Auto and Truck Sales Show: The Inflation Mindset Has Changed, Consumers Are Ready To Pay Much More, Not Only Generating Record Sales But Also Record Gross Profits

This change in mentality about inflation is probably not “temporary”.

By Wolf Richter for WOLF STREET.

Record retail sales of new vehicles despite reduced incentives by automakers, record transaction prices for new vehicles, soaring used vehicle prices and trade-in values, very tight stocks on popular models and record profits for dealers – this is what drives stimulation and gains in the stock market. as well as supply disruptions produced in May. Inflation is written everywhere because the whole mindset has changed.

The average transaction price (ATP) of a new vehicle sold to retail customers in May hit a record high of $ 38,255, according to JD Power estimates. ATP is a function of the price of new vehicles sold to retail customers and the mix of new vehicles sold: the shift to high-end trucks and SUVs that we’ve seen in recent months has helped drive ATP up. The graph, based on data provided by JD Power, shows the months of June and December of each year except 2021, where it shows ATP for May:

The MSRP (Manufacturer’s Suggested Retail Price) does not normally change during the model year. What changes are car manufacturers’ incentives paid to dealers and / or customers, and the prices negotiated between dealers and customers.

Retail sales, despite much lower incentive spending, jumped 10.6% from May 2019 to 1.35 million units, according to JD Power estimates.

That surge came despite automakers slashing their incentives, with average incentive spending per new vehicle falling 24% from May 2019, to $ 2,957.

But fleet sales fell 49% from May 2019, to just 167,000 units, amid complaints from car rental companies that they are struggling to order new units for their fleets as automakers are juggling supply chain issues and component shortages due to the semiconductor shortage, and are prioritizing high-margin retail sales with high-end retail models, such as pickup trucks and SUVs.

And overall new vehicle sales – strong retail sales and dismal fleet sales – at 1.53 million units are still expected to decline around 2% from May 2019.

The lineup of new vehicles sold to retail customers continues to shift from cars – typically cheaper, low-margin vehicles – to trucks and SUVs which are typically more expensive, high-profit vehicles. In May, trucks and SUVs accounted for 76.2% of new vehicle retail sales.

This trend towards high-priced vehicles and strong retail sales set another record in dollar terms: consumers are on track to spend a record $ 53.1 billion on new vehicles in May, up 27 % from May 2019, according to JD Power.

And the profits of new vehicle dealers have skyrocketed. Finance & Insurance (F&I) gross margin and combined earnings are expected to reach an all-time high of $ 3,245 per new vehicle sold.

Soaring wholesale prices for used vehicles, which has driven up the trade-in value of used vehicles, has helped generate new profits through trade.

The prices of used vehicles auctioned in the United States during the first half of May are up 45% from May 2019, according to the used vehicle value index of Manheim, the largest operator in the United States. auto auctions in the United States. All vehicle segments have seen sharp price increases at auction, and pickup truck prices have skyrocketed – although I suspect that some, but not all, that rise will eventually dissipate:

These spikes in wholesale used vehicle prices have the effect of increasing trade-in values, and people who might have been upside down in their vehicles – due to more than trade-in value – could now find themselves less upside down, or even have positive equity. in their trades, which makes it much easier for the dealer to close a very profitable transaction.

New vehicle inventories are tight and very tight in some popular segments. The pace of sales has outstripped the supply of new vehicles, whose production is constrained by the semiconductor shortage, and the situation has not improved yet.

On average, the number of days a new vehicle was in the dealership’s inventory before it was sold has dropped to 47 days, while 60 days is considered healthy. And 33% of vehicles were sold within 10 days of arriving at the dealership, up from 18% in May 2019. This indicates that the hottest units, like trucks, are often sold when unloaded. This includes vehicles ordered by retail customers.

Used vehicle stocks are also tight. Retail supply had fallen to 38 days by mid-May, according to Manheim; and the wholesale supply had fallen to 18 days (23 days is normal).

That companies can raise not only their prices – on the basis of strong demand and mutilated supply – but also their benefits As far as the record gross and F&I profits of new vehicles show, shows that the whole inflation mentality has changed, that this time consumers are willing to pay more. It is a theme that we are now seeing throughout the economy. And this change of mind is probably not “temporary”.

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