Analysis of Demand and Supply for Ford Suvs and Trucks

Introduction

This paper will discuss the analysis of demand and supply for Ford’s SUVs and trucks, particularly the larger SUVs and trucks. What is demand and supply analysis? It is "the study of how buyers and sellers interact to determine transaction prices and quantities" (Demand and Supply Analysis: Introduction, 2011). It might be hard to believe that the sales of big SUVs and trucks are on the rise while all sedan sales are plummeting in every category. Half a decade ago, SUV and truck sales were at rock bottom, but with the current economy, low gas prices, low interest rates, and the average income on the rise, people are opting for larger vehicles. Ford is one manufacturer that is going to take advantage of the new demand shift. Ford has opted out of making any more sedans and will only produce SUVs and trucks. Ford will keep two sedans, the Ford Focus and the Ford Mustang, their best sellers. Ford plans to introduce new SUVs and trucks to cover more market segments because not every consumer can afford Ford's top-tier line that costs upwards of seventy to eighty thousand dollars.

The Shift in Consumer Preferences

Less than five years ago, car manufacturers were in a race to improve fuel economy. This was mostly due to the high gas prices. From around 2011 until late 2014, gas prices averaged over $3.50 a gallon, with a high average just over $4.00 a gallon (Gas Price Charts, 2018). According to data from the U.S. Department of Transportation, the average American driver puts in 13,474 miles behind the wheel each year. So, if a U.S. consumer were to buy a large SUV that got a combined average of 18 mpg at $4 a gallon, it would have cost the consumer $2,994. However, if the consumer were to buy a car that got closer to 40 mpg, it would have cost the consumer $1,347.4. This would have saved the consumer on average $137 a month just in gas, not to mention that smaller cars cost less. Gas was a significant factor, but there were other factors such as economic confidence being down, and the average American’s salary was stagnant and even declining. During the time frame from 2010 to 2016, consumers were spending less.

Economic Recovery and Market Trends

The economic environment has changed, and the economy has strengthened over the last two years. Gas prices are lower, with the current national average at $2.84. At the current gas price, with larger SUVs and trucks peaking around 20 mpg, it would currently cost the consumer $1,913 in gas, resulting in a thousand-dollar annual savings. Other factors driving consumer spending more on cars include increased economic confidence and rising American wages. According to USA Today, "U.S. workers’ wages and benefits grew 2.6% last year [2017], the fastest 12-month pace since the spring of 2015" (Wages rise at 2.6% in 2017, 2017). This means that U.S. consumers have a little more money in their pockets and are willing to spend more to get more.

Ford's Strategic Shift

Americans have always been drawn towards larger vehicles more than other nations. Therefore, Ford has made the change to focus more on their SUV and truck lines. Only two cars survived the chopping block. One thing that is evident with the current new demand is the price. In 2013, the Ford Expedition topped out at $51,355 in the top trim level of the King Ranch. Now in 2018, Ford has introduced a remodeled Ford Expedition with a top-tier base price of $76,175. These prices were gathered from Autotrader.com. What caused this massive jump in price in just 5 years? To start, the demand was down due to the recent high gas prices. Environmental factors such as gas prices reduce the demand for larger vehicles when there is an alternative vehicle that gets better gas mileage and costs significantly less. As gas prices decreased and consumer income increased, the demand for these SUVs went up, but the supply was low. Ford's parent company, Lincoln, was selling their high-end Lincoln Navigator, but Ford was having a hard time keeping up with the demand. In January 2018, Lincoln sold 1,300 Navigators, up 97.5% from January 2017. Not only were Lincoln's sales up, but of those 1,300 Navigators sold, 84% were Lincoln's two highest trim levels, which brought a price of over $90,000.

Future Prospects and Challenges

While not everyone might be able to spend upwards of $80,000 to $90,000, Ford is introducing new models that are smaller but resemble SUVs. This move is to capitalize on the current trend that people are moving away from sedans and that current technology allows some of the smaller crossover SUVs to achieve upwards of 30 mpg. The ability to get 30 mpg in an SUV will help Ford survive if gas prices go up or if the economy takes a downturn. In the end, if the economy is right, U.S. consumers will spend more on their vehicles, but if gas prices increase and the economy tanks, we could see prices fall for large SUVs and trucks.

References

Demand and Supply Analysis: Introduction. (2011). Retrieved from [source link].

Gas Price Charts. (2018). Retrieved from [source link].

Wages rise at 2.6% in 2017. (2017). USA Today. Retrieved from [source link].