Can you hear that chorus of retailers singing, “It’s the most wonderful time of the year”? Thanksgiving is a couple of days away, but we are already seeing it: Christmas trees at Lowe’s, Holiday Deals on Amazon, and plenty of television ads with Santa leading a fleet of white cars with red bows – as Lexus always says, “…a December to Remember.”
But this year definitely won’t be a typical “December to Remember” sort of year for car buyers. This next six weeks and specifically the week after Christmas normally provide car buyers with plenty of options to score a great “end-of-year” deal. In most years, automakers are focused on clearing out their prior model year inventory (MY2020 in this case) and pumping up some last-minute sales volume to impress shareholders with strong year-end financials.
But like everything else, nothing is normal in 2020.
Consider the following: New-vehicle inventories are down nearly 750,000 units from year-ago levels. The roll-out of the new 2021 model year vehicles was behind schedule in late summer, but is now catching up. A Cox Automotive review of vAuto Available Inventory data reflects that 46% of on-the-ground dealer inventory is MY2021, and the ratio of incoming and outgoing model year mix is almost identical to what we saw last November (48%). But that’s where the similarities end. In terms of raw units, there are roughly 350,000 fewer model year 2020 vehicles than what we might normally expect at this time of year. In a typical year, the outgoing model year is where the best deals would be found.
Automakers have taken notice and begun pulling back on their incentive spending. In April, incentives as a percent of the average transaction price was 11.3%. Over the past 6 months, that percentage has dropped and last month stood at 9.4%. This equates to almost $800 less incentives per vehicle versus April. In many of the bestselling model lines, we’re seeing significant reductions in cash incentives: Ford Escape down $2,925, Toyota Corolla down $2,000, Silverado down $1,000, and Mercedes GLS down $5,000 all compared to cash offers from a year ago.
Cox Automotive Rates and Incentives also tracks the collective number of incentive programs offered in the marketplace each month and that number is down 15% versus last year. With less inventory to push and consumer demand remaining relatively strong, automakers have less necessity to provide specials like Owner Loyalty Cash or Employee Pricing For All-type offers.
Less inventory and less incentives are known issues as we close out the year. But there are a few wild cards which may have an even bigger impact on holiday sales.
- Rising COVID-19 Cases: The pandemic numbers are clearly heading in the wrong direction with nearly 200,000 new cases a day and hospitalizations setting new daily record highs.
- Falling Consumer Sentiment: The University of Michigan Consumer Sentiment Index dropped from 81.8 in October to 77 in November. In November 2019, Consumer Sentiment was 96.8.
- High Unemployment and No Stimulus in Sight: This week our chief economist noted there are more than 20 million Americans on some form of unemployment benefits. Initial jobless claims have been falling, but the weekly numbers still exceed the peak in claims during the Great Recession. The current political environment in Washington does not seem conducive to yielding an agreement on the next round of stimulus anytime soon.
Despite these unfavorable headwinds, I still believe auto dealers will finish the year on a strong note. Historic low interest rates continue to be one of the most effective incentive offers in the marketplace, thanks to Federal Reserve Chairman Jerome Powell. Many consumers have realized they can essentially “refinance” their automotive debt while getting a new vehicle in the process. This trend coupled with the significant number of lease turn-ins expected in Q4 provides the foundation for continued strong sales.
And for consumers who planned to surprise their spouse with a brand-new car with a red ribbon on top, it would be wise to visit their local dealer sooner rather than later. With available remaining inventory on the “deal cars” only getting tighter in coming weeks, this could easily become a “December not worth remembering” for those holiday gift buying procrastinators.
Brian Finkelmeyer is senior director of new car solutions at Cox Automotive.