Compact SUVs: A Recipe for Substitution

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(Photo: Canadian BlackBook)

When two vehicle segments go to war, can both emerge as winners?

Like it or not, luxury brands are steadily marching into the middle of the market. The last two years have seen their offerings blossom into compact cars and sub-compact SUVs with starting prices that are no doubt tempting buyers from the upper price band of the mid-size car market, and from compact SUVs.

On the surface, the luxury brands’ plan for growth appears to be working. Sometimes driving around neighbourhoods in Toronto, Vancouver, and Montreal it looks like everyone is driving a luxury car nowadays, while the poor mid-size car has vanished from the landscape.

While the luxury market has proliferated, and its offerings and volumes have increased in the last ten years (up a combined 37,000 units), they have only grown market share by 1.2%. An accomplishment? Certainly. But the impact in the mid-size car market has to be driven by something more. We have looked at that phenomenon in this column before. Over the past few years, there has been a marked decline in volume – less than half of what it was in 2001.

Compact SUV popularity

Those sales did not vanish into thin air. Rather, many… likely most of them moved to compact SUVs. We can witness the shift in Chart 1 where there is nearly a complete inversion of market share between these two segments. This movement has been steady, and shows little sign of letting up, although there will certainly be a natural limit to the share of the market these vehicles will occupy.

The substitution is not very surprising. Whenever I sit through a marketing presentation for an SUV, the main purchase reasons always seem to be available all-wheel-drive and high seating position. Neither are offered in the mid-size car market, with a couple of exceptions for AWD. Add to that the fact that the MSRPs of the two segments are nearly the same, and we have a recipe for substitution.

Sub-compact SUVs

We may be sitting on the cusp on another shift in the market as we see the, rather unimaginatively coined, “sub-compact SUV” taking off. This new breed started life in Canada with the launch of the Mitsubishi RVR and Nissan Juke as 2011 models. It could be argued that the Dodge Raider or Lada Niva had the jump on the RVR, but let’s not.

Since then, the Ch evrolet Trax and Buick Encore landed on our shores in 2012. This year it’s the Fiat 500X, Honda HRV, Jeep Renegade, and Mazda CX3. This is beginning to look like a trend. Further proof: As this piece was being penned, Hyundai announced their Creta will take on the above mentioned. And we have to imagine that where Hyundai goes, so too will Kia. Toyota is rumoured to have devices to join the party, along with Volkswagen. That would make it at least one entry from every mainstream maker.

While we are expecting that the overall Canadian market will continue to see expansion over the long-term, there will almost certainly be substitution taking place from other segments. There are not enough buyers in the market to assume that every sub-compact ‘ute’ sale will be incremental growth.

Death of the compact car?

Scanning the industry and looking for likely candidates to be cannibalized by this new wave of utilities, there is little doubt it will be compact cars. Advantages of sub-compact SUV over a compact car: a) available AWD? check! b) higher seating position? check! c) similar pricing? sort-of! We can see some of the compelling consumer draws are seen here again between these two segments, but the pricing might be the limiting factor.

The sub-compact SUVs are more expensive than the heart of the compact car market. Even if you are willing to live with front-wheel-drive, they will no doubt be more expensive, but on a monthly payment. Leasing might close the affordability gap, though, as SUVs tend to have better residual forecasts. However, we are talking about some of the most price-sensitive buyers in the market.

There is a chance that some compact SUV buyers will move a size down to sub-compacts. This new crop of SUVs are around the same size as the original CR-V and Rav4 from the mid-1990s. That said, there will most likely be a perception among buyers that they are “too small.” In addition, the psychological impact of moving down-market often holds people back from doing so.

The question outstanding is: Will the sub-compact SUV impact compact cars with the same voracity as did the compact SUV with mid-size cars? That remains to be seen. However, there is a real possibility that in 15 years’ time we will be looking at a substantially weakened compact car market. It is well documented that there is better profit in SUVs than cars for car makers, so if price is the barrier to volume, there’s always a fix for that.

There are struggles ahead for all trucks because of fuel economy imperatives from regulators, so that may tilt buyers back to cars. More likely though, human ingenuity will take hold, and we will figure out how to make SUVs fit the efficiency dictums. There is big money for automakers in those all-wheel-driven, command-view-of-the-road shapes, so at the risk of sounding cynical – where there’s a profit, there’s a way.

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