 Volume 9, Number 1 First Quarter 2007 FEATURES After the Boom, Housing Affordability a Growing Challenge Florida Drives the National Auto Market A Falling Dollar: Good or Bad News? DEPARTMENTS Southeastern Economic Indicators
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The market for domestic cars in the Sunshine State has undergone recent changes, as traditionally strong fleet sales lag and foreign makers gain market share. Although cars are still a big business in Florida, what autos are big sellers and how is the marketplace evolving?
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Floridians' love affair with their cars is evident from the state's auto sales during the past few years. Though it is the fourth most populous state, Florida has moved past Texas into second place behind California among the nation's largest vehicle markets. In the process, selling and maintaining cars has become a substantial part of Florida's economy.
Cars are a key to economic ignition
Because of cars' economic impact in the state, domestic and foreign car producers count Florida as an essential part of their sales strategies.
Recently, though, domestic automakers have faced two challenges in Florida. For one, the state's substantial fleet vehicle business—usually large sales made to rental agencies, corporations, police forces, and taxi companies—has lost some luster. Second, imported cars have made significant inroads into the state's retail car sales business, which used to be the domestic makers' stronghold. The changes in the marketplace have caught the attention of makers and dealers alike.
In Florida, cars outpace people
Even though it's slowed in the past year, Florida's car growth has exceeded even the state's booming population growth. The number of vehicles registered in the state soared 44 percent from 1997 to 2005, to nearly 16 million, according to the Federal Highway Administration. Meanwhile, the population rose by 21 percent, to just under 18 million people, according to the U.S. Census Bureau (see chart). During that period, total cars registered nationwide increased just 16 percent, the Federal Highway Administration said, while the U.S. population rose by 9 percent.
Despite domestic automakers' well-documented ills, it's not as if Americans have stopped buying cars. The United States is the world's largest and most profitable vehicle market, and Florida does its part to keep it that way. In 2006, Floridians registered 1.4 million new cars and trucks, including fleet vehicles, or just under 9 percent of all new vehicles nationally, according to Cross-Sell.com and the automotive research firm J.D. Power and Associates, despite making up less than 6 percent of the U.S. population. Florida car registrations in 2006 were down slightly from 2005, largely because of declining fleet sales.
Residents, tourists take to the open road
The basic factors that make Florida such an attractive car market are simple: It is a large state, with nearly 18 million residents, and few residents use public transportation. Less than 2 percent of Florida households with people who commute to work used transit in 2005, compared with just under 5 percent nationwide, according to the U.S. Bureau of the Census. At the same time, much of Florida's car business is fueled by visitors.
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Florida's tourism industry provides a huge rental car market. Consequently, fleet or commercial auto sales have traditionally accounted for a large portion of the state's automobile market.
Before Sept. 11, 2001, fleet sales made up about 35 percent of Florida's new vehicle registrations, according to estimates from the Atlanta Fed and R.L. Polk, a firm that analyzes the automobile industry. While that percentage has dropped for the state overall because of declining fleet sales, the state's prominent tourist destinations such as Orlando, Miami, and Tampa reported high fleet registration volumes—between 40 and 52 percent of all titled new vehicles last year.
Fleeting fortunes
Car rental companies serving tourists account for the bulk of Florida's fleet business. Last year, 290,000 new fleet vehicles were registered in Florida, about a tenth of all fleet vehicles registered nationally.
Traditionally, fleet sales fluctuate in response to economic developments. In the wake of Sept. 11, 2001, for example, tourism plummeted, especially at Florida destinations that rely on visitors who fly in. However, lower fleet numbers today appear to be driven less by declining demand and more by the auto industry's strategy to enhance long-term profitability.
Specifically, domestic automakers have reduced production of fleet vehicles, which are typically sold on a volume basis at discounted prices, and placed renewed emphasis on the more profitable consumer retail market. Until recently, American makers used fleet sales as a way to manage inventories during periods of subpar retail sales and as a reason to continue the production of vehicles that were fading stars on the consumer market, such as the Ford Taurus. The Taurus, which for many years was the best-selling car in America, recently had sold mainly to less-profitable fleet markets. However, Ford halted that strategy when it closed its Taurus plant in Atlanta in 2006.
With the focus on retail sales, fleet registrations in Florida last year dipped 6.3 percent, primarily because of lower sales to Palm Beach County and the Orlando area. Orlando, which attracts nearly 50 million visitors a year, is reportedly the world's largest rental vehicle market. But even Mickey Mouse couldn't prevent Orlando's 2006 fleet registrations from dropping more than 4 percent from very strong 2005 levels. Bob Schnorbus, chief economist at J.D. Power and Associates, figures fleet sales will continue to fall in 2007, according to that firm's January 2007 sales report.
Retail market holds its own
Unlike fleet sales, however, the retail business is remaining positive, if only modestly. In 2006, Florida's new retail vehicle registrations rose less than half a percent. However, if not for luxury models and imports, particularly Japanese cars, there would have been no growth at all. Among Florida's 25 best-selling cars in 2006, only eight were domestic models.
Furthermore, among Florida's top 25 auto dealers, only four sell mainly domestic vehicles, according to AutoCount, a firm that tracks new and used vehicle sales. And in 2006, only one of those four posted higher year-over-year sales. Also, combined sales of cars and trucks at the domestic dealers dropped more than 6 percent, according to AutoCount. By contrast, foreign cars had a 19 percent increase in registrations among those top Florida dealers, according to AutoCount, and the Toyota Camry has become the Sunshine State's most popular new vehicle.
The high end of the market is faring similarly well. Powered by affluent south Florida, high-end luxury cars continue to speed off the state's dealership lots. Sales of brands like Lexus, Mercedes-Benz, Cadillac, Audi, and Hummer posted double-digit gains in the state last year, with several brands reporting gains at double their national rate, figures from AutoCount indicate. Jaguar is an example of the high end's success. Based on registrations, Jaguar's market share in Florida is double its share of the entire U.S. market, according to AutoCount. Other luxury brands, such as Porsche, also are far more popular in Florida than in the country at large.
Unlike those high-flying market segments, trucks were eating dust in 2006. Truck registrations in Florida slumped by about 3 percent last year, according to the state Department of Motor Vehicles. In fact, with the exception of Miami-Dade County, most of Florida reported weak truck registrations.
Florida was hardly alone, as truck sales sagged across the nation in 2006, partly because of higher gas prices. Ford's F-150 sales in Florida were down 16 percent, and Dodge Ram sales were down 21 percent in 2006 compared with 2005, and sales of the Chevrolet C-1500 sank by 8 percent. Bucking the trend was a foreign truck make, the Toyota Tundra, a full-size pickup assembled in Texas and made with engine parts manufactured in Alabama. Florida's Tundra sales increased nearly 13 percent in 2006 over 2005.
Pinning hopes on retailers
For domestic automakers, retail markets are essential for a return to profitability. Manufacturers' reliance on fleet customers was a temporary solution to offset flagging retail sales. However, that stopgap fix and the strength of foreign car sales hurt domestic companies' bottom lines: Because of a number of reasons including labor and employee health care costs and customer incentives, the Big Three Detroit automakers make an average of $2,400 less in profit per vehicle than Toyota, Honda, and Nissan, according to a recent analysis from the Harbour Report, an automobile industry publication.
Florida's vehicle market, as one of the nation's largest in retail and fleet sales, will likely remain a bellwether for the rest of country. In weaning themselves from reliance on fleet sales and countering foreign carmakers' inroads into the retail market, U.S. automakers face stiff challenges in Florida. The strategies they pursue will no doubt be watched closely by the rest of the country.
This article was written by Gus Uceda, an economic analyst at the Atlanta Fed, and Charles Davidson, a staff writer for EconSouth.