.
Nissan's Aron said capturing millennials means more than just bringing in more sales. "Our equity lies in being a more bold and provocative brand."
"Most people, and the younger generation in general, are stressed out by driving, increasing commute times, increasing traffic situations," he said.
The digital generation
Marketing to millennials also is changing. TV is of less importance. Social media, with new sites and apps popping up at a rapid pace, is far more relevant, automakers said.
Autotrader found that millennial vehicle buyers do 61 percent of their research and shopping online and just 12 percent visiting dealerships. "Millennials feel the Internet is four times more helpful during the shopping process than TV or newspapers."
And millennials like communicating through images more than older groups, Autotrader said.
JLR tried to capitalize on the millennial taste for photos and videos during last year's multicity Art of Performance Tour and allowed participants to test drive cars. Using in-car video technology and special effects, videos were created for participants to post on social media.
"What we did is the best encapsulation to reach this new audience, tapping into ... millennials' desire for virtual content and making those videos that are shareable," McCullough said.
And 37 percent of the tour participants were 25- to 32-year-olds, she said.
"You have to take chances, and you have to learn. It is changing so fast with things like Snapchat that weren't on the radar six months ago," McCullough said. "You have to dedicate some of your budget to do that and learn."
Luring more millennials will indeed take time. As Nissan's Aron puts it, it will be a five- to 10-year "assault on millennials."
"You can't boil the ocean all at once, so we are trying to leverage our brand image with our investment in connective services and leadership with electric vehicles like the Nissan Leaf."
Lease vs. buy
According to a new Edmunds study, about 32 percent of millennials who bought a vehicle last year opted to lease, up from 21 percent in 2011.
Millennials were the biggest group of lessees with a household income under $50,000, Edmunds said.
"Leasing hits a sweet spot for millennials -- they can enjoy the benefits of owning a new vehicle at a low price point with the latest features they crave," Jessica Caldwell, an Edmunds analyst, said in a release. "If automakers make a positive first impression with this influential group, they have a great opportunity to build lasting relationships as brand loyalty rates are much higher among shoppers who lease vs. buy."
Lessees save an average of $120 per month leasing rather than financing, and the terms average 36 months, Edmunds said. Last year, the average period for financing was 69 months.
When millennials do finance, it's for a longer term, generally 64 months -- which AutoNation says is the average length of most of its buyers' contracts.
But if interest rates rise and residuals are under more pressure, leasing may become less attractive to millennials.
"If credit were to tighten, it could put pressure on millennials, which affects the market," Schuster said.
Nevertheless, J.D. Power forecasts that millennials' leasing rates will rise "as they get a little older and a little bit wealthier," said King.
The segment will grow in both purchasing and leasing, he adds: "They are big enough that they cover all bases."