Higher gasoline prices are only part of the equation.
Echo boomers, the children of baby boomers, are coming of age and starting to buy their first cars. Eventually, they'll become the fastest-growing car-buying demographic, says Susan Jacobs, president of auto consultant Jacobs & Associates. "All these people are up for grabs, and they don't have any allegiance to any [auto] franchise, so strategically this is a very important segment long term."
New small-car entries are popping up faster now than since the 1970s, an era of gas shortages and the start of federal fuel economy regulations. All the other mainstream categories are overcrowded, Ms. Jacobs says.
The entry-level small-car segment had just four models in 2005. This segment, which J.D. Power & Associates calls "compact-entry," will be the fastest-growing segment in the U.S. in the next few years, increasing by more than 90% from 140,931 units in 2005 to 273,658 in 2010, says Mike Dawson, manager-global forecasting analysis at Power.
At the moment, this industry segment is still, well, smallest-0.8% of the auto industry's 16.9 million units sold last year, but is expected to rise to 1.5% in 2010. Automakers this year are adding three all-new models, which will power sales: American Honda Motor Co. is launching the Honda Fit this month. Then comes Toyota Motor Sales USA's Yaris and Nissan North America's Versa, positioned and priced under the Sentra in the Nissan brand's lineup.
Toyota's Corolla and Honda's Civic were their entry-level cars when they arrived in the U.S. decades ago. But over time, both cars got bigger, with more finesse, as the marketers responded to what buyers wanted, says George Peterson, president of consultant AutoPacific. "The market for spartan, bare-bones transportation is pretty thin, especially when you can buy a pretty darn nice certified used car for the same price as a small new car with much more and better equipment."
Today's small cars are a far cry from the Ford Pintos and Yugo econoboxes of yore, what with the arrival of pricier models such as BMW's Mini Cooper and Audi's A3 five-door hatchback. Sprinkle in Toyota's hip Scion sub-brand, aimed at young trendsetters who love to customize their ride, and the industry has become an old dog learning new tricks.
"The old way of looking at entry-level small cars has been thrown out the window," says Wes Brown, an analyst at consultant Iceology. BMW proved consumers of all ages would pay a premium for a small car if it had cool design and made a fashion statement. Automakers are taking small models sold in other parts of the world and bringing them to the U.S., a move that reduces development costs.
NO TASTE FOR 'VANILLA'
Young buyers want functionality and style, Ms. Jacobs says. "Young buyers want to stand out. No one wants to buy a vanilla car."
The Mini and A3 fall into what Power calls the "compact-premium" segment, which had 28 models last year and sales of 2.29 million units, accounting for 13.6% of the entire industry, says Mr. Dawson. That segment will grow by 3%, with 34 models in 2010, to sales of 2.36 million vehicles, he projects.
Even the experts disagree on certain models and whether they're in the subcompact, entry-level or premium compact segments, and that's part of the marketing challenge. Automakers will need to build awareness for their new small-car models, and the elusive target is driving marketers to increase their spending online and in other nontraditional places.
In additional to events and traditional media like TV, Chrysler Group's Dodge Division has eight video games-four of them custom-made-for the current launch of its Caliber, with a base price of $13,985. The main target for the car is echo boomers.
The estimated $50 million blitz for the car from BBDO Detroit, Troy, Mich., is themed "Anything but cute" to match the Dodge brand's bold attitude. "Caliber is not a car you drive not to be noticed," asserts George Murphy, global senior VP-marketing of Chrysler Group.
"Small cars don't have to be cheap or bare bones," Mr. Murphy says. The Caliber has cool features like a cooled beverage-storage bin it calls the Chill Zone, illuminated cupholders and a pocket for storing a cellphone or MP3 player.
"We see opportunity in the segment," says Mr. Murphy. "We're very bullish on small cars."
DETROIT PLAYS CATCHUP
Detroit's Big 3, which aimed resources to grow their truck share in the 1990s and earlier this decade, are behind in small cars, the experts say. General Motors Corp. was losing money on small cars in the U.S. in the late 1990s and allowed its entries, the Chevrolet Cavalier and Saturn S line, to get long in the tooth.
But GM, Ford Motor Co. and Chrysler Group can all "find products that can fit into the segment and would be a big strategic benefit if they could capture the imagination of young people," Ms. Jacobs says, though she adds that Detroit automakers tend to execute vehicles poorly, price them too high or have lofty, unrealistic sales expectations.
Brent Dewar, GM North America's VP-field sales, service and parts, begs to differ. "We rock in small cars," he says, adding that GM has 40% of the subcompact segment with the Chevrolet Aveo.
The key question in all this may be: Why did small cars fall out of favor in the first place? And the answer lies beyond the price of a gallon of petrol.
In the early 1970s and early '80s, small cars weren't too cool. Back then, "they were slow as stink," says AutoPacific's Mr. Peterson. "They were noisy and the doors clanked when you shut them. Only recently have you been able to buy a small car with a great image at a premium price."