An Inventory Uptick

Jul 1, 2023 | Industry

By Jim Henry

New-car dealers are getting what they’ve been asking for, ever since the COVID-19 pandemic began – more, but not “too much” more, new-vehicle inventory.

Nevertheless, dealership groups say they’d like manufacturers to do more to stimulate retail demand. They want the factories to increase incentives on loans and leases, and to produce a more affordable mix of new vehicles. More on those issues later.

“Too much” inventory requires a lot of discounting, to move the metal. On average, new-car dealerships are far from that point, said Jonathan Smoke, chief economist for Cox Automotive, in a recent report.

“The new-vehicle market’s most acute inventory issues are in the rearview mirror now,” Smoke said. According to Cox Automotive, U.S. dealerships had new-vehicle inventory of about 1.9 million units in May, an increase of about 70%, vs. 1.1 million a year ago.

“Dealers are now facing an uncertain economy and high loan rates that are keeping many would-be buyers on the sidelines,” Smoke said.

Higher inventory produced higher sales in May. According to LMC Automotive, U.S. light-vehicle sales in May were about 1.4 million, an increase of 23.5%, vs. May 2022. “Original Equipment Manufacturers raised vehicle production on the back of fewer supply issues,” LMC Automotive said in a June 14 report.

But new-vehicle inventory is still far below pre-pandemic levels. For most of 2019, new-vehicle inventory was above 3.5 million new cars and trucks combined, and incentives were much higher than they are today.

“New-car inventory is building,” said Jeff Dyke, president of Sonic Automotive Inc., Charlotte, N.C.

“If you take a look, it’s not just us, but you look across the board. If you look at new-car inventory, it’s gone from, call it, a 20-day supply to a 30-day supply on average across the board. We expect that to continue to grow,” he said, in a conference call to announce first-quarter earnings.

Days-supply is an estimate of how long a given supply of new vehicles would last, at the current monthly sales rate, if the supply were not replenished. Before COVID, a 60-day supply was the industry benchmark.

Fast-forward to today, and with the current increase in inventory, new-car prices are declining from recent record highs.

The average new-vehicle transaction price is back down below Manufacturer’s Suggested Retail Price, and incentives are up — but only for the last few months.

The average new-vehicle transaction price is back down below Manufacturer’s Suggested Retail Price, and incentives are up – but only for the last few months.

According to Kelly Blue Book, the average, new-vehicle transaction price in May was below MSRP for the fifth month in a row. In May 2023, the average new-vehicle transaction price was $410 below MSRP.

In May 2022, the average transaction price was $637 above MSRP. Paying above sticker price was virtually unheard-of before the pandemic, except for the occasional luxury or sports car.

Despite the recent downturn relative to MSRP, today’s average transaction price is still much higher, and discounts are still much lower, than they were in 2019, before the pandemic, and the long-lasting shortage of computer chips.

Specifically, the average new-vehicle transaction price in May was $48,528, Kelly Blue Book said. That was an increase of $1,393, or 3%, vs. a year ago. That’s a small increase by recent standards. In May 2022, the average transaction price was up 13.5% vs. May 2021, Kelly Blue Book said.

Meanwhile, manufacturer incentives are up. Kelly Blue Book said that in May, the average manufacturer’s incentive represented 3.9% of the average transaction price, or $1,914. That was the highest incentive level so far in 2023. A year ago, it was just 2.5% of average transaction price, or $1,178.

Besides higher incentives, LMC Automotive said the average new-vehicle transaction price may also have declined in part because manufacturers produced a bigger mix of lower-priced vehicles.

Computer chips were in shorter supply last year, and with customers waiting in line for new vehicles, manufacturers have been steering chips to their most profitable products, to make up for lower unit volume overall.

At the end of the first quarter, the big, publicly traded dealer groups complained that manufacturers had over-produced high-end vehicles with a high level of options, and they complained that manufacturers were slow to increase incentives.

“While inventory availability is improving, several OEMs have not invested in additional consumer incentives to meet the retail demand,” said Chris Holzshu, COO for Lithia and Driveway Motors, Medford, Ore.

“We expect incentives to increase throughout the year, which should have a positive impact on new car volumes,” he said in a conference call to announce first-quarter earnings.

David Hult, CEO of Asbury Automotive Group, Duluth, Ga., raised similar concerns, in a separate earnings call.

“We had an imbalance of inventory, in the sense of there were heavy-contented vehicles that were built during the chip shortage. Everyone went with the heavy content in the vehicles,” he said.

“And in the first quarter, especially on the domestic side, people are looking for less expensive trucks than what we had, and there was a slow approach on incentives there,” Hult said.

Dealer groups also said they’d like to see a comeback in leasing, as a way to address affordability issues.

Roger Penske, chairman and CEO of Penske Automotive Group, Bloomfield Hills, Mich., said that before the pandemic and the new-vehicle shortage, leasing accounted for 50% to 55% of his group’s retail volume, but today it has fallen to the mid- to low-30% range.

Penske Automotive’s lease share is much higher than the industry average because the group has a high share of luxury brands.

On average, leasing accounted for around 30% of new-vehicle volume before the pandemic, vs. around 18% today, according to Experian Automotive. Leasing fell when manufacturers cut back on incentives, since lease share has always been driven by incentives.

Roger Penske said leasing may make a comeback, provided manufacturers return to lease incentives. “I think that I expect leasing to increase,” he said in an earnings call – when manufacturers need more leases to hit their sales numbers. 

Jim Henry is a New Jersey-based, veteran freelance reporter covering the U.S. auto industry, writing for trade magazines Automotive News and WardsAuto, plus Forbes and others. Concentrations include U.S. light-vehicle sales, dealership Fixed Operations and Finance & Insurance, mergers and acquisitions, publicly traded dealer groups, OEM financial results, and Connected, Autonomous, Shared, Electric Vehicles. He is also the former department manager, corporate strategy and market research for Mercedes-Benz USA, and a former president of the International Motor Press Association.

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