There’s a buyer’s market waiting for today’s auto purchasers. You can see it in the form of packed dealer lots, increased competition between gas and electrified options, and outright price reductions for some vehicles.
Discounts and bargains are out there for many brands, a new reality among dealers needing to unload inventory.
“In the new car market,” said the Kelley Blue Book in June, “prices are already falling, and most automakers this month are struggling with an oversupply of new cars to sell. That means discounts as dealers compete for your business.”
What we’re seeing is a market shake-up, and the emerging new market looks pretty good for buyers.
You can see this from a recent transaction. The buyers went to a local dealer, intent on purchasing a particular model from a specific manufacturer.
It was automobile love at first sight – until the dealership said it would only sell that one special car, the car sitting right there in front of them, if the buyers would purchase some $5,000 worth of add-ons and extras. The buyers went online, found a year-old model of the car they liked with 6,000 miles on it, and bought from a national used-car company with a lot down the street from the dealership.
They paid less for the car, nothing for needless add-ons, and wound up with a lower monthly loan cost.
The New Market For Cars, SUVs, and Pick-ups
If you shopped for a new or used vehicle during the past few years you likely came across fast-rising prices. According to the Bureau of Labor Statistics (BLS), higher prices since 2020 were caused in large part by “significant supply shortages and supply-chain bottlenecks, both due to the pandemic-related shutdowns adopted across the globe.”
What bottlenecks? Remember those photos of massive container ships parked off the West Coast, ships that could not be unloaded?
Those ships had the parts and pieces manufacturers needed to assemble cars, especially chips and other electronics.
Meanwhile, the government – fearing an outright recession if not something much worse because of the pandemic – started a series of programs to keep the economy afloat.
In total, more than $5 trillion was distributed in the form of $1,200 stimulus checks to individuals, help for small businesses, hospital bailouts, aid to local governments, etc. Dealers reduced orders, believing the economy would have a recession and fewer vehicle sales.
In the early pandemic period there was a shortage of vehicles to sell. It was a seller’s market with little supply, much demand, bulging wallets, and soaring prices. The results were what you would expect.
“Dealers will acknowledge it was the best time to be in the new car business,” said Cox Automotive in late June, “akin to an unforgettable college rager. They enjoyed an unprecedented financial boom, with return on sales soaring from 2% to over 6% at most publicly traded auto groups. To put that into perspective, a dealer who earned $1 million in net profit in 2019 watched their earnings surge to over $3 million in 2022. The most astonishing part? Dealers made three times more profit while selling roughly one-third fewer vehicles.”
The New Auto Market
Those days are over. The tie-ups at West Coast ports are gone. Car manufacturers have the chips they need. Dealer lots are full.
Covid financial assistance programs have ended. The economy is strong, unemployment is near historic lows, and the big worry is inflation and not recession.
The premiums buyers were forced to pay before 2020 have largely evaporated.
No less important, many 2023 models remain on dealer lots, available at substantial discounts. According to a May report from Edmunds, the average discount for a 2023 vehicle was $4,1472 compared with $1,741 for 2024 models.
“For dealers and automakers, the trend serves as a moment of caution surrounding the old habits of overproduction and inventory glut,” said Jessica Caldwell, Edmunds’ head of insights. “It’s also a reminder that the expensive vehicles now being discounted were strong sellers one to two years ago, showing just how significant high interest rates are in today’s market.”
One result: According to the Bureau of Economic Analysis, Americans spent $304.5 billion on new vehicles in the first quarter, down from $334.1 billion a year ago. The story with used vehicles is the same: We spent $38 billion on them in the first quarter compared with $46.3 billion last year.
Dealer Competition
It’s tough to raise prices in today’s market. Not only is there a lot of supply, there’s a lot of competition to make a sale.
First, there’s increased dealer-versus-dealer competition. We now have more dealers than before the pandemic. According to the National Automobile Dealers Association (NADA), there were 16,682 franchised light-vehicle dealers in pre-Covid 2019 versus 16,835 in 2023.
Second, there’s a battle between traditional dealers and new competitors, pushing prices lower.
“The newer companies typically don’t have traditional dealerships,” explains Consumer Reports. “Instead, they call their stores ‘spaces’ or ‘galleries.’ There’s a reason these companies don’t use the term ‘dealership.’ Most states have franchise laws that prohibit auto manufacturers from making sales directly to consumers. The idea behind these decades-old policies is to protect independent dealerships from manufacturers opening their own dealerships and becoming direct competitors.”
Third, if a dealership is only selling vehicles with internal combustion engines (ICE vehicles) it’s facing new competition.
According to Experian, ICE vehicles represented 77.3% of the market in the first quarter, down from 80.3% a year ago. There are now 3.6 million electric vehicles in operation, as well as 8.7 million hybrids.
If you’re only selling ICE vehicles the odds are that you’re losing sales, repairs, and profits to electrified cars, SUVs, and pick-ups. One of every five new vehicles is an electric or hybrid, according to Experian, a large and growing chunk of the market.
The bottom line: There’s no second place in the auto sales business. If you don’t close a sale you get nothing. The result is that many dealers are trimming margins to get people in the door – and that’s good for buyers.