On The Rise: Gas Prices, Interest In Small Vehicles

Back in 2008, when gasoline prices topped $3 per gallon, many industry observers

pegged the magic inflection point where consumers would turn away from big vehicles

at $3.50. Indeed, 2009 was a great year for vehicles like Honda Civic and Prius, even

as the economy dove into the sod. It looks like consumers may be heading into fuel

sippers again, and analysts say that $3.50 magic number still holds water.

Unfortunately for automakers whose profits come by way of larger vehicles, gasoline

has surpassed $3.50 in a number of markets. 

In December, just as the economy began showing signs of life, gasoline hit $3. Since

then, the trend has been up, with prices hitting $4 at the pump last week in places

like Southern California. And a new survey from Kelley Blue Book looking at consumer

sentiment and gas prices suggests that consumers have begun changing their vehicle

consideration criteria because of higher gasoline prices and fears about the economy.

Last month, per the firm's study, four out of five car shoppers said that gas prices

have influenced vehicle considerations. That reflects an increase of 11 percentage

points over the survey in January. Kelley Blue Book says the national average for gas

prices increased by 29 cents last month, and that 74% of the latest KBB.com survey

respondents said they expect gas prices to rise more in the next 30 days.

The firm says if prices were to stay at around $3 per gallon, car shoppers likely

would not make major changes in vehicle consideration criteria. But at the $3.50 per

gallon price point, more than half of consumers will feel that gas is so expensive it

will affect their vehicle consideration, and at $4 per gallon, 80% of consumers say

their vehicle consideration will be affected. At a price point of $5 per gallon,

almost all car shoppers (95%) said that gas prices would affect vehicle

consideration.

The current national gas price average is now around $3.39 per gallon, and Kelley

Blue Book says consumer activity on the KBB Web site corroborates results from its

survey. The firm says activity on its site in the compact segment of new cars has

increased by 9% versus January, which is the largest increase of any segment. But

hybrids have seen only a minimal gain of increased share 1% month-over-month.

Jack Nerad, executive editorial director and executive market analyst for Kelley Blue

Book's KBB.com, said the increased interest in fuel-efficient vehicles and lower

interest in "gas guzzlers" typically foreshadows corresponding changes in buying

behavior.

And Nerad tells Marketing Daily that the change has not been gradual. "It's been

precipitous," he says. "We saw a long lull [in consumer interest in compacts] through

most of the recession when fuel prices were down, and there was, in fact, lots of

interest in larger vehicles," he says. "But we have seen these new changes over the

course of three or four weeks, when the price of gasoline has increased by 33 cents.

There's a remarkable correlation when gas prices go up fast. It's like the frog in

lukewarm water: it never jumps out if the heat gradually increases. But if you

suddenly turn up the heat really fast, it jumps."

Nerad says that automakers are in a much better position now to address the latest

gasoline spike, and are much more aware of it. General Motors CEO Dan Akerson said

early in the year that he hopes to triple sales the Chevy Volt electric car, and that

the company is in a much better position -- product-wise -- to deal with higher

gasoline prices. "Ford has small cars, Chevy has Cruze, Hyundai has the renewed

Elantra, and there are more hybrids than ever before," he says.