Mike is a sales and digital marketing software manager in the automotive dealership business.
Car prices are out of control with skyrocketing prices...why?
If you have been shopping for a new vehicle, you have probably experienced sticker shock, as well as limited availability. We are all familiar with the issues that Covid-19 has produced such as supply chain disruptions, and in the event of new vehicles, computer chip shortages. This has led to a demand for new vehicles that is exceeding supply...and everyone from the manufacture, to the dealer, is making huge profits!
In 2019, the last year before Covid-19 became the economic normally changer, vehicle manufacturers produced and sold approximately seventeen million vehicles in the United States. In this last normal year of business, a significant number of these vehicles were offered with some incentive, whether it was a no-money down lease, zero percent interest, or a rebate. After the pandemic did it's part during the March 2020 timeframe, vehicle sales slumped as there was the big unknown about jobs and the economy.
The manufacturing process in the spring of 2020 was slowed down, as new vehicles that were unsold were piling up. Included in the slowdown of new vehicle production, manufacturing plants were closed due to the virus spreading among the assembly crews. To ensure the economy was going to survive, the Federal Reserve started increasing money supply via stimulus money and PPP money or Payment Protection Program for small business.
With 85% of people still working, this put a lot of money in the hands of the individual which could be considered disposable income. I am not going to get into the mechanical aspects of the economy, but we do know that by summer of 2020 the economy started picking up. There were lumber shortages, building material shortages, along with excess inventory in the recreational sector of motorcycles, campers, boats, etc. being sold out.
Due to the manufacturing plants closing periodically due to the spread of Covid, there were supply chain problems that were starting to act in part like a slinky. If you have ever played with a slinky, it expands, flows, then contracts and stops, repeating this cycle. In the manufacturing process, the plant may have the workers ready to go, but the parts to assemble may not be there due to that plant being closed. This lead to multiple delays, exacerbating the frustration in producing products that were now running low on shelves and in dealerships.
By late 2020, the economy was getting itself back on track, but there were supply issues that couldn't be solved immediately. With back logs piling up, any excess inventory was being sold, along with inventory that was behind schedule but being available for retail. This set in motion, the inflation we are experiencing today - too much demand and not enough supply.
In 2021, the economy was going full pace for the most part, but the problem of getting parts out for manufacture was experiencing frustrating delays. With regards to vehicles in-stock, dealers were running out of new inventory fast, so the switch to used started to decrease the number of used vehicles in supply. Used vehicle pricing started to increase in early 2021, something car dealers had never seen before. The price of some two year old vehicles with 40,000 miles was selling for more than it has sold new!
As new vehicle supply dwindled, and the manufacturers telling dealers they were not certain when they would get their allotment, the business model changed. The old business model of having inventory on the floor shifted to order out contracts, in which the buyer would place an order for a vehicle delivery date that was little more than an estimate.
Since there weren't enough vehicles available, the manufacturers did not need to incentivize the purchase of any of the vehicles, therefore almost all vehicles were selling at MSRP. However, as vehicles were being delivered to dealerships, the dealer had a list of people interested in purchasing these vehicles, they started to ask for MSRP +, and they still were sold out!
Being this is a free market economy principle, the question is - do you want to pay more than MSRP for your vehicle? If the answer is - I really want the car, and am OK with the price, then the vehicle was sold...and the dealer made big MONEY! Although they had fewer vehicles, the fact that every vehicle they were selling was bringing above sticker money, they were doing quite well. The buyer was usually happy, due to the increase in value of their trade in, so new vehicles continued to be in short supply.
Studying this phenomena is interesting, because in Europe, the business model is set up for the order it here at the dealership, we have enough vehicles for a test drive, but none of them are available for retail sale. Will this be the business model that the United States franchise owners start to partake in, after all, they are making good money and not having to floorplan huge amounts of capital to keep vehicle inventory in stock.
Most younger buyers are completely satisfied, they come inquire on-line about the vehicle, and will do an order out. Older buyers, who are used to the negotiating process and seeing/feeling the car in person, aren't as apt to want to go in this direction. Time will tell how it all works out, but all it takes is a lower tier manufacturer such as Nissan, to take advantage of market demand, and increase their market share. To compete in the marketplace, other manufacturers may need to increase availability to match demand, after all, if you purchased a new camper and need a truck, but the Ford dealer tells you it is a 90 day wait, and Nissan has a new Titan on the floor.
At some point, the market will stabilize, probably in the next 12 months. People ask - when are new vehicle prices going to go down? The answer is - they have tested the water on the high side...new vehicle prices aren't going to go down again, they are here to stay.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2022 Mike Dempsey