Why Are Young People Driving Less?

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What's keeping the Detroit executives up at night?

Young people really aren't interested in cars anymore. 

Numerous studies suggest Generation Y is giving up the automobile in favor of public transit and bicycles. And it's a trend that spells big trouble for manufacturers. 

The facts

From 2001 to 2009, the average number of miles driven annually by 16-34 year old dropped 23%. That's three times larger than the decline in all other age groups.

Today, 26% of Millennials don't have a driver's license. That's up 5% from 2000. 

Increasingly, Generation Y is turning to other transit options like buses, trains, bicycles, and walking. 

The consensus reason for this decline? The recession.

Generation Y was hard hit by the recent economic turmoil with the unemployment rate for those under-25 hitting 16.2% in April. 

Debt is another common explanation. According to the Project for Student Debt, the average college graduate has $26,000 in student loans, up 24% since 2004. Don't forget an additional $10,000 in credit card debt. 

Throw in the fact that inflation adjusted gasoline prices have doubled in the last decade, plus skyrocketing insurance premiums, and you have a recipe for delayed car ownership. 

Marketers assume that as the economy recovers young buyers will return to their show rooms. 

Perhaps. But what if this assumption is wrong. What if rather than a temporary symptom of this recession, this trend represents a permanent change in buying habits?

What if this is something bigger?

Here's the problem. Driving usage has still declined even as the economy recovers and gas prices stabilize. Even among employed Millennials, annual miles driven has declined 16% over the past eight years

Unlike previous generations which developed their driving habit in high school and college, Gen Y is comfortably cruising through their 20's on bikes and subways. 

Here's a scary thought for auto executives: after missing this generation during their formative years, maybe they'll never buy a car! 

What if falling car ownership isn't just a symptom of higher gas prices and a poor job market, but a rejection against the hassles of parking and traffic?

There's some evidence to back this up. According to the National Association of Realtors, six out of 10 Americans prefer walkable communities led by young people.

Of Generation Y, only 15% consider themselves car enthusiasts versus 30% of baby boomers. 

How are manufacturers reacting?

General Motors (NYSE: GM) has hired MTV Scratch, a Viacom consulting service, to make its product offerings for appealing to this demographic. The company is favoring subcompact vehicles with sophisticated user interfaces, social network connectivity, Bluetooth, USB ports, and Pandora music services.

The problem once you include many of these features, the vehicle is suddenly out of the typical 24-year old's price range. A loaded Chevrolet Cruze can cost up to $24,000. 

Ford (NYSE: F) has revamp its marketing efforts to target younger buyers. When the company launched its super-mini Fiesta in 2009, it developed an innovative marketing campaign. Ford gave out 100 cars to influential bloggers for a free six-month test-drive plus airfares and hotels to attend launch events. 

Can tech bloggers drive car sales? Maybe. The Ford Fiesta sold 90,000 units during its first 18 months after launch. But that momentum was difficult to sustain and sales fell 30% the next year. 

Toyota (NYSE: TM) has been the most aggressive in trying to appeal to the Gen Y crowd.

Ten years ago the company created its Scion division to specifically target this demographic. The median age of a Scion buyer is 34 which is the youngest in the industry.

A big part of Scion’s mission is to capture a new buyers and not cannibalize sales from other brands. In this respect, it has been successful. About 75% of Scion’s customers have never owned a Toyota product.

Foolish bottom line

Generation Y is too big to ignore. This demographic is the largest U.S. history accounting for nearly one in four Americans today. Whichever automaker is first to crack the Millennial code will have monopoly-like access to a massive market and earn the highest returns for investors in the decades to come. 

Of the large manufacturers Toyota is probably the best positioned to exploit this demographic. It's Scion brand was recently named the most popular among Gen Y buyers according to J.D. Power and Associates. And while this division may not move the needle in the company's financial results, Scion sales today translate into Matrix and Camry sales down the road (pun intended).

If General Motors and Ford can't convert Millennial customers today, they may lose those buyers forever. 

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Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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