Why GM's New Crossovers Are Selling Like Hotcakes

While many of the biggest automakers experienced declines last quarter, General Motors (NYSE: GM) saw a 7.5% boost in August, and that's in no small part because of its new crossovers.

In this segment from Industry Focus: Industrials, analyst Sarah Priestley and senior auto specialist John Rosevear discuss GM's crossover line, and explain why customers are so eager to buy them recently. Listen in to find out how much sales have grown, why consumers are switching over from SUVs to crossovers, why crossovers appeal to both baby boomers and millennials, and more.

A full transcript follows the video.

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This video was recorded on Sept. 21, 2017.

Sarah Priestley: We mentioned before that GM sales were up 7.5% in August, in no small part thanks to their line of crossovers. Is that right?

John Rosevear: GM has been rolling out all new versions of its whole crossover line, starting a little over a year ago. They're coming out in phases. I went to a press conference at GM headquarters in January when I was in Detroit, and I remember Mary Barra saying, "Yeah, we see the U.S. market weakening a little bit, but we think our new crossovers are going to help carry us, even if the overall market starts to soften, and preserve profitability," because new products, generally speaking, can be sold with slimmer discounts, even in a healthy market. So, they tend to be more profitable, especially if they're strong entries. And some of GM's crossovers have been quite good. These are Chevy, GMC, Buick and Cadillac crossovers. There are a couple more coming this fall, and then more new Cadillacs next year. But, there are a whole bunch of new ones. Chevy Equinox, the GMC Acadia and Terrain, the big Buick is coming this fall, the big Chevy Traverse is also coming this fall. It's a whole family, they've been working on this for a few years now. Sales have been very strong. Equinox sales were huge last month, it was up some ridiculous number year-over-year.

Priestley: 47%, I think.

Rosevear: And the old one was not a Chevy seller. It was a dated product, but they had still been doing well with it, just because there's such tremendous demand in that market segment.

Priestley: Yeah, you're absolutely right. I find this whole storyline pretty fascinating, the changing consumer preferences to SUVs and crossovers. Car sales are becoming a smaller part of the market. I think it's now pegged at 38% of the overall market. Last month, light duty sale trucks were up 3.3%, crossovers a whopping 7%, large SUVs up almost 5%. So, it's a bright spot in the market that needs this right now, and like you were saying, Mary Barra talking about them carrying them through this weak moment. And I know a lot of the autos are thinking the same thing.

Where do you think this is coming from? Do you think it's just the result of consumer confidence? Or do you think this is a long-term change in preferences?

Rosevear: I think it's a long-term thing. We started talking about this three or four years ago, even before oil prices fell. What has happened, go back 10 or 15 year, SUVs were truck-based. They were built on pick up platforms. They were heavier, they got truck-like fuel economy, which is to say not great. They rode like trucks. Go back and look at a 2004 Ford (NYSE: F) Explorer. It's a truck. Whereas the modern Ford Explorer, and these other things, we call them crossovers because they cross the capabilities and general shape and size of SUVs, but they're built on car architecture. They're unibody instead of body-on-frame, for listeners who know what that means. They're built more like cars rather than trucks. They're lighter in weight, they handle more like cars. They get somewhat better fuel economy just because of that change. They are, of course, much more fuel-efficient engines now than were available 15 or 20 years ago. That's another thing.

So, people have been seeing these really all through this cycle, since 2010, 2011 and so forth, more and more as the sensible alternative. It gets the fuel economy of a car, it has the ride comfort of a car, it's easy to drive like a car. But it's got tons of space for your junk in the back, it's got room for five kids or seven kids or whatever, you can fit half the baseball team in there. I was a baseball parent when my kids were younger, I can relate to this. It's an alternative to what people used to buy minivans for 15 or 20 years ago. But people think there's somewhat cooler looking. Male customers who might have winced at a minivan, look at a crossover SUV and go, "Oh, yeah, that's more my thing." But, at the same time, female customers who might have winced at a truck like a Ford Explorer 15 years ago, they take a drive in it and go, "Oh yeah, this is more my thing." [laughs] It's just hit this sweet spot of engineering and development where they've become very popular. And people are coming in with their Camrys and Accords and Fusions and Chevy Malibus and so forth that maybe they have driven for two or three generations and saying, "This time, I want one of those. I want a RAV4, I want a Ford Edge," or whatever, these new crossovers from GM. And more and more people are migrating to them, because they make more sense for families and for empty nesters and even for older folks. If you have lower back problems, it's a lot easier to get out of something like a Chevy Equinox and into it, or a Toyota RAV4 or whatever it is, to get in and out of a relatively low-slung sedan.

Priestley: Yeah. I noticed a lot of the commentary around this is focused on being in a prime position where Baby Boomers are looking to get the comfort of a large vehicle, Millennials are growing their families so they're wanting the space, as you said. So, you're seeing this mentioned a lot in the earnings calls. Toyota sales chief saying the consumer demand for light trucks has shifted, I need to build more light trucks and rebalance our car mix. You're seeing it all over the place. Honda is also, the Honda Division also commenting, many automakers are looking for signs of stability as consumers continue to head toward trucks and SUVs.

Rosevear: Honda and Toyota both had a funny problem last year. They were selling literally all of their compact crossovers that they could get to the United States, so they both needed to look to ramp up production of Toyota's RAV4 and Honda's CR-V, which they have been able to do, but they haven't been able to show sales growth even though they were selling them very quickly. They just didn't have any more available. The production lines that existed to supply this market had been maxed out. So, they have reconfigured production to get more here. But, those vehicles are doing very well. Nissan's Rogue is also doing very well, they're selling a ton of those. It's another vehicle in the same category, the compact crossover.

John Rosevear owns shares of Ford and General Motors. Sarah Priestley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.