Auto Spend To Rise 7%

Ad spending in the U.S. auto industry this year is expected to grow at a 7 percent rate to an estimated $10.2 billion—despite flat vehicle demand from new buyers—compared with a 6.2 percent rise in 2003 to $9.5 billion, according to new research from Merrill Lynch.

“There are two main reasons that we forecast steady ad spending growth,” writes the report’s author, analyst John Casesa: “Intense incentive activity, with supporting deal-related advertising, to stimulate demand in the face of excess assembly capacity and record new product launch activity in the next 24 months, especially at Ford, European and Korean manufacturers.”

Casesa suggests that ad spending in the auto industry is not only increasingly becoming a fixed cost of doing business, but also a rising one. As evidence, he argues that automotive advertising has historically corresponded to demand, with spending levels rising steadily since 1995—interrupted only by an 8 percent drop in 2001 as the economy softened and struggled in the aftermath of 9/11. But in 2002, ad spending and sales levels began to diverge. While marketers increased ad spending by 15.2 percent to nearly $9 billion, year-over-year U.S. vehicle sales dropped by 1.8 percent to 16,817,913 units.

According to Casesa, spending per unit rose at a 5.5 percent compound annual growth rate from 1995-2003, and he forecasts an increase of about 7 percent this year and again in 2005. “This divergence reflects not only the cyclical phenomenon of 0% financing incentives, which requires advertising to get the message out, but also, we believe, a secular trend toward an increasingly competitive U.S. auto market,” he writes.

The ammunition in such marketing wars has become driven by promotional tactics. Casesa underscores that consumer and dealer incentives, ranging from cash rebates to 0 percent financing and lease deals, are now a requirement for virtually all brands. He points to manufacturers like General Motors, which rebrands incentive strategies such as Summerdrive and Truckfest, as evidence that marketers need to sell the deal before they can sell the car. By Merrill Lynch’s estimates, the average incentive per unit in the U.S. market has risen, year-to-date, from $632 to $2,521.

When it comes to actually selling the car, Casesa points to the number of expected new products slated to fuel category ad spending as well. New- model introductions require disproportionately higher ad support, and he said that “the industry is currently in a period of the most intense launch activity we’ve ever measured.”

The U.S. industry’s total replacement rate will reach record highs in the 2006 and 2007 model years, which correspond to the 2005 and 2006 calendar years. (New models typically are introduced in the fourth quarter preceding the launch year with which they are associated.) The ’05 model year began Oct. 1.