When Boomers Go, Who Will Buy Cars?

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Lee Iacocca knew he was on to something -- and he had to have been astonished that no one else in the industry had given it much notice. He was sure the auto industry was about to change more dramatically than it had since before the Great War, when perfecting the moving assembly line had lowered the cost of the Model T to such an extent that it became affordable for the masses.



What Iacocca saw was that in 1964 the first of 78 million baby boomers would turn 18 and lead the largest wave of potential car buyers history had ever seen. In April of that year, Ford (F) introduced the Mustang, a car aimed specifically at that burgeoning demographic, and, as they say, nothing would ever be the same.



The boomers had their own music, their own automobiles, and their own lifestyle. A generation of contradictions, the boomers championed the environment but willingly bought muscle cars. They protested one controversial overseas war but four decades later ardently supported another one -- at least at first. They demanded the drinking age be lowered to 18 and then, as the last of them came of age, insisted it be raised back to 21.



Unburdened by the economic fears their parents had absorbed in the Great Depression and in the aftermath of World War II, the boomers would go on to become the Greatest Generation of consumers. First they rejected the concept of department store layaway programs, which for decades had been the mainstay of American buyers who lacked the cash to make impulse purchases. After all, layaway sounded suspiciously like having to save up to buy something you wanted. No, the boomers demanded the product now; paying for it could happen later. MasterCard (MA) and Visa thanked them.



Glory Days



In April, 1964, as the Beatles' Can't Buy Me Love topped the charts, Ford trotted out the Mustang -- and sold 22,000 on the very first day. Over the next year, Ford would go on to sell more than 400,000 Mustangs, while Chevrolet sold more than 1 million Impalas in 1965 alone [making it the best single-model sales year ever]. Detroit has dreamed wistfully of those years ever since.



But by 1975, Toyota (TM) had surpassed Volkswagen (VLKAY) to become the best-selling import brand in America. In this the boomers made their second mark, and the rise of the Japanese auto industry wasn't far behind.



Meanwhile, other consumer status symbols were coming to siphon off boomers' discretionary funds. Affordable and exceptional color TVs, first-rate home stereo systems, microwaves, VCRs, compact disks, mobile telephones, and personal computers would all be offered to the public over the next eight years. These items ended the day when new automobiles in driveways determined status in the neighborhood. If Detroit's manufacturers made one major mistake, it was that they failed to appreciate how much boomers were afflicted with the consumer version of attention deficit disorder. This generation demanded the latest and greatest whatever: Warmed-over versions of automobiles they'd owned just five years earlier held no appeal for a generation that equated new with improved.



Over the next two decades the picture darkened even more, and in this it seems the Japanese, not the business descendants of Iacocca, first recognized a problem. Japanese auto executives studied surveys that showed that the once youthful buyers of Camrys and Corollas, Accords and Preludes were now well into middle age. There was nothing shocking in this other than Toyota's fear that this generation saw its Camry in the way we once perceived our parents' Impala: an old and conservative person's automobile, possibly shunned by Generations X and Y. Toyota's solution was to create its Scion line of vehicles, while Honda (HMC) came up with the surfer-boy-friendly Element.



While Toyota has had some success attracting younger buyers with Scion, at first both the Honda Element [BusinessWeek.com, 3/23/07] and Scion xB [BusinessWeek.com, 8/17/07]'s buyers were far older than the intended audience. And Chrysler fell into the same trap: It believed the PT Cruiser would lure youngsters into its stores, only to discover younger buyers didn't appreciate retro designs that look like Fords from the 1930s.



Ain't It Funny How Time Slips Away?



This year, many boomers who turned 18 in 1964, purchased their Mustangs, and listened to the Beatles on their one-speaker AM radio, will start collecting Social Security checks. And absolutely no one in the auto industry knows how sales will be affected when the greatest generation of new car buyers moves into retirement.



Nobody saw another change coming in 1974, the year automotive finance companies first offered 48-month financing to spur car sales during one of the nation's worst recessions. Up until then, the average car buyer traded for a new car every 27 months. As finance terms lengthened, most automakers were slow to accept the fact that the consumer dollars once primarily donated to Detroit and Tokyo were now being diverted to buy other wonderful consumer toys. And over the past three decades automotive trading cycles have stretched longer -- and most assuredly will go even longer, as the 78 million boomers retire from public life.



Sha-la-la-la-la-la, Live for Today



While much has been made in recent years about the inequality of wage distribution in America -- between the super rich and everyone else -- it appears that the wages of those over 50 have improved against inflation since 2001. So the boomer generation also has a strong edge; this economic fact, it would seem, is primarily why boomers continue to lead in automotive purchases and luxury car manufacturers continue to set sales records every year.



That scenario soon will change, as on average 3.391 million baby boomers will die each year until 2031. What should be keeping the car companies' executives awake at night is fear of the unknown: What will new-car sales be like without the boomers? The key problem is that the generations coming up have never quite had the same love affair with the automobile that boomers' had. But there's still hope for the group following the boomers; all its members need is more income.



In 1962, Iacocca saw the future of American car sales in the coming wave of baby boomers. Who would have thought that he would have outlived two of the Beatles to watch that generation age and start accepting Social Security checks? It makes you wonder: Who is the Iacocca of today? Who will lead the auto industry to deal with the next reality?