Can Leasing Save the Car Business?

Welcome to another episode of the Car Dealership Guy Market Update—Brought to you by Edmunds.

This podcast segment is a monthly recurring discussion with automotive industry experts and dealers about the current state of the car market and where it might be headed in the future.

Today, CDG is joined by Jessica Caldwell, AVP/Head of Insights at Edmunds, who breaks down the hard data and provides a macroeconomic perspective on the market. Gen Balouev, the General Manager at Norm Reeves Honda Superstore West Covina in California, is also joining the podcast. He shares his insights on inventory management, the EV shift, and navigating the economy.

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Episode Topics:

(00:00:00) - Intro

(00:01:41) - Q1 Performance reports

(00:05:38) - The health of the new vehicle market

(00:09:31) - What brands are winning right now?

(00:14:30) - The state of affordability in sub-compact cars and pick-up trucks

(00:18:39) - Combating the affordability crisis

(00:22:15) - Negative equity

(00:27:43) - Interest rates

(00:31:13) - Used car profitability

(00:37:08) - EVs

(00:45:50) - Expectations for Q2

1. The seasonally adjusted annual rate, or SAAR, is 15.5 million.

SAAR is a fancy acronym for the number of cars the industry is on pace to sell this year. According to Caldwell, this is strong. In general, the industry no longer holds itself to the pre-pandemic standard of 17 million. Automakers were mostly positive after Q1 earnings. But, the sales numbers show ongoing affordability issues.

2. Inventory levels are impacting profitability margins for dealers and automakers. 

On one hand, lower inventories over the past few years led to high profits for dealers, as more vehicles were selling for over MSRP. On the other hand, incentives and discounts practically vanished for consumers. Inventory today varies widely across brands. Caldwell points out that Toyota maintained a 30-day supply, whereas Stellantis had over 200 days' worth of inventory.

3. During economic downturns, brands that maintain a clear value proposition tend to sustain better sales. 

Brands known for reliability and affordability, like Toyota and Honda, are performing well despite higher overall vehicle prices and interest rates. On the other end of the spectrum, Nissan is facing challenges due to an increased reliance on incentives and fleet sales. There is concern about the ripple effects it might cause in the industry, prompting competitors to engage in similar business practices to stay competitive.

4. Affordable subcompact cars are on the rise, while midsize trucks hold their ground.

According to Balouev, subcompact cars are gaining popularity, particularly in Southern California, driven by affordability and the impact of high gas prices. But when it comes to pickup trucks, there is a decline in overall sales due to affordability issues. Yet, midsize trucks like the Ford Maverick, Toyota Tacoma, and Chevrolet Colorado are performing well, says Caldwell.

5. With used car values dropping, a worrying trend is emerging: negative equity. 

This means car owners owe more on their current loan than their trade-in is actually worth. The first quarter saw a concerning jump, with 23% of trade-ins having negative equity. Even though this percentage has been higher in years past, what’s more alarming is the average amount owed–a record-breaking $6,000.

6. Dealers are leveraging government tax credits for used EVs to assist subprime customers. 

This approach helps manage negative equity. It also opens up more car options for struggling consumers. However, subprime customers may not be ready to switch to EVs due to the necessary infrastructure and lifestyle changes.

7. Interest rates remain high and are staining consumer budgets.

With elevated interest rates for new and used cars (over 7% for new cars and more than 11% for used), consumers face significant additional costs over their loan term. Automakers have started subsidizing rates on new cars to attract buyers, but used car buyers still need more affordability. High interest rates could slow down the auto market recovery by making financing less accessible for average consumers.

8. Rising acquisition costs and fewer lease returns are squeezing profitability in the used car market.

Lease returns traditionally serve as a significant source of used vehicles for dealerships. This decrease will likely affect the inventory levels in the used car market. Dealers must continually refine their strategies and focus on efficient acquisition and pricing models to stay competitive.

9. Broad EV adoption is lagging. 

A new study from Edmunds reveals that consumers face issues like congested charging stations and long wait times, which deter EV purchases. For dealers–enhancing consumer education and aligning vehicle models with consumer needs are essential for boosting EV sales.

10. Many 2023 car models still need to be sold.

Looking ahead, Caldwell notes that many 2023 models are still lingering into the first quarter, leaving many to wonder if some will remain into the summer, which would be unusual. The focus is on how incentives might play a role in moving these remaining vehicles. Analysts eagerly wait to see the plans automakers put into effect to address this.