Over the years, the auto industry has always had a healthy tension between the sales vice presidents and the chief financial officers. Sales executives were bonused on share gains, while the finance teams were bonused on profit. This led to a never-ending battle over how much incentive money was necessary to meet sales objectives. Each would happily blame the other if sales or financial targets were not achieved.
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. Last month, according to Kelley Blue Book, incentives averaged just 2.3% of average transaction price (ATP), down from 10.5% in August 2019. With numbers like that, the sales VPs’ and the CFOs’ relationship has greatly improved. They now get together on Friday afternoons for happy hour to celebrate their shared success.
Although incentive spending is way down, it may come as a surprise that 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, when a total of $6.51 billion was spent motivating shoppers to buy from overstocked lots.
The continued supply chain challenges have dramatically reduced the number of new vehicles being sold. In August 2019, there were 1.65 million retail deliveries, according to Kelley Blue Book data, versus 1.14 million in August 2022. Losing 510,000 units of sales volume can’t make anybody happy, right?
However, diving deeper into the August numbers reveals compelling insights into why the CFOs are not that upset about the lost sales volume. In August 2019, the average incentive spend across all brands for 1 point of market share was $65.1 million. In 2022, the incentive cost for 1 point of market share dropped to $12.4 million.
For some brands, the monthly incentive savings is just jaw-dropping. Consider the Cadillac brand. The GM luxury division spent approximately $167.3 million for less than 1% market share back in August 2019, as their incentives were running hot at 18% of average transaction price. In August 2022, Cadillac’s market share remains slightly less than 1%, but they’ve been able to slash total incentive spending to only $21.8 million. That’s $145.5 million per month in reduced incentives. Annualize it, and the savings is north of $1.5 billion a year for a brand that captures less than 1% market share.
The situation at Ford is even more dramatic: Our estimate indicates they spent approximately $947.9 million in August 2019 for a 12.1% market share with incentives at 11.4% of ATP.
Fast forward to August 2022: Ford share improved to 13.2%, but the sales team only spent $143 million on incentives. Ford just pulled off the greatest trick in the history of the auto industry: They increased market share by more than 1% while reducing monthly incentive spending by $804 million!
That equates to $9.6 billion per year in annualized incentive savings. Just last week, Ford stock was hammered due to a projected $1 billion of unexpected supplier costs in Q3. Worry not, Wall Street — their incentive savings in August alone almost covers these increased supplier costs.
There are many interested parties who are cheering for production levels to get back to pre-pandemic levels ASAP. Shoppers, suppliers, dealers, and certainly the sales vice presidents would love to have more vehicles being produced and made available to consumers. But the CFOs are loving these hefty new margins and they realize the incremental cost of growing sales volume back to the pre-pandemic levels would be outrageously expensive.
Let’s do the quick CFO math: 510,000 fewer units were sold in August 2022 versus 2019, but $5.27 billion less was spent on incentives. That works out to an incremental incentive cost per vehicle of $10,333 to get back to the good ol’ days of 2019.
While the sales VPs would love to see 17 million total industry new-vehicle sales again, no CFO is going to sign up for $10,333 in incremental incentive cost per vehicle to get there. 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, regardless of how many rounds the sales VPs buy at the next happy hour.
Brian Finkelmeyer is senior director of new-vehicle solutions at Cox Automotive.