On the Rise

Sep 1, 2023 | Industry

By Jim Henry

Incentives are starting to make a comeback, now that the situation has changed. Customer waiting lists aren’t so long, and the average transaction price has fallen below Manufacturers Suggested Retail Price.

Good times continue to roll for U.S. new-vehicle dealerships – just not quite so good, in some ways.

Here are some of the high-level pros and cons affecting dealership business from mid-year through the rest of 2023.

Pros:

1. Better new-vehicle availability;

2. A modest return to factory discounts;

3. Strong demand for parts and service.

Cons:

1. Lack of affordability, high interest rates;

2. Lower per-vehicle gross profits, new or used;

3. Shaky consumer confidence.

The central new fact in the auto retail market is the current increase in new-vehicle supply. However, better supply cuts both ways.

The upside is that new-vehicle sales are up this year. New-vehicle shortages had severely limited sales and created pent-up demand, dating back to COVID-related business shutdowns that began in the spring of 2020.

Low inventory continues to an extent today, due to parts shortages, especially computer chips. Automakers also are slow-walking production increases, in some cases, to keep supply scarce, and to support high transaction prices.

Still, the industry is gradually overcoming the chip shortage, and new-vehicle availability has improved.

According to Cox Automotive, new-vehicle inventory was about two million cars and trucks at the end of July, an increase of 71%, or more than 800,000 units higher than July 2022. Even with the increase, that’s still well below historical standards, pre-pandemic.

With better supply, U.S. light-vehicle sales for July were about 1.3 million, an increase of 16% vs. July 2022, according to Kelly Blue Book. Year to date through July, U.S. light-vehicle sales were about nine million, an increase of around one million, or 13.3%.

What’s not to like? The downside for dealerships is, average gross profit per new vehicle is declining, as consumers get more to choose from, and consumer bargaining power has improved. Used-car grosses per vehicle were down in the second quarter, too, for many big dealer groups.

The second quarter produced a lot of ups and downs in dealership results.

At Asbury Automotive Group, for instance, on just a 3% increase in new-vehicle unit sales in the second quarter, new-vehicle revenue increased 8%, to $1.9 billion. However, average new-vehicle gross profit per vehicle fell 16% vs. a year ago, to $4,832. That’s on a same-store basis. Asbury Automotive is based in Duluth, Ga.

For dealerships in general, not just Asbury Automotive, it remains to be seen whether the increase in sales volume is enough in the long run, to make up for the decrease in gross profit per unit.

David Hult, Asbury president and CEO, said in a July 25 conference call he doesn’t expect inventory to go back to pre-pandemic levels, and that should support higher per-unit gross profits, even if they’re down from recent highs.

“I think all of our peers and ourselves have been talking about it, we’re not going to go back to ’19 levels,” of inventory, he said.

For the industry, Cox Automotive said the new-car days-supply was 56 days at the end of July, 39% higher than a year ago. Days-supply is an estimate for how long a given inventory would last at the most recent monthly selling rate, if it were not replenished.

Before the pandemic, a 60-day supply was considered “normal and ideal,” Cox Automotive said.

Supplies vary a lot, from brand to brand. Dealers report that generally speaking, domestic brands have the biggest inventories, approaching pre-pandemic levels in some cases. Mass-market import brands like Toyota and Honda have the lowest inventory on average. Luxury brands are mostly in-between, dealers said.

Asbury reported it had a 32-day supply of new-vehicle inventory as of June 30, 2023. That’s up from 26 days as of Dec. 31, 2022, and up from just 13 days a year ago.

With more inventory on hand, dealers have been complaining for a few quarters now, that the manufacturers need to increase incentives, and produce a higher mix of more-affordable vehicles. Incentives are on the rise, but from a very low starting point.

When customers were waiting in line to take what new vehicles they could get, and pay more than sticker price to get them, the factories steered scarce computer chips to the most profitable vehicles, with the highest levels of trim and equipment.

Incentives are starting to make a comeback, now that the situation has changed. Customer waiting lists aren’t so long, and the average transaction price has fallen below Manufacturers Suggested Retail Price.

According to J.D. Power and GlobalData, the average incentive per vehicle more than doubled in July 2023 vs. a year ago, to an estimated $1,888. That’s an average of 3.7% of MSRP, vs. 1.7% a year ago.

Part of the incentive increase is meant to offset the increase in the average auto loan rate, since the Federal Reserve started raising interest rates in March 2022.  

Satyan Merchant, senior vice president and automotive business leader at Chicago-based TransUnion, said that in the second quarter, the average new-vehicle finance rate was 6.8%, up from 4.7% in the second quarter of 2022. The average rate for used-vehicle financing was 11.9%, up from 9.2% a year ago.

Also In the second quarter, TransUnion says 6% of new-vehicle financing had an annual percentage rate of 2% or less, which implies there were factory-backed incentives to buy down the interest rate. At the end of 2022, only 3% of new-vehicle financing had an APR of 2% or less, TransUnion said.

The relative decline in profits has new-car dealerships reacting the same way dealerships always do, whenever new- and used-car profits are down: they’re making more money the old-fashioned way, from parts and service.

Dealers note that the age of the average vehicle on the rise. That’s partly because there are fewer new vehicles being produced and sold compared with pre-pandemic years, and that alone raises the average age of all other vehicles on the road.

According to Experian Automotive, the age of the average vehicle on the road was 12.3 years for the first quarter of 2023, the most recent available, up from 12.1 years in the first quarter of 2022. When the pandemic first hit, the average age in the first quarter of 2020 was 11.7 years.

Still, dealers report that with new- and used-car prices being high, many customers are keeping their vehicles and fixing them up, which is good news for dealership parts and service business.  

 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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