Consumers can choose from a variety of causes: the Covid-19 pandemic or a shortage in semiconductors, blocks at Canada’s border, fire aboard a ship carrying Volkswagens and Porsches, or all three. The new American car lot is unusually empty.
This means that dealers and manufacturers have abandoned rebates and other incentives used to attract customers into their showrooms. Dealer markups are actually becoming more common. Edmunds recently found that more than 80 percent of buyers bought new vehicles for more than the sticker price in January, a nearly 30-fold increase over a year earlier.
Dave Gardner, Honda’s executive vice president for U.S operations, said “Think back to two years ago.” “When was the last time you heard of cars selling MSRP?” That’s the beginning of the conversation.
Since the pandemic, the automotive retail landscape has seen a dramatic shift. The North American vehicle manufacturing network was shut down for three month in the spring 2020. At first, it didn’t seem like a big problem as almost no one was buying vehicles during the lockdown. However, demand rebounded faster than expected as dealers started taking orders online and delivering vehicles directly to customers’ homes.
Manufacturers went into maximum overtime once the plants were reopened. They were then hit by a sudden shortage of semiconductors that are used in modern vehicles. AlixPartners research shows that global vehicle production fell 10m short of initial estimates in 2021. Automakers lost approximately $210 billion.
The U.S. dealer has just 1 million vehicles currently on their lot, which is less than a third what would be expected at this time of the year. However, General Motors, Ford, and other manufacturers reported strong earnings for this year. Key dealer groups such as AutoNation also reported strong earnings.
It’s a seller’s market because of the scarcity of new cars. Popular models have seen their incentives disappear, including rebates, low-interest loans, and other incentives, which were once a industry standard for the past 40 years. Dealers are now offering “adjustments,” which can cost more than $10,000 for vehicles like Ford’s new Bronco and the Chevrolet Corvette, as well as the Kia Telluride.
Jessica Caldwell (executive director of insights at Edmunds) stated that “the fact that an overwhelming majority consumers are paying more than sticker price would not have been possible even a year ago.” This is exactly what data tracking service found.
Edmunds analyzed January sales reports and found that 82.2 percent of buyers paid $728 more than the suggested retail price. Only 2.8% of buyers paid more than the sticker price for January 2021 and only 0.3 percent in comparison to the same month in 2020.
Caldwell stated that the rise was partly due to affluent customers being more willing to spend more money to get the cars they want, but there is also a large population of people who are forced to do this simply because they have no other option.
Six brands had their average transaction prices fall below sticker in the last month. Edmunds reports that Cadillac dealers added the most markups to their average transaction price of $4,048, an average of $4,000. Luxury dealers weren’t alone in taking advantage of low inventory. Last month, Kia customers paid $2,289 more than the sticker.
Buyers are being punished by a lack of discounts and dealer markups on brand new vehicles. According to Kelly Blue Book, December’s average transaction prices, which is the actual amount that a buyer pays before they get behind the wheel, hit a new record of $47,243. According to the service, though transaction prices fell by 1.8 percent to $46,404 in January, this was largely due to a drop in luxury car sales.
Caldwell stated that consumers have long memories and could switch brands if they see a dealer markup on their next vehicle.
This has led many automakers, including Ford and General Motors to press dealers to adhere to the MSRP. Problem is, state franchise laws restrict a manufacturer’s ability to regulate what a dealer charges. They have some tools, but they don’t have all the answers. Automakers have advised dealers to relax — Jim Farley, Ford CEO, confirmed that it could be harder for retailers to obtain the vehicles they desire from the factory.
Buyers shouldn’t expect a return to days when they could get lucrative factory incentives or demand discounts from dealers.
Mary Barra, General Motors CEO, has stated that she doesn’t think the automaker will put as many vehicles in dealer inventories than it did in the past. Others have also echoed this strategy, which could lead to a shift in power over the long-term.
The industry will benefit from tight inventories, as the shortage of semiconductors is expected to continue through the end. Long-term, the question is what happens to the economy if it weakens or consumer demand falls. This could allow buyers to regain control.