When a car adds 22% to an automaker's overall sales in the U.S., a lot of responsibility falls on its shoulders. The car in question is Honda's (NYSE:HMC) Civic. The company released the 2015 Civic with the hope of reviving sales in the U.S. market -- from January to November, Honda has sold 2.1% fewer Civics than in the comparable 2013 period. Laden with new high-tech features, the latest version has received rave reviews from critics, but against the backdrop of falling oil prices, is Civic's unique selling proposition of fuel economy its biggest enemy?
The shadow of oil
Civic has had a lackluster year in 2014, and ever since oil prices started weakening in June, its fortunes have taken a bad turn. The 2015 model launched in September has failed to ignite sales so far. Analysts expect car sales in December to be strong, but whether it will show in Civic's numbers, we won't know until next month.
There are two interrelated things the Civic has working against it: falling oil prices and Americans' undying love for SUVs. A Vox article, citing a 2009 study by the National Bureau of Economic Research, says that a "$1 increase in gasoline prices boosts the market share of the most fuel-efficient new vehicles by 20%, while reducing the market share of the least-efficient vehicles by 24%." We can expect a reverse play when oil prices drop. In December, oil prices have been hovering at around $60 per barrel compared to $115 in June, and sales of fuel-saving cars are threatened. No wonder, then, that record-low oil prices are one of the main reasons cited by analysts for Civic's lackluster sales in 2014.
In fact, the sedan segment as a whole seems to be running a losing race against its SUV counterpart. The fall in oil prices has rekindled Americans' love for SUVs, which tend to be less fuel-efficient. Although modern SUVs are not the big fuel guzzlers of the past, they are not exactly the vehicle of choice when fuel prices hover over the $100-per-barrel mark. Quite understandably, the SUV segment has been up 11.9% in 2014 through November, leaving other segments far behind. Sales of the Ford Focus and Hyundai Elantra sedans were down 6.5% and 10.2%, respectively, in January-November, and the compact car segment grew a modest 2.6%.
Will Civic sales revive?
When Honda launched the 2015 Civic, it must have been hoping to drive past these hurdles. It seems to have come up trumps on the redesign, as some auto analysts are calling the tenth iteration of the car its best yet. The upgraded Civic has rearview cameras, automatic climate control, lane-change assist, a touchscreen Display Audio system, and enhanced security and safety features. The fuel economy is spot-on, too, with 30 miles per gallon for the city and 39 mpg for the highway.
Prices of the new Civic have been increased by $100 across variants and start at $19,000. The pricing is competitive -- Toyota's 2015 Camry comes in at over $22,970, and the hybrid versions cost $24,735 for Honda and $26,790 for Toyota.
It looks a bit gloomy for the Civic the way things stand now. But oil prices might not be low forever, and once they bounce back, the Civic will again start luring buyers. The 2015 Civic, with its technology enhancements and price-competitiveness, may not give sales a big push, but it could help stabilize things for Honda in the sedan segment.
Where does this leave Honda?
It's important for Honda that Civic does well, as its performance remains intertwined with the overall sales of the company. Honda has maintained a steady market share of 9.8% over the last two years (2012 and 2013) in the U.S., which increased from 9% in 2011. Nonetheless, in 2014 through October, the company's share has gone down to 9.3% in the U.S. automobiles market. To regain its market share, the Japanese automaker needs big sales performances from its popular vehicles.
Thankfully for investors, Honda has some winners in its portfolio. The compact SUV, CR-V, is in top gear, and Accord is recording big sales gains helped by generous incentives and promotions. Year to date, Accord sales are up 7%, and CR-V sales up 10%. Had this not been the case, the decline in Civic sales would have hurt Honda more. These two vehicles account for nearly 44% of Honda's unit sales and have lifted the company's overall sales volume in the last few months.
The 2015 Civic is a good car, and by balancing high-tech features with pocket-friendly prices, Honda has made a genuine attempt to please buyers. But if low oil prices persist, it's difficult to predict when Civic sales will revive. When sales of an important car like Civic start falling, it can never be good news for investors. Thus far, the impact has been somewhat cushioned by the growing sales of Accord and CR-V, but investors should keep an eye on the sales charts in the coming months. Further deterioration in Civic sales or weakening of CR-V and Accord sales could spell the need for caution.