Luxury Market: Upscale Models Gain Ground in Canada


(Photo: Scotiabank)

Increased consumer confidence sends buyers to luxury models.

In addition to buying more vehicles overall, people often change the type of vehicle they buy when consumer confidence rises. And that’s something we’re currently seeing both in Canada and across the globe: there’s a significant increase in the purchase of luxury models.

Luxury is the fastest-growing segment in Canada and across many other nations as well. In May 2015, sales of luxury models advanced 12 percent year-over-year and now account for more than 10 percent of our new-vehicle market. That’s the highest level on record, and well above the 8 percent average that we normally saw over the past decade. We’re now close on the heels of the 12 percent market share that has been typical in the United States.

This ties into the overall increase in household wealth we’re seeing in Canada. The net worth of Canadian households advanced by 8.5 percent in the twelve months coming into March 2015, which marked a considerable uptick over the 5.7 increase that households saw in the United States. And if you look at the first three months of 2015, the net worth of Canadian households rose by 3.4 percent when compared to the first quarter of 2014. That’s the largest increase since the global economic recovery began in mid-2009. By the end of March 2015, Canadian household wealth totalled a record $8.7 trillion, more than double what we saw ten years ago.

Looking at the higher-end models

On a per capita basis, Canadian households are quickly narrowing the gap with United States households, and this is enabling Canadian vehicle buyers to look at the higher end of the scale. And what’s more important, people not only have more money, but they’re feeling far more comfortable, and that’s what has enabled them to go out and shift into the upscale market.

What’s even more interesting is that we’re seeing this right across the country, from British Columbia to the Atlantic. Luxury vehicles have outperformed the market in every region this year, posting double-digit gains in most provinces and declining only in Newfoundland and Labrador, which is a highly oil-dependent jurisdiction. Luxury volumes even edged up in Alberta, which was a surprise because if any area was going to be weak, this would be it.

British Columbia has proven to be especially strong, and luxury is now a significantly greater proportion of overall volume. Luxury vehicles make up 15 percent of B.C.’s overall vehicle sales, which is about 50 percent higher than the national average. That’s not surprising, given the per capita wealth in the province.

Part of that is a direct result of housing prices, of course, but financial assets overall are also higher in B.C. than they are in the rest of Canada, and Statistics Canada indicates that the household wealth of British Columbians is more than 30 percent above the national average. The lowest share of luxury vehicles is in Atlantic Canada, where they make up 4 percent of sales, but we’re still seeing strong gains across the country.

Light trucks lead the way

Most of the increases aren’t in cars, but in the light truck segment, where automakers have been introducing a large number of new upscale models. Purchases of luxury light trucks have surged by more than 11 percent each year over the past five years, which is nearly triple the advance we’ve seen in luxury car volumes.

And this seems to be where Canadians want to be, especially at the upper end of the segment in terms of vehicle size. In every region in Canada, the largest increases we saw in the luxury segment belong to the large luxury SUV, with sales of these models increasing in excess of 80 percent year-over-year. In Alberta, it was surging sales of large luxury SUVs that brought the province’s numbers up from the smaller volumes that we initially expected.

Mid-level luxury takes over

The rise of SUVs and crossover vehicles is a global shift overall, as more people move into larger and more spacious vehicles, but in Canada we’re seeing buyers move up and beyond the entry-level luxury point that accounted for much of the growth we saw in previous decades.

Ten years ago, entry-level models accounted for half of the Canadian luxury market, but in recent years, their share has consistently been below 40 percent. The rise in popularity of luxury crossover utility vehicles, such as the Audi Q5 and Lexus RX, has enabled mid-luxury vehicles to topple the entry-level segment. This “medium luxury” segment has consistently been the top seller among luxury models in Canada since 2012, followed by entry-level and then by upper luxury.

Baby boomers have been the key drivers of the luxury market, but premium-level automakers have been bringing in younger buyers in recent years by adding higher-end options to their small- and medium-sized vehicles while keeping them at an affordable price. This is going to be a key development going forward, since by 2017, the 30-49 age group will exceed that of those 50 to 69. By the end of the decade, this younger group will be close to 10 million, and they’re all potential buyers.

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