SANTA BARBARA, Calif. -

Automakers are being more cautious and strategic in fleet sales of late, realizing that a sales flood of a certain model into the fleet market could water-down used values when these units come back to market, according to ALG. On Friday, the company talked about how OEM strategies for these sales are shifting to a more long-term view.

In ALG’s September/October Industry Report, analysts discovered the trim mix offered to rental fleet companies has begun to include better-equipped vehicles. They also said many manufacturers have staggered rental fleet sales in order to mitigate the negative impact from large quantities of used supply returning to the market within a short period of time.

While ALG has always recommended a conservative rental fleet strategy, analysts believe there is some flexibility in rental fleet penetration levels for certain segments.

Before going into specific of its recommendations, ALG recapped why a model saturation flooding rental fleets causes such a problem.

“Fleet sales have served many functions over time. Some manufacturers used rental fleet sales to help gain exposure for a new product by offering limited vehicles to reputable fleet companies, while others used rental fleet as a channel to off-load excess inventory when actual demand was below production levels,” ALG began. “Historically, through proprietary modeling and research, ALG found that high rental fleet penetration levels not only have had a negative impact on residual values, but on perceived quality and brand image as well,” analysts continued. “In the past, many rental fleet companies purchased the most basic trims available for a particular model with little or no residual value adding equipment.

“Some manufacturers also offered fleet-only variants that had little equipment and occasionally had less potent powertrains,” officials went on to say. “These strategies served to create a negative image for the fleet model, while increasing used supply on less desirable trims, which diluted the strength of a given model nameplate.”

ALG found that the negative impact to residual values increases when rental fleet penetration levels exceed 10 percent for mainstream brands and 5 percent for luxury brands.

Elsewhere, ALG noted entry compact and mid-compact segments see little negative impact on resale/residual values for rental fleet levels up to 15 to 20 percent.

Currently, analysts determined the fleet size of midsize and full-size segments are consistent with ALG’s recommended threshold of 10-percent rental fleet penetration.

Meanwhile, they added minivan, compact SUV, midsize SUV and full-size SUV segments show that maintaining rental fleet levels consistent with the segment average yields optimal resale values.

“ALG maintains that the generalized rule of 10 percent and 5 percent rental fleet penetration for the mainstream and luxury brands remains the key gauge to avoid adverse impact on residual values but is also incorporating these new updated findings,” the firm emphasized.

“Furthermore, ALG closely monitors rental fleet penetration levels that diverge significantly from optimal levels, as well as trends well above segment averages,” analysts added.

How Is Residual Value of Entry Premium CUV Segment Faring?

Moving along to another part of ALG’s Industry Report, analysts delved into the sales and residual value potential of entry premium CUVs.

ALG described the entry premium CUV segment as relatively young, but added the category has experienced significant growth during the last few years with retail sales increasing three-fold.

With the segment only 10 years old, ALG pointed out that growth has been mostly generated by new entries, while individual nameplate sales growth has been limited by the competitive nature of this market segment. ALG acknowledged the Land Rover Freelander has been around since the 2002 model year, but analysts believe BMW’s X3 kick-started the segment for the 2004 model year.

“Visible success in the premium CUV segment with the initial entries of Mercedes-Benz M-Class, Acura MDX, Lexus RX and BMW X5, convinced these same manufacturers to invest in a smaller segment, which ALG classifies as entry premium CUV,” analysts explained.

ALG currently includes the Infiniti EX, Mercedes-Benz GLK, Land Rover LR2 (which replaced the Freelander), Audi Q5, Acura RDX, BMW X3 and Volvo XC60 in the segment.

With these units in mind, ALG went on to provide an overview of the entry premium CUV segment in terms of retail sales, vehicle price, used supply growth and residual outlook:

—Sales: The entry premium CUV segment has grown its retail sales from less than 40,000 units in 2004 to an estimated 100,000 units in 2011. The manufacturers are expecting to grow this segment to 200,000 in the next few years. According to CSM Worldwide, total sales expectations are to exceed 180,000 units in 2012CY based on new entries such as the BMW X1 and Range Rover Evoque, as well as growth in the existing nameplates.

—Vehicle Price: Average new-vehicle price hovered around the $39,000 mark in 2010. According to ALG’s AutoMarketPulse data, prices for the segment are trending at the $41,000 level this year. Analysts said this trend is mainly driven by the new-generation BMW X3 and its new 2-trim strategy — with a more expensive xDrive 35i trim — as opposed to the single trim in previous model years.

—Used Supply: ALG indicated one- to five-year-old used market supply experienced high year-over-year growth rates in the segment early on, largely due to the low starting point. The growth rate has consistently declined as the segment has aged. In absolute levels, used market supply is expected to clip the 180,000 unit mark in 2014 compared to an estimated 94,000 units in 2011, mainly due to new entries and sales growth in existing entries.

—Residual Outlook: ALG noted the residual outlook has initially been quite strong for the 36-month term, at 52 percent in 2004. Yet the segment’s competitive nature and the addition of new entries have clearly put pressure on used-market prices and thus ALG has a more conservative residual outlook. A combination of reduced demand due to the recession, more competition in the segment and increasing used supply is affecting new- and used-market prices. ALG’s current 2011 model-year outlook is an average 47 percent for the segment, which is about 3 percentage points higher than its lows for the 2009 model year.

ALG Examines Five New Models

After discussing the entry premium CUV segment, ALG went into an examination of five new models mostly from foreign OEMs.

—2012 Nissan Versa Sedan: Until recently, ALG maintained that the Versa had been locked in a fairly tight race with the Honda Fit and Toyota Yaris for the entry compact sales crown. For the past two years, the firm highlighted Nissan has won the fight with a combination of low price (it carried the lowest starting MSRP of any vehicle) and size (its dimensions fall closer to those of a mid compact than its entry-level peers).

For 2012, ALG pointed out Nissan will introduce a new sedan — the hatch — which retains the same formula. Analysts said its price goes up by $1,000 to $10,990, but still comes in more than $1,000 less than the cheapest 2011 Kia Rio.

“Sporting the same wheelbase, the redesign remedies the old sedan’s worst styling offenses, particularly its rear roofline. However, the new styling remains uninspired,” ALG surmised.

“Nissan insists that buyers in this segment see value as paramount, but competitive offerings have become more stylish and compelling in recent years, and Nissan has already lost the sales lead this year to Honda and Ford,” ALG continued.

—2012 Cadillac SRX: While the SRX may look the same on the outside, ALG noted the power under the hood is a substantial upgrade.

Gone is the 3.0L V6 (the 2.8 turbo was dropped earlier), replaced by General Motors’ 3.6L engine with 308 hp, a bump of 43 horses. ALG said torque rises by 42 lb-ft to 265. The firm calculated this new engine puts the Cadillac in the thick of the competitive set, competing more effectively with the 300-hp Acura MDX and 305-hp Lincoln MKX, while trumping the 275-hp Lexus RX350. In exchange, though, the SRX loses 1 mpg, putting it at the low end of the segment fuel-efficiency spectrum.

“The SRX has jumped to number two in the segment, challenging the pack on the value front,” ALG stressed. “With gas prices expected to continue their rise, however, buyers may wish for the return of the 3.0L.”

—2012 Land Rover Range Rover Evoque: ALG indicated Land Rover is extending the Range Rover line further downward with the Evoque.

Analysts think the smallest Range Rover does a convincing impression of the LRX concept that inspired it, and even offers a 2-door version along with the 4-door that is expected to be more popular. They highlighted the Evoque shares its underpinnings with the LR2, but “justifies its looks and Range Rover badging with more sure-footed on-road handling.

“It also sports a more refined cabin, but the step up between the two models is a dear $7,500 or more, depending on trim,” ALG continued. “Unlike the 6-cylinder LR2, the Evoque sources a turbo four from Ford, which, at 240 hp, has only a 10-hp advantage over that six. The more efficient turbo engine, combined with a 350-lb weight advantage, yields an enormous mpg difference, with the Evoque returning 19 city and 28 highway.”

So how do these features place the unit for productive future?

“Although the Evoque is priced towards the top of the segment, its combination of style and Range Rover cachet should help it to meet Land Rover’s modest sales goal,” ALG projected.

—2012 Audi A6: As Mercedes-Benz and BMW have continued to consolidate their hold on the luxury segment sharing roughly 60 percent of sales, ALG stressed Audi is looking to regain the glory of its second generation A6, which made a big sales splash with its curvy aesthetic.

Analysts contend the brand again sets the segment design standard, and takes elements from its upscale A7 and A8 brethren, such as available full-LED headlights, textured wood trim and Audi’s touch-pad MMI interface. It even offers an in-vehicle WI-FI hotspot.

ALG also pointed out Audi has managed to make the model lighter with aluminum despite more size and features. Powertrains carry over, but a hybrid debuts later in the year.

“The new A6 should help Audi once again challenge the segment leaders,” ALG concluded.