Does Lyft’s entire business strategy rests on one flawed assumption about cars?

Lyft image

Lyft is no doubt one of the most anticipated IPOs of the year. The ridehailing firm, along with rival Uber, has transformed the way we think and use cars.

Though we normally lump Lyft together with Uber, the companies significantly differ in strategy. While Uber has expanded into industries like tourism, food delivery, and freight, Lyft is going all in on its core business of getting passenger from Point A to Point B.

“We are laser-focused on revolutionizing transportation,” Lyft said in its S-1 filing with the Securities and Exchange Commission.

Specifically, Lyft believes that people no longer want to own cars, whether out of economic necessity, concern for the environment, or just demand for convenience. And by people, the company really means younger generations like Millennials, who grew up in the Internet age and are more comfortable with technology.

From its filing:

“Consumers increasingly value accessibility and experiences over ownership. Across industries, Internet-enabled businesses have delivered value by connecting underutilized supply with consumer demand, driving changing consumer preferences regarding ownership of material goods.”

“For younger generations born as digital natives, on-demand services are the new normal. This opens up economic opportunities for businesses to serve consumers through mobile apps, a trend we expect to continue with increasing momentum.”

“Consumers, especially millennials, are gravitating towards brands that value community engagement and embrace social and environmental responsibility.”

But what if Lyft is wrong? What if the company is placing too much emphasis on faulty generational analysis?

Fed study undermines Lyft’s thesis

In a recent study, the Federal Reserve unequivocally disputed the central premise to Lyft’s premise: that younger people no longer want to own cars.

“For spending on motor vehicles, we find little evidence that millennial households have significantly different tastes and preferences than households of previous generations,” the study said.

Americans are fascinated–perhaps obsessed– with generational comparisons, whether the Silent Generation, Greatest Generation, Baby Boomers, GenX, Millennials, and now Generation Z. We like to classify people into groups with specific characteristics as a means to understand or perhaps just ridicule. (Remember Gen Xers are supposed to be “slackers” while Millennials are supposed to be entitled brats.)

In the quest for a competitive edge, companies risk substituting sound, long term strategy for convenient stereotypes around whole groups of consumers, mostly because the latter is much easier to do than the former.

That’s not to say generational analysis is not useful or unsound. But you have to do it well.

Cohort vs. period effects

There are three ways to examine differences between generations: life cycle effects, period effects, and cohort effects.

Life cycle effects refers to how people change as we get older. For example, younger people have historically not voted in large numbers. But that gradually changes over time; people over 65 enjoy high participation rates in elections. This holds true regardless of what generation you belong to. As you get older, your behaviors and opinions inevitably shifts depending on your life stage.

Period effects refers to how major events like war, economic boom and busts, and social movements affects everyone. The Vietnam War and Watergate scandal bred mistrust in government among all generations.

Cohort effects are what truly distinguishes one generation from the other. It means measuring how events uniquely impacted one generation versus another. That impact is usually greater when people are in a period when they are the most impressionable and therefore more deeply influenced by big events.

“Differences between generations can be the byproduct of the unique historical circumstances that members of an age cohort experience, particularly during a time when they are in the process of forming opinions,” according to a report by Pew Research.

In other words: when people are young.

“A historical moment can have an outsize effect on members of one generation,” the Pew report said. “This may be because it occurs during a key point in the life cycle, such as adolescence and young adulthood, when awareness of the wider world deepens and personal identities and value systems are being strongly shaped”

The Great Depression, of course, impacted all levels of American society. But research shows that people growing up during this period were more likely to vote for the Democratic Party because the government actions to directly assist people with jobs, food, and financial support.

So we must ask ourselves two questions: how did major events impact all generations? (period effects) And how did major events impact a particular generation? (cohort effects)

Great Recession’s impact on Millennials

For Millennials, perhaps the singular event of this generation has been the financial crisis in 2007 and the subsequent recession, the worst economic downturn in U.S. history since the Great Depression.

We’ve seen countless articles in the news media how the economic trauma of the Great Recession affected Millennials: a popular narrative is that Millennials suffered great financial hardship and were unable to get quality jobs after college and had to live with their parents.

From this narrative, it makes sense that Millennials would eschew car ownership in favor of more affordable options like ridehailing. Taken further, as Lyft seems to have done, perhaps the Great Recession combined with new technology permanently shifted Millennials’ attitudes toward property ownership in general in favor of shared models.

But is this really a cohort effect? The evidence seems to say no. According to the Fed study, car ownership rates among Millennials did drop following the Great Recession, which is completely understandable.

However, the data says that car ownership rates among Millennial households does not significantly differ from other generations. In other words, as the economic recovery took hold and Millennials married, usually with both spouses earning income, the generation eventually did purchase cars.

“Although vehicle spending by millennial households was slightly below that of comparably aged Generation X households at the very beginning of the life cycle, those vehicle spending profiles appear to have converged by the time those households reached age 25 to 30,” the Fed study said.

In other words, the study suggests that the Great Recession temporarily impacted car sales among Millennials but did not significantly alter their purchase habits or views on vehicle ownership.

Lyft’s thesis that car ownership will permanently wane in the United States may still hold true. But generational analysis is a tricky thing, which makes a pure play ridehailing model a riskier bet that it initially seemed.

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