The strange way Americans buy cars developed over more than a century. It wasn’t planned as a logical process from start to finish. It consists of practices that grew around each other like gnarled vines. We may all be used to it, but that doesn’t mean it’s streamlined or reasonable.
It’s changing rapidly in response to the abnormal economic conditions of the past two years. Perhaps the most important change is the near-disappearance of incentives.
Sticker Price Is Now the Norm
“In today’s world, where roughly 70% of vehicles are presold at full sticker or more, there is almost no sales pressure and incentives have been dialed way back,” explains Brian Finkelmeyer, senior director of new-vehicle solutions at Cox Automotive.
Cox Automotive is the parent company of Kelley Blue Book.
New Car Sales Are Complex Transactions
With a few exceptions (notably Tesla), automakers don’t sell cars directly or operate their own dealerships. They sell to dealers who sell to customers. They often operate banks that loan money to buyers so they can buy from dealers so dealers can buy from the automakers. Gnarled vines.
These complex transactions often mean that the company that builds a car has to jump through hoops to discount the car. That leaves automakers, for instance, offering a cash-back incentive rather than simply changing the price.
Incentives Growing Rare
Those incentives are growing rare. Last month, Finkelmeyer notes, they made up just 2.3% of the average transaction price. Just two years ago, they made up more than 10%.
“The industry still deployed $1.24 billion on incentives in August. This may seem like a lot, but it pales in comparison to August 2019,” Finkelmeyer explains, “when a total of $6.51 billion was spent motivating shoppers to buy from overstocked lots.”
Oversupply No Longer Normal
Overstocked lots play a big role in how the buying process evolved. Pre-pandemic, dealers often kept more than two months’ supply of cars on hand.
Supply chain problems, like a near-crippling shortage of microchips, have left automakers unable to build cars fast enough to meet demand. That has left dealers with little supply, often selling vehicles before they even arrive on the sales lot.
Automakers have little need to discount cars if they know they have more cars than interested buyers.
Automakers Profiting Without Discounting
Cadillac, Finkelmeyer says, spent approximately $167.3 million on incentives in August of 2019. That earned them about 1% of the U.S. sales market.
This August, he notes, they spent less than $22 million and still controlled 1% of the market.
Ford cut its incentive spending from nearly a billion dollars in August 2019 to just $143 million this August and saw its market share increase. Finkelmeyer calls that “the greatest trick in the history of the auto industry.”
Supply Costs Offset by Higher Prices
By some measures, automakers are having a rough 2022. They’re short on everything from microchips to sound insulation. This week, reports emerged that Ford is sitting on a backlog of thousands of unfinished vehicles, many just waiting for a Ford badge. Yes, Ford is running low on Ford badges.
Automakers are spending huge sums to try to fix their parts shortages. “Just last week, Ford stock was hammered due to a projected $1 billion of unexpected supplier costs” in the third quarter, Finkelmeyer notes. But it barely matters to their bottom line. “Their incentive savings in August alone almost covers” the increased quarterly cost. The rest of the quarter is profit.
Big Incentives Now “A Thing of The Past”
What does it mean for car shoppers? Those incentives, Finkelmeyer says, may not come back.
“Yes, we may see incentives slowly coming back on certain models in the months ahead as demand is eroded by inflation and higher interest rates. But the good ol’ days of big incentive spending are a thing of the past,” he says.
