Two of the biggest pieces of American consumerism are moving in opposite directions, and it may be related.
According to Michael Exstein at Credit Suisse, the two stories are related.
“While there are a variety of reasons why auto sales appear to be doing better than other discretionary retail, we highlight two possibilities: (1) low interest rates on auto loans, and (2) new features in cars that incentivise purchases,” wrote Exstein in a note ot clients Monday.
Interestingly, Exstein believes that things like the divergence in interest rates for auto loans and credit cards are actually benefiting car sales at the cost of the sales of other goods.
“The first potential reason for robust auto sales, at the expense of traditional retail sales, is that auto loans rates are at record lows of 4.1%,” he wrote.
On the other hand, said Exstein, credit card interest rates have ticked up to 13.9%.
“The availability of cheap financing for auto purchases relative to general retail purchases could be one reason why consumers are purchasing more cars now while rates remain low,” wrote Exstein. “The derivative result is that monthly auto loan payments are competing for a greater portion of households’ disposable income each month, leaving less to allocate to other discretionary purchases such as apparel.”
Secondly, new innovations in cars and trucks such as blind spot monitoring, internet connectivity, and backup cameras have improved vehicles to the point where consumers feel compelled to buy them. Exstein said that this innovation is lacking in the retail sector.
“If there is one thing that traditional apparel and accessories retailers can learn from auto companies, it could be to try to add new benefits and features while clearly communicating these about their products, so that consumers have more of a reason to upgrade or spend at traditional retailers,” he said.
He highlighted examples where companies are slowly beginning to latch on to these ideas — Fossil buying fitness tracker Misfit, Kate Spade adding phone chargers to their bags, and Nike’s Flyknit cleats.
By pushing innovative products, Exstein said that retailers can increase consumer’s urgency and incentivise new purchases.
With the possibility of increasing wages, Exstein said that retailers need to act more like carmakers to get people out shopping and grab a bigger piece of consumer’s wallets.