Could These 3 Cool and Inexpensive Cars Drive You to Big Gains?

According to "Kelley Blue Book" these three inexpensive cars are tops in the "cool" department. But is that coolness translating into improved sales for these underlying automakers?

May 4, 2014 at 11:31AM

Let me be very clear about this: I love my car. It's everything I've always wanted in a car and chances are it'd be classified as "cool" by most car enthusiasts. The one thing my car isn't is practical. Its gas-guzzling nature and price would certainly scratch it off many consumers' new car shopping lists.

I've found that most consumers these days are looking for a utopian ideal that they're expecting car manufacturers to meet. They want a vehicle with improved or improving gas mileage, technological comforts and luxuries in the interior of the vehicle, a sleek or defined exterior, and a price that doesn't make them cringe in horror. Needless to say, it's a balancing act that's easier said than done for most automakers.

Source: State Farm, Flickr

The allure of a cool car
Automakers, in turn, need to hit a bevy of price points in order diversify their revenue streams and optimally hit as many income groups as possible. In a perfect world for automakers everyone would buy mid- and high-priced vehicles and SUVs which carry beefy margins. But, we know this is far from a reality. Some folks, including a number of first-time car buyers, are in the market for something practical, fuel efficient, and most importantly, affordable.

That's why automotive research experts Kelley Blue Book released its list earlier this year of the "10 Coolest Cars Under $25,000". The point of KBB's list is to highlight vehicles which are fun to drive and which draw in customers better than other vehicles at a similar price point.

Today, we're going to look at the top three "coolest" and affordable cars on the KBB list to understand what attributes about them make them cool, as well as determine if the automaker behind each vehicle potentially will be able to use these "cool" factors to increase its own bottom line either now or down the road.

However, before we dive right into which three cool and inexpensive cars topped KBB's list, let's have a look at the positives and negatives that automakers face by focusing on lower-priced vehicles.

Two good reasons why automakers sell inexpensive cars
I believe there are a two reasons why automakers benefit from producing vehicles that start under $25,000.

Perhaps the biggest reason is that lower-priced cars act as a magnet for younger buyers, and younger buyers are still impressionable. Simply put, it affords automakers an opportunity to make a good first impression on a young or first-time buyer and keep them loyal to the brand. If automakers don't give consumers a stepping stone into their higher-priced product it can, unless you're a specialty company such as Lamborghini, make it very difficult to convert those buyers into repeat customers.

Another key point is that less expensive cars fit into consumers' budgets during both strong and weak periods of U.S. economic growth. When the U.S. economy is rapidly growing more people are generally willing to step up and buy higher-priced vehicles. However, when the U.S. economy contracts, luxury vehicle sales can struggle. Affordable cars, those under the $25,000 price point for a new vehicle used by KBB, bring in cost-conscious consumers year round. This is an important point for automakers to keep in mind considering that the Pew Research Center in 2010 polled Americans to find out that 86% consider their car a necessity.

There's a downside too!
Yet, there's a downside to offering a large degree of product diversity and price ranges. Primary to those disadvantages is the fact that lower-priced cars have lower margins. While automakers can still produce healthy profits by selling lower-end models, an unhealthy skew toward low-priced vehicles can negatively affect margins and lower profits.

Also, having a more diverse product line means higher expenses on everything from research and development to launching and marketing new vehicles.

Overall, though, as long as an automaker doesn't get overwhelmed by an unfavorable product mix, it's often in their interest to cater to cost-conscious buyers.

Now, let's have a look at those aforementioned three cool cars under $25,000 and see what makes them tick, and whether these automakers are poised to benefit from higher sales of these vehicles.

Jeep Wrangler
Nothing says cool like the most iconic American-made off-road vehicle in history, the Jeep Wrangler.

Jeep Wrangler Rocks
2014 Jeep Wrangler, Source: Chrysler

There are a number of factors that make the Jeep Wrangler a cool car, and potentially setting up Chrysler, owner of Jeep and wholly owned subsidiary of Fiat (NASDAQOTH:FIATY), to be quite successful.

For one, no other vehicle in KBB's list has true off-road capability. In fact, the ability to go off-road is becoming something of a rarity today now that SUVs are geared more toward family transport and storage than actual adventure. The Wrangler's rugged characteristics certainly make it a standout on the list and among its peers.

Furthermore, the Wrangler also stood out as the top American-made car for resale value (while ranking third overall) in KBB's rankings. According to KBB, the Wrangler will retain 70.3% of its value after 36 months and 59.1% of its value after 60 months. Knowing that consumers can get a substantial amount of their "investment" back if they choose to sell their Wrangler later on makes it an attractive buy.

More importantly for Fiat Chrysler, Wrangler is more than just cool – it's a rapidly growing moneymaker for the company. Since sales fell to roughly 82,000 units in 2009 they've grown at an annual average of 17.3% and topped 155,000 units in 2013. In January, CEO Sergio Marchionne projected that total Jeep sales could grow to 1 million units in 2014, which if true would represent at least 37% year-over-year growth. While additional sales of the Grand Cherokee could add the bulk of the gains, another double-digit improvement in Wrangler sales doesn't seem out of the question. 

Ford Fiesta ST
Just because a vehicle is small doesn't mean it can't be fun to drive. Clocking in at the No. 2 spot on KBB's list is the Ford Fiesta ST, a turbocharged subcompact that cranks out 197 horsepower.

2014 Ford Fiesta ST, Source: Ford

What makes Ford's (NYSE:F) Fiesta ST really stand out, at least according to car specialist Car and Driver, is that it represents a move opposite to Ford's recent strategy of emphasizing its F-Series pickups and redesigning models with a rich history and emotional attachments such as the Mustang (which coincidentally also make KBB's top 10 "cool" car list). As noted by Car and Driver, the ST version of the Fiesta isn't expected to be a huge seller in the U.S., but in the U.K. in August Ford announced a 15% boost in production because it had sold through more than half of its annual production in just three months. In other words, the Fiesta ST hatchback could succeed in plenty of other areas of the world.

Also working in its favor is generally favorable fuel mileage considering that the Fiesta ST puts out 197 horsepower. Consumers are particularly sensitive to higher fuel prices, so any vehicle that puts out around 30 miles per gallon combined with close to 200 horsepower is bound to entice younger buyers.

Sales for the entire Fiesta brand have been a bit lumpier in the U.S. with unit volume soaring in 2013 to 71,073, after dipping in the previous year to just shy of 57,000 from 68,574. Globally, though, Fiesta represents an important stepping stone for Ford to introduce cost-conscious consumers to the brand and will likely be a nice source of profits for Ford moving forward.

Scion FR-S
If you perused last year's list of coolest cars for under $25,000, then the Scion FR-S taking the top spot for a second year in a row probably comes as no surprise. Owned by Toyota (NYSE:TM), Scion and the FR-S hit a number of positives with consumers according to KBB, including being rear-wheel drive, lightweight, and producing 200 horsepower. In other words, it's really sporty and fun to drive, which is a great combination for under $25,000.

Scion Fr S
2014 Scion FR-S, Source: Scion

Scion would certainly be a car maker that I would consider to be hit or miss with consumers since it tries to get their attention with out-of-the-box designs (including some designs which actually are quite box-like, ironically). The FR-S, though, "brings together the style, handling, an elusive fun factor that's needed in this segment [sport compacts] and on the road," according to Scion Vice President Doug Murtha in response to his company's top-spot award.

Don't discount the role technology plays in the vehicle, either. Consumers, even the most cost-conscious ones, usually prefer luxuries when they are affordable. The FR-S comes standard with a display audio system, LCD touchscreen, Bluetooth technology, and a USB port for an iPod per Scion. 

Not only is the Scion cool and affordable, but people are buying it in increasing numbers. Within the U.S. sales improved from 11,417 in 2012, when it was introduced, to 18,327 in 2013. Given that Scion was targeting 20,000 units annually when the sporty compact was introduced in 2012, it appears to be well on its way to reaching that goal. At just 20,000 units the FR-S isn't going to make a huge effect on Scion's profitability or help Toyota by a large measure, but the positive press that its cool factor brings the brand could give the company the ultimate boost in terms of creating an emotional attachment with consumers.

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of, and recommends Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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