SEAT Rethinks its Product Strategy Due to Weak Demand at Home

New car registrations plummeted by 18% in 2011 in Spain and were down by a further 8% year-on-year in the first half of 2012. If sales remain down by 8% for the full year, they will not even reach the 750,000 unit level forecast by the automotive trade association ANFAC, and would even fall below the level they were at in 1993, which was the worst year for the Spanish car market since 1986. Driving this weakness in Spanish new car demand is Europe’s highest unemployment rate, a result of the bursting of the property bubble and more general economic woes brought about by the global economic downturn and sovereign debt crisis. However, new car registrations in Spain are actually holding up much better than the number of housing completions.

New Car Registrations and Housing Completions, 1982-2011

Source: ACEA, ANFAC, Euromonitor International

The proportion of Spaniards living in relative poverty has been on the rise, with the country’s rate of unemployment soaring from 8.5% in 2006 to 21.7% in 2011, the highest jobless rate in Europe and one of the highest in the world. Click to Tweet! Unemployment is highest among young adults, with 45.1% of 15-24-year-olds officially jobless in 2011. Click to Tweet! This severely constricts spending on items and services traditionally popular among this demographic. Disposable incomes have also been declining steadily since 2007, with household annual disposable income falling by 3.4% in real terms to €41,871 per household over 2007-2011. Over the same period, consumer expenditure fell by 12.4% in real terms to €35,743 per household.

In “Growing Poverty Rates Suppress Consumer Spending in Spain”, Euromonitor International commented that “this presents daunting challenges for market players, particularly those selling mid-market discretionary goods and services, as families and individuals previously within reach of a middle-class lifestyle adjust to the new austerity by reining in spending. While the subsequent belt-tightening will pose a challenge for businesses, the new austerity will also bring opportunities in budget sectors such as discounters and private label. The pressing need to cut domestic costs has created fertile commercial territory for companies that can offer perceived value for money”. The same naturally applies to the automotive industry and SEAT appears to be changing its product strategy in an attempt to stem losses in its home market, where sales of the VW-owned brand tumbled 20% year-on-year in the first six months of 2012. Apart from launching the Mii, a version of Volkswagen’s Up! city car, SEAT will also introduce an affordable family hatchback bearing the established Toledo name.

According to an Automotive News Europe article on 26 June, Paul Sevin, SEAT’s sales and marketing boss, said it made sense for the brand to offer an affordable, mainstream car: “We are known for our attractive cars which are dynamic to drive with high levels of technology and engineering and our customer profile is the youngest in VW Group, but we should also care for more conservative and practical demand”.

Given the young customer profile of the SEAT brand and the particularly high level of unemployment in Spain, the additions of the Mii city car and the Toledo as an affordable family car make perfect sense. Moreover, both should prove popular with the car rental industry in Spain, which is remarkably stable (see “The Resilience of European Car Rental Markets”), registering as many cars in the first half of 2012 as in 2011 according to ANFAC. In contrast, registrations of cars by private and business consumers were down 11%, despite sales incentives being among the highest ever.

However, the introduction of the Toledo and the Mii move the SEAT brand away from the sporty character which differentiated it from its VW and Skoda siblings. The VW Group, therefore, seems to be rethinking its SEAT product strategy because of weak demand in Spain. As the VW brand moves increasingly upmarket, there is perhaps room to position SEAT between Skoda and VW, but it will require careful product planning and pricing and the brand cannot realistically expect a significant rally in support at home in the near future.