From the February issue: With new-car purchases lagging and used-values increasing, captives and OEMs are reimagining lease products to keep their customer bases growing.
Roughly a decade ago, 1.4 million new vehicles were leased — a 16% penetration rate. Fast forward to 2019, and lease volume is expected to reach 4.1 million, with penetration as high as 31%, according to Edmunds.
To maintain penetration levels, however, financiers will have to look beyond their existing customer networks. “The biggest challenge for leasing is the fact that the base of buyers is going to be repeat buyers,” Jeremy Acevedo, manager of industry analysis at Edmunds, told Auto Finance News.
On top of that, lenders need “flexibility in leasing” to attract new customers, Geoff Robinson, vice president of Mercedes-Benz Financial Services, told AFN. Industrywide, captives are diversifying lease terms, marketing certified pre-owned programs and experimenting with subscription service models.
Leasing Favors Customer Experience
Lease terms cater to customer preference, arguably more so than traditional loans, Robinson said. “[Mercedes-Benz Financial] wants customers to come into the product and stay in the product,” he said. “To do that, [lenders] have to establish trust and transparency. There are more touchpoints with the consumer than a loan contract, you have to bear that out.”
By “touchpoints,” Robinson is referring to the various forms of contact by which lenders provide consumers with transparent information. “Treat customers individually and present [information] upfront,” he said.
Mercedes-Benz Financial, which provided leases for nearly half the vehicles it sold last year, is open to buyer flexibility with lease terms that go out to 60 months, Robinson said. Additionally, the captive focuses on training F&I professionals across its 385 franchise dealerships in the U.S. with the proper dialogue to communicate with consumers about lease contracts.
“That’s the key to success — making sure the customers’ needs are understood and customers can access the information needed,” Robinson said. “Keep their eyes open to the experience of leasing as a viable option to mobility. If we don’t do it right, then we lose that customer.”
The captive’s U.S. portfolio consisted of 491,000 lease contracts totaling $23 billion as of Sept. 30, 2018, according to a recent S&P Global Ratings presale report.
Though lease volume and penetration rates have held steady industrywide since 2016, according to Edmunds, the loan-lease ratio has shifted at Kia Motor Finance. Leases accounted for 51% of the portfolio last year, down from 57% in 2017, Hyundai Capital America National Sales Director John Thacker told AFN. On the Hyundai brand side, the portfolio mix has been steady at 39% loan to 61% lease, according to an S&P Global Ratings presale report.
Thacker attributed the pullback in leasing for Kia vehicles on more aggressive retail loan incentives. The OEM “went heavier on cash” last year, which tends to make leasing less attractive, he said. “Consumers tend to go with the bank with the lower rate,” he added. However, HCA’s lease mix is higher for Hyundai because consumers are typically “good credit customers,” Thacker said. Meanwhile, Kia has more “marginal credit consumers,” with fewer people qualifying for leases, he said.
In spite of Kia’s lower lease penetration, the loyalty with consumers is a “must-have” for strong branding initiatives, Thacker said. “Kia lease is an important product because the Kia buyer is typically a younger buyer,” he said. “It’s a great way to introduce people to the brand with very low risk.”
Flexible Lease Terms
HCA’s major initiative for promoting leases is its Hyundai Plus Lease subscription service, a bundled lease that includes prepaid maintenance and car insurance, Thacker said. The program is piloted in Arizona, Illinois, Indiana, Ohio, and Texas.
The captive is also looking to expand the program to its Genesis brand, which boasts a lease penetration rate in the 60% to 75% range. Since launching in July 2018, the performance of the pilot is looking “promising,” Thacker said. Hyundai’s subscription service allows consumers to lease cars on a three-year term with insurance and maintenance bundled into the $279-per-month starting price. That compares to new-car, month-to-month dealership subscription programs that typically start at $1,000 per month.
Additionally, the program has allowed the captive to bolster leasing volumes in Texas, a state whose car buyers usually prefer loans. “Texas — not generally a lease market — generated businesses where we don’t have a big lease portfolio,” Thacker said, noting that 60% of bookings from the program were coming from Texas.
Meanwhile, Mercedes-Benz Financial released its subscription service, called Mercedes-Benz Collection, as a means for recruiting new customers, Robinson said. The program is priced between $1,095 and $2,995 per month, with members paying a one-time activation fee of $495. The service is being tested in Nashville and Philadelphia. The monthly subscription fee for the tier also includes insurance, 24/7 roadside assistance, and vehicle maintenance.
With the subscription market growing rapidly and consumer appetite changing when it comes to obtaining vehicles, “financial and mobility services are evolving to fit those demands,” Robinson said. Subscribers can access any type of vehicle within their tier with no mileage limitations.
A number of OEMs — including BMW USA, Ford Motor Co., Hyundai Motor Co., and Volvo Cars — are exploring subscription services as a more flexible lease. However, these services have come into question by analysts as being too costly for affordability-focused consumers.
“One thing that has become apparent [for subscription services] to the dealership and OEM is that right now prices are just far too high for the vast majority of shoppers,” Acevedo said.
For example, at yearend 2018, General Motors Co. hit the pause button on subscription service Book by Cadillac, after launching two years prior in Los Angeles, Dallas, and New York. As long as they are available, direct-to-consumer leases and indirect leases are more financially viable transactions than subscription leases, Jim Houston, senior director of auto finance at J.D. Power, told AFN. “It’s the cost,” Houston added, noting that a consumer can lease a Cadillac for less than $1,800 a month. “It comes down to getting money for the used vehicle,” Samuel Ellis, principal consultant for Auto Experience, told AFN. “These programs are just going to struggle until they can make the economics work. The discussion needs to center around, ‘What needs to be innovated?’ Describing [a lease] different doesn’t necessarily make it better.”
Still, this year could serve as a “perfect storm” for leasing, Nissan Motors Acceptance Corp. President Kevin Cullum told AFN.
While NMAC has plans in the works to offer consumers a subscription service and sees such programs as “part of the opportunity to grow,” the captive is more interested in diversifying its lease terms by lengthening instead of shortening, Cullum said.
“Short-term leasing has never been huge, especially when you have fleets to compete with,” he said. “It’s difficult to manage a short-term residual at a payment consumers will want.”
To that end, NMAC relies on lengthening lease terms and creating a diverse mix within its leasing portfolio. “A 48-month term is a good extended term. If we can blend our mix where we have [an even] spread between 24-month, 36-month, and 48-month, that will help the portfolio grow,” Cullum said.
Additionally, extending standard leasing terms to 48 months from 36 is likely to increase lease penetration to 30% of its portfolio, he said. However, “the extra year is another year that the customer is not in the trade cycle, which has always been the pushback from dealers in terms of leasing extensions.”
Still, Cullum plans to “push internally for our programs to support a diverse portfolio that will enable [NMAC] to take our lease penetration as high as 30%” — from 26% currently, he said. “It will take an organizational and dealer-supported effort to make sure [NMAC] is managing marketing risk appropriately,” he added.
Meanwhile, plans by parent company Nissan Motor Co. to release new models in the next 18 months will increase leasing penetration in the latter part of NMAC’s fiscal year, which ends March 31, 2020, Cullum said. “As we launch our all-new Sentra, Rogue, and Versa, we will be able to take advantage of increased lease opportunities,” he said. NMAC had $28 billion of leases outstanding as of Sept. 30, 2018.
Conversely, Toyota Financial Services focuses on flexible leasing terms with a short-term leasing bundle approach, but not a subscription service.
In September, the captive announced the Lexus Complete Lease program, slated to launch this quarter. The 24-month, 20,000-mile limit program bundles lease payment, car insurance, and maintenance coverage. “[TFS] works hard to ensure that we capitalize on the opportunities leasing offers us to build brand loyalty and to get those customers coming off lease back into new Toyota and Lexus vehicles,” Karen Ideno, TFS group vice president of product, marketing, brand and remarketing, told AFN.
To attract new and repeat consumers, the TFS and LFS websites have a “Buy or Lease” quiz, which provides consumers information about leasing new or certified used cars, along with financial education resources designed to help in the decision process, Ideno said. “Younger consumers looking to enter the car market certainly have far more choices to consider than previous generations,” she said. “But it isn’t just relative to a customer’s age — those who have traditionally financed the purchase of a vehicle are seeing leasing as an attractive option, as well.”
Keeping Customers in the ‘Fold’
The biggest challenge with leasing, Acevedo said, is how lenders retain existing customers. Enter a beefed-up, certified pre-owned program.
Mercedes-Benz Financial, HCA, and NMAC collectively attribute customer loyalty and reduced risks to leasing CPO vehicles. Additionally, CPO programs provide dealers with shorter trade cycles and consumers with more reliable vehicles. “We spend a lot of time talking about the loyalty message,” HCA’s Thacker said. “What’s the point to conquest new customers if you’re watching your existing customers peel off?”
To that end, HCA favors a shorter lease term — 24 months — in a bid to drive consumers back to the dealership earlier than 36 months. This strategy creates a strong lead list for the captive’s dealer partners. “Dealers have access to pull the pending leases that are going to terminate soon and have access to [consumers] early on before their lease term is up,” Thacker said. A strong certified pre-owned program is a driver of higher leasing volumes since it allows off-lease vehicles to have a great landing spot, and presents an attractive option for consumers.
As the market continues to experience rising residual values, it’s timely for lenders to take advantage. Rising residual values have created a strong used-car market, which has had a “positive impact,” for captives and their leasing programs, Thacker said. “[HCA’s] loss on terms is down because used values are up,” he said. What’s important for lenders is to strategize where to allocate money for residual losses. “Any lender in leasing has to keep an eye on residual risk,” Thacker said. “Make sure the portfolio is balanced, [and] residual losses are not excessive. It’s about finding the right balance of reserve. If you reserve too much, you leave business on the table. If you don’t reserve enough, you have losses.”
Additionally, with an influx of off-lease vehicles coming into the market under 10,000 miles, 2019 is slated to serve as another good year for leasing, Robinson said. Dealers access and use the Mercedes-Benz version of a CPO program, which the captive calls a courtesy vehicle program, to make the cost of mobility “digestible” for consumers, Robinson added.
Boosting leasing volumes includes shortening or extending term lengths, experimenting with subscription programs, and pushing CPO programs through dealerships. However, to have a successful leasing model is about sustainability and customer loyalty within the multiple ways of presenting leasing as a mobility option, Robinson said.
“Remember on the back end that the customer needs to feel that everything is handled,” he said. “Have a remarketing channel at the end of the contract to be sure you have an end to the channel. Remarketing the off-lease vehicles with our dealer network is a key to success with our sustainability.” To think a dozen years ago, HCA didn’t have a lease option for consumers.
“To have no leases and to see 12 years go by and now [leasing] is 50% to 60% of the portfolio, it’s been a very good growth product for both the dealers, OEMs, and captives,” Thacker said. “We’ll ride this wave as long as we can.”