It’s been more than four decades since Chrysler told customers they could “buy a car, get a check.” Since then, automakers have repeatedly failed to eliminate those givebacks — at least until the pandemic struck, followed by the ongoing shortage of semiconductor chips.
With barely a million vehicles in dealer inventories — less than a third the normal supply — sales incentives have all but dried up. And they aren’t coming back — at least not according to the CEO of the nation’s largest dealer network.
“We will not return to excessively high inventory levels that depress new-vehicle margins,” AutoNation CEO Mike Manley said during an earnings call. “Significant discounting and high incentives can also damage a brand, which is another reason for our industry to balance appropriately supply and demand.”
Catching the blame
It’s excess dealer inventory that traditionally catches the blame for incentives and other margin-depressing discounts. Automakers have to pump out products while betting they’ve got the right combination dialed in to meet consumer demand. Meanwhile, dealers want to get those vehicle back off their lots as soon as possible to minimize holding costs.
At least, that was the theory. Now, it’s proving to be true. Despite being short of product, dealers and manufacturers alike reported generally strong — and, in some cases record —– earnings for 2021.
For consumers, it’s another matter entirely. Average transaction prices — which factor in options, discounts and dealer markups — hit a record $47,243 in December, according to KBB.com, an all-time record. The figure did drop 1.8%, to $46,404, in January, the service reported, but that largely reflected a decline in luxury car sales. Since the pandemic began, the typical transaction price is up by over $10,000.
Dealer markups reach record levels
An equally telling figure: 82.2% of U.S. new vehicle buyers paid over MSRP in January, up from just 2.8% a year earlier, and a mere 0.3% in January 2020, according to data analyzed by Edmunds.com. On average, motorists paid $728 above sticker last month, with Cadillac dealers sticking shoppers with markups that averaged more than $4,000.
Whether that trend will hold is uncertain. There’s a growing backlash among car buyers and Edmunds chief analyst Jessica Caldwell warns that could impact owner loyalty when buyers are next ready to trade in. There also are signs some shoppers have decided to wait or have opted, instead, for a used vehicle.
Some automakers are advising dealers to ease up on the markups, Ford CEO Jim Farley confirming that retailers who refuse could find it harder to get the vehicles they want from the factory.
Even so, conditions seem ripe for it to remain a sellers’ market for some time, the semiconductor shortage expected to drag on throughout 2022, leaving consumers scrambling to find the vehicles they want and facing the prospect of few, if any, real deals.
One slow month and they’ll be back. It’s almost guaranteed that Brandon’s economy will lead to many slow months, as many as 35.