New-car shoppers have fewer choices these days. Dealerships are keeping fewer models on the lot, theoretically making it harder to find your desired combination of color and features. Unfortunately, it may be a new normal.
The COVID-19 pandemic has forced many changes in the automotive market, from an increase in purely online car shopping to a hot market in used cars as an alternative to public transportation. Some of the changes may be short-lived. Others may stick around…particularly those that help automakers earn money. Carrying less inventory is one of them.
Throughout the pandemic, manufacturers have kept lower inventories than before. In mid-February, data from Cox Automotive (Kelley Blue Book’s parent company) shows that automakers had about 2.72 million new vehicles sitting on dealership lots across the country. That number is 17 percent lower than it was at the same time in 2020, just before the pandemic hit.
Despite having fewer cars to sell, both automakers and their dealers (which are separate businesses) had a strong 2020.
General Motors reported a $6.4 billion profit for the year despite the worldwide economic downturn. Volkswagen turned a $10.7 billion profit for the year, after warning that a result that good was unlikely. Even Fiat Chrysler, which was heading into a merger (a circumstance that often temporarily disrupts a company’s profits dramatically) stayed in the black for 2020.
Dealers, too, made it through the pandemic year with stunning success. Automotive News reports that American dealers posted an average pre-tax profit of $2.1 million in 2020 – a 48 percent increase from 2019.
Even though sales dropped, new vehicle production shut down completely. The lag in resuming production to match rising demand is why inventories are slow to recover.
This relative scarcity of new cars results in lower incentives and higher prices. The average transaction price for a light vehicle in the United States topped $40,000 for the first time late in 2020. Transaction prices in January 2021 were 5.45 percent higher than a year earlier.
Similar patterns show up in the used market. Cox Automotive reports that total used car supply was 12 percent lower in February than one year ago, but average list price is up 10 percent in that same period.
Lower inventories save dealerships money. Dealers generally don’t own the vehicles on their lots. Through a complex transaction, they are generally making payments on the vehicles they sell. Fewer vehicles sitting unsold on the lot means paying less in interest.
An important cautionary note on those numbers – an increase in average transaction price doesn’t necessarily point to an affordability crisis. According to the Cox Automotive/Moody’s Analytics Vehicle Affordability Index, the relative cost of cars is decreasing. Offsetting higher transaction prices are low interest rates and increases in household median income. However, that picture could change if interest rates rise or household income drops once all the COVID relief runs out and employment doesn’t recover to pre-COVID levels.
If both automakers and dealers embrace the notion that keeping production in check and managing smaller inventories can lead them to better profits, what will that mean for consumers?
First, they should expect the situation to persist, says Cox Automotive Senior Analyst Charlie Chesbrough. “With recent issues tied to harsh winter weather and a global shortage of computer chips slowing manufacturing, we believe new vehicle inventory will likely remain tight for much of 2021,” he says.
“Tight inventory, however, does not mean there are no great deals out there. But they will likely be harder to find.”
“As inventory tightened last year, we saw lower incentive spend on many popular vehicles,” Chesbrough notes.
The circumstances could lead dealers to offer previously rare incentives on some types of transactions. Higher-than-expected retained value could mean that vehicles being returned at the end of a lease are worth more than dealers expected them to be. They could respond by offering so-called “lease pull-ahead” deals, which incentivize a customer to return a leased vehicle ahead of schedule, giving the dealership both a customer looking for a new deal and a car to sell at a higher price than anticipated.
It’s also worth noting that the media tends to report national trends in car buying, but many incentives are often regional in nature. So a lot of these deals often don’t get the same attention as a nationwide program.
Increasing prices can be a weapon for both sides in a negotiation. “Yes, car prices are high, and selection is low,” Chesbrough explains. “But your current vehicle may also be worth more than you think in this market.”
“Lower inventory certainly means less choice in the market, so some buyers may have to settle for a different color or trim-package than desired,” Chesbrough explains.
If manufacturers are going to build fewer cars, they’ll need to get more money out of each sale. So, they’re likely to focus on building the more expensive trim levels.
Chesbrough notes, “Some automakers – Ford and GM in particular – have mostly abandoned lower-priced vehicles altogether in favor of more expensive SUVs and pickup trucks. It is also common for automakers to launch all-new vehicles with a heavy mix of high-trim, high-price vehicles, as early buyers often want the top-trim models, and those well-equipped models help pad the automakers’ bottom line.”
The fact that there are fewer base models available doesn’t matter particularly much when you’re shopping for one. Looking for a new car online enables shoppers to search for and buy vehicles not just from local dealer inventory, but from just about any lot in the country.
If average transaction prices keep increasing, how will dealers incentivize buyers to come in the door? By de-emphasizing the purchase price.
Chesbrough explains, “while average transaction prices are growing, that does not necessarily mean monthly payments are jumping as well. Buyers with good credit scores can score longer loan terms and lower rates and stretch out the payment schedule to keep the monthly costs in check.”
In Europe, car buyers typically order the car they want from the factory and wait for the manufacturer to build it to their specifications. Americans, however, expect to pick from a dealer’s current inventory.
Does the intersection of the trends toward lower inventories, higher prices, and online shopping end in a European build-to-order system on our shores?
Chesbrough doesn’t see it as likely in the short term. “The entire dealership infrastructure is built to support large inventories,” he says, “and Americans are a buy-it-now culture. That said, with the purchase model shifting online and consumers visiting fewer dealerships in the vehicle-buying process, it’s hard to predict where the process may eventually go.”
A few years down the line, there may even be a new business model where manufacturers build nearly every car to the same specification. These generic models will incorporate a wide range of features they can turn on and off through over-the-air updates as customers pay or subscribe to them. Didn’t buy the heated seats? That’s ok – you can add them from your phone at any time, for a fee.
Such a system would let automakers build just one model and allow buyers to customize their car on the fly. Now, if they could only find a way to change a car’s color that way, problem solved.
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