Rising prices blunt small cars' appeal, but segment still No. 1 in Europe

Higher prices caused by increased regulation costs are reducing the appeal of small cars in Europe even as the segment receives a boost from investment in full-electric versions.

Small cars remain Europe’s largest segment, but sales fell by 5.4 percent in 2019 to just under 2.7 million, as automakers focused on higher trim levels to cover increasing development costs to meet emissions targets.

“The best way to pass on regulatory costs is to do it on a model change. That is what we are doing with the Clio and Captur,” Renault interim CEO Clotilde Delbos told analysts on an earnings call last October.

The fifth generation of the Renault Clio, which was launched in June last year, remains the best-selling small car in Europe, both in 2019 and in the first quarter of 2020, despite pressure from the newly revamped Peugeot 208, which finished second in the first quarter, according to figures from market researcher JATO Dynamics

The effects of coronavirus lockdowns kept volumes down in the segment (see table, below).

Renault is hoping that customers will be impressed enough by the Clio's new interior quality and technology to spend on higher trim levels. “We made huge efforts to improve the interior to be able to have this pricing power to able to pass on,” Delbos said. 

Renault’s approach of raising perceived quality is being repeated across the sector. When Ford launched the latest-generation Fiesta in 2017 it targeted what it called the “premium small car sector” -- models typically selling for more than 20,000 euros.

Fiesta variants have been given their own bumper and grille treatments, such as the SUV-inspired Active. Ford also said it would stop offering some lower trim levels, resulting in smaller market share. The Fiesta was fifth in the segment for the first quarter of 2020, compared with third in the same period in 2017.

Prices are increasing across the segment. In Germany, for example, the most popular price band for small cars in the first quarter was 18,000 to 20,000 euros, accounting for 20 percent of the market, according to data from JATO. In 2016, the largest band was 16,000 to 18,000 euros, which made up 25 percent of sales.

The four price bands over 20,000 euros, the zone that Ford calls “premium,” accounted for 36 percent of sales, compared with 13 percent in 2016.

Rising prices, competition from the fast-growing small SUV segment and the impact of the coronavirus pandemic will mean that sales of small cars will not return to 2019 levels until 2023, analyst firm LMC Automotive predicts.

One boost may come from big changes in the minicar segment, which is increasingly moving to electric power as emissions regulations render it uncompetitive.

“An electric minicar is a lot more expensive than an internal combustion engine small car,” said Sammy Chan, senior analyst at LMC Automotive. “The shrinking choice of budget minicars may turn potential buyers to the next cheapest alternative” — small cars.

Price increases among small cars are also being driven by electrification. In the first quarter of this year 5.9 percent of all small car sales in Europe were full electric, led by the Renault Zoe, which entered the segment’s overall top 10 for the first time with sales of 20,477, an increase of 85 percent over the same period in 2019.

LMC forecasts that around 9 percent of small cars will be battery-electric by 2025.

PSA Group is joining Renault in offering full-electric small cars, with the Peugeot e-208 and sibling model Opel/Vauxhall Corsa-e launched with a 50 kilowatt-hour battery pack. The price is far above the normal small car range, at 29,900 euros for the Corsa-e compared with 13,990 euros for the entry-level Corsa.

But the timing may be right, particularly in PSA’s and Renault’s home country of France, where incentives starting June 1 to lift sales after the coronavirus slump favor electric vehicles, potentially cutting the price of a Renault Zoe from 32,000 euros to 20,000 euros if the buyer is scrapping an older diesel car. Germany is also expected to promote low-emissions vehicles in its own incentive plan.

Diesel’s share in the sector has shrunk to just 8 percent in the first three months of the year, with gasoline accounting for 79 percent. Mild-hybrid versions reached 1.5 percent, a figure that LMC expects to climb. By 2025 around 17 percent of all small cars made in Europe will feature 48-volt mild hybrid technology as automakers try to reduce emissions to hit increasingly stringent targets, LMC predicts. Full hybrids could account for 5.5 percent of small cars by that year, LMC says.

The same cost-cutting that has led automakers to delete lower trim levels has also shrunk body choices. Five-door hatchbacks accounted for 94 percent of all small car sales in the first quarter, up from 82 percent in 2016, according to JATO data. Three-door models were down to just 3 percent of sales, with station wagons dropping to 2.3 percent. Skoda is now the only volume automaker offering a small wagon.

Despite the increasing prices of models in the sector and the competition from SUVs, the segment is unlikely to lose its top spot in Europe, JATO Dynamics global analyst Felipe Munoz believes.

“Consumers in Europe have always liked hatchbacks, and even if this has changed with the arrival of the SUV, the lack of space and parking and the small roads in the city centers are still a reality,” he said.