(Bloomberg) -- The $89 a month it takes to lease a VW Jetta at some U.S. dealerships is about as low as the price of using an iPhone on some cell phone contracts. It’s also a sign of how Volkswagen Group is moving to turn around the fortunes of its core brand in the U.S.
The bargain deal -- available after a down payment of about $2,500 on the $17,325 Jetta -- runs over a three-year term. Other recent offers ranged from as low as $39 a month in San Jose, California, to $99 in Boston. VW’s reliance on leasing is designed to lock in repeat customers for 2017, when the automaker can show them an improved product line. VW, with an aging lineup that lacks a midsize SUV, seeks to more than double U.S. sales to meet an 800,000-vehicle goal by 2018.
Subsidized leases from Volkswagen, sometimes sweetened by the dealer, illuminate the U.S. as a weak spot for the world’s second-biggest automaker. VW’s American sales have dropped for two straight years, even with industrywide growth now in its sixth year. In recent months, leases accounted for as many as 45 percent of the company’s deliveries -- more than Porsche and about double the rate of most mainstream brands.
“This market isn’t particularly in VW’s favor,” Jack Nerad, an analyst at KBB.com, said in an interview. “They sell mostly small, fuel-efficient kind of stuff, and gas prices have not favored that. A lot of their deals are subsidized. That’s the way they put cars on sale.”
The company needs to get the U.S. market right to reach its goal of overtaking Toyota as the world’s biggest automaker by 2018. Its U.S. deliveries fell 10 percent to 366,970 vehicles last year and were down 7.5 percent through April, even with a bump that month from the entry-level Jetta, one of the oldest models in VW brand’s lineup.
Monthly sales
Automakers report May sales results Tuesday. They’ll probably post a 1.1 percent decline in deliveries of cars and light trucks in May to about 1.59 million, the average estimate from 11 analysts surveyed by Bloomberg. There were 26 selling days last month, one fewer than in May 2014. Adjusted for seasonal trends, the annualized pace probably rose to 17.3 million, the fastest since August.
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Volkswagen is expected to say that monthly sales fell 0.9 percent, while Fiat Chrysler Automobiles may report a 2.6 percent increase, the widest gain from a year earlier among the largest carmakers, based on the estimates. General Motors deliveries may have risen 0.1 percent and Ford Motor Co.’s may have declined 3.1 percent.
VW’s vehicles get criticized by reviewers for stodgy styling and being a step behind on safety and infotainment technology. While there is a market for conservatively designed vehicles, it’s already cornered by the two top-selling sedans: Toyota’s Camry and Honda’s Accord.
Strong competition
“Those customers who want a very conservative product will go with Toyota, and VW doesn’t have a chance to beat it,” said Alexander Edwards, managing director of Strategic Vision, a marketing research firm in San Diego.
VW’s U.S. car lineup beyond Jetta includes the midsize Passat, compact Golf hatchback, sportier GTI and Beetle. Its SUVs, the compact Tiguan and upscale Touareg, have yet to catch on even in a market hungry for SUVs and pickups. A new midsize SUV is slated to begin production in Tennessee in late 2016.
VW is leaning on leases until it can start reaping the benefits of a planned $7 billion investment in North America. To be more nimble, it plans to introduce new products every five years and refresh models after three years instead of seven. The fruits of that program won’t start to reach dealer lots until at least 2017, so doing leases now helps VW ensure customers come back to see a spiffed-up and expanded fleet.
‘Effective tool’
VW said its leasing percentages are higher because it has greater market share in the Northeast, Florida and California, where customers are more likely to lease. The automaker also likes the increased likelihood of repeat business as consumers come back to dealerships when the contracts end.
“Leasing is a very effective tool to support sales and leasing customers are significantly more loyal,” said Carsten Krebs, a company spokesman. “These returning customers will provide VW and our dealers with a business opportunity. Generally we run a very balanced and quality-oriented business model.”
The strategy has risks by jeopardizing profit on each transaction and possibly pushing down resale values because of the increase in the number of leased vehicles that return to be resold. VW is averaging discounts, which include cash or leasing incentives, of about $3,020 a car through April, or $134 more than last year and just $64 less than what U.S. automakers offer, according to Autodata Corp.
The outlook for VW’s residual values has declined from a year earlier since fall 2013 and outpaced the industry, according to forecasts from TrueCar Inc.’s ALG unit.
Higher cost
Lower residual values increase the cost of making a lease affordable for the consumer and damage the brand, said Kevin Tynan, an auto analyst at Bloomberg Intelligence.
Leasing rates are determined by interest rates and residual value -- how much the vehicle will be worth at the end of the lease. The cost of a lease is the difference between the selling price and the residual value, spread across the months in a lease term. Automakers and dealers subsidize leases to help entice buyers. Down payments and interest rates can also affect the price.
“Subsidizing leasing lets you discount without pushing the cash across the table for everyone to see,” Tynan said. “That protects your brand image a little bit and it gets you the first shot at that person when they return the lease vehicle.”
About two-thirds of lessees enter into another lease with the same brand when their contract expires, he said.
More leasing
About 28 percent of vehicles in the U.S. were leased in April, compared with as low as 12 percent in 2009. More leasing means a glut of newer used cars on the market, and those vehicles will compete with new entry-level vehicles, Tynan wrote in a report.
VW’s lease rate has been near 30 percent of sales since late 2011 and reached as high as 49 percent in late 2013. Most mainstream brands are closer to 20 percent, KBB’s Nerad said.
VW’s rate is “beyond what most manufacturers would be comfortable with over the fairly long haul,” Nerad said. “There’s some risk of damage when you have that percentage out in leasing. Those vehicles will come back in two to three years and could depress your residual values. It makes it harder and more expensive to lease the next time around.”
Still, spending marketing money now to lock buyers into three- or four-year leases is an efficient way to keep customers, said Alan Brown, general manager of Hendrick Volkswagen in Frisco, Texas. His suburban Dallas store is VW’s largest in the U.S.
“If VW has all this new cutting-edge technology, wouldn’t you want to put a heavier emphasis on your lease programs so that in two, three or four years you know that you’ve got a lot of natural traffic coming back to you?” Brown said.
