The Return of the Auto Lease

Back in the 1980s, the famous psychophysicist and marketer, Howard Moskowitz, was tasked with conducting groundbreaking market research in the area of spaghetti sauce. (Yes, I did just say spaghetti sauce). Moskowitz set out to determine what consumers wanted from their spaghetti sauce and one crucial element to his research was the question: Do customers prefer chunky or smooth sauce? It turns out the answer was both.

Turning to the world of vehicle sales, we face a similar conundrum when we ask the question: Which is better, financing or leasing? Again, the answer is both.

Leasing: A Brief Summary

Financing and leasing each have their own advantages and reasons to be chosen by a car buyer. The proportion of buyers who choose the leasing option has varied over time, reaching a high of 45% in 2005 and currently hovering between 20 per cent and 25 per cent. In order to determine which is ‘better’ – financing or leasing – one must access the specific needs and wants of a given customer.

Leasing will tend to be the preferable option when a buyer knows in advance the number of kilometres driven over a set period of time (this figure is typically at or below 25,000km per year). Leasing is also the better option for customers who like to change their vehicles every two-to-four years without the worry of rolling over excessive negative equity. Conversely, financing will trump leasing for those buyers who drive over 25,000km per year, or for those who intend to drive their vehicle for many years, most notably long after the loan is fully paid off.

One could say that leasing has fallen out of favour in recent years with many OEMs offering limited lease programs and weak incentives. But perhaps 2021 should be the year of the lease for the following three reasons: (1) Leasing facilitates customer engagement and retention; (2) Contrary to popular belief, leasing still allows for the sale of backend products; and perhaps most important, (3) Leasing can mitigate many of the challenges brought on by COVID-19.

Customer Retention

Staying close to one’s customers has never been more important and leasing creates a guaranteed way to get your customers back into your store every two, three or four years. Leasing customers must make contact at the end of their leases to explore End of Lease options, and while this doesn’t guarantee a repeat sale, it certainly provides the important opportunity to reinforce your brand, show off your vehicle line-up and introduce any financing or leasing offers.

Back-End Product Sales

It is true that selling warranty products or other long-term enhancements such as rust-proofing, etc. are generally difficult for a lease sale however there are other options available to an astute F&I Manager. Insurances such as Disability, Life or Loss of Employment are very relevant in this time of economic uncertainty and these products typically offer attractive profit margins. Protection plans such as tire, wheel, dent and windshield are also excellent ideas for backend sales. Lease End Protection coverages are available which protect the customer against end of lease charges, which can be substantial. Finally, vehicle accessories are also an excellent way to increase the profitability of a lease sale. F&I Managers can introduce (or re-introduce, if the salesperson has already presented them once) the range of vehicle accessories available and can then explain the residualization of these accessories. By illustrating to the buyer that they are paying only a portion of the cost of these accessories, one increases the likelihood of a sale. (If at your dealership you prohibit F&I from selling accessories, you are definitely missing an opportunity).

COVID-19 Challenges

The COVID-19 pandemic has wreaked havoc on vehicle sales in Canada, with 2020 sales showing a 20% decline from 2019. With dealers accepting that this is the ‘new normal’ in auto sales, leasing presents opportunities to overcome these challenges.

Job Insecurity: Even buyers in seemingly secure, ‘recession-proof’ jobs were dealt a blow by the COVID-19 pandemic. The newfound realization that one’s job could disappear at any given moment creates a hesitancy that may scare buyers from taking on a six-, seven- or even eight-year auto loan. A lease, with its shorter term, may help mitigate these fears.

GenZ: Generation Z ˗ defined as those born between 1996 and 2010 ˗ are now coming of age and needing cars. In fact, the first GenZs reach the age of 25 this year (do you feel old yet?). GenZ was already a demographic known for fiscal restraint and an aversity to ownership of ‘big ticket’ items therefore leasing may be the less committed purchase this relatively untapped demographic desires.

Risk of Pricey Repairs: Repairs are a normal part of vehicle ownership. However, COVID-19 has highlighted this future ‘unknown’ and the risk of a large repair bill could be a deterrent to a car purchase. Leasing can eliminate this risk because leased vehicles are often still covered by the manufacturer’s standard or extended warranty. Also, leases tend to be for the first few years of a vehicle’s lifespan, a time when large repairs are far less likely. A lease with a term that matches the warranty period may be the ideal solution for customers weary of facing pricey repair bills in addition to their auto loan payments.

An Opportunity to Purchase Pricier Vehicles: Consultants, McKinsey & Company, have documented a purchasing shift during the COVID-19 pandemic toward ‘A-Brands’. They found that even with an overall decline in discretionary spending, customers are willing to spend more in order to purchase brands they trust. Leasing facilitates this shift to pricier vehicles because leasing typically carries lower payments than financing. This creates an opportunity to close a customer on a vehicle they had previously viewed as unattainable.

The entire food industry benefited enormously from Howard Moskowitz’s breakthrough discovery that some consumers wanted smooth spaghetti sauce and others wanted chunky. Food companies realized that offering a broader range of products to suit customers’ needs was the key to increased profitability. Similarly, vehicle leasing allows dealers to offer an alternative to financing and a purchase solution that is crafted to the new ‘2021’ normal.

Sandra Marchetti, BA, MBA, is a Senior Finance Manager at Georgetown Kia (part of the CarNation Group) in the area of non-prime financing and sales. Sandra also has a passion for writing about the auto industry with a specialty in customer engagement and marketing.

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