Big incentives are edging back into new-car dealerships.
Big incentives are edging back into new-car dealerships.
With the economy slumping and gas prices spiraling, incentives that began creeping up in January gathered steam last month, increasing to an average of $2,435 per vehicle sold in February, according to Edmunds.com.
The 8.4 percent increase from February 2007 is significant because it suggests that automakers – particularly the Detroit Three – are being forced to return to the high, profit-sapping incentives they have all renounced.
Two years ago, for example, General Motors Corp. said it was adopting “value pricing,” in which it lowered retail prices to reflect actual transaction prices at dealerships and reduced incentives.
In recent months, though, “incentives have been boosted to the levels we saw regularly before automakers instituted the ‘value-pricing’ strategy that aimed to reduce sticker prices and minimize the need for incentives,” said Jesse Toprak, executive director of industry analysis for Edmunds.com. “It’s a car buyers’ market, and that will likely be true for months to come.”
Most big incentives are on full-size pickups and SUVs. But the amounts on some sedans are also growing.
In a recent list in Automotive News, the Chrysler Group had incentives on 24 cars and trucks, Ford Motor Co. offered them on 25 vehicles, and General Motors had 34 with cash on the hood.
Many offers were generous. Dodge had a $5,000 incentive on 2008 models of the Ram pickup, and Chrysler had $3,000 on its well-regarded 300C sedan.
Leo Griggs, who owns Park Cities Dodge in Dallas, says one of his challenges is selling the Dodge Ram in a tight market where gas prices are rising. The Ram is an older-design truck that’s scheduled for replacement this fall.
Between dealer and customer incentives, “I can go $8,000 to $10,000 off the price of a Ram, and I can still make a good profit,” he said.
Meanwhile, Ford was offering up to $4,000 back on its 2008 F-150 pickup – which, like the Ram, will be succeeded by a new model this fall.
Even the new Mustang, which was redesigned just three years ago and was once among Ford’s hottest-selling vehicles, was carrying a $2,000 incentive.
Likewise, GM put $3,000 incentives on the full-size Cadillac DTS sedan and GMC Envoy midsize SUV, plus $2,000 incentives on vehicles such as the Chevrolet Silverado pickup, Tahoe, Escalade and Suburban SUVs.
Many industry observers expect incentives to keep going up until at least the summer.
“For a period there, incentives did go down,” said Jessica Caldwell, an analyst at Edmunds.com. “They were down in the $2,000 range. But we have seen them creep back up into the $3,000 range.”
In a recent assessment, Edmunds.com found that the average incentive in February for the Detroit Three was $3,393 per vehicle, while European brands spent an average of $1,945 per vehicle sold, Japanese brands averaged $1,313 per vehicle sold and Korean brands spent $1,807.
Incentives do more than erode automakers’ profits. They can also lower the future resale value of cars and trucks because the market discounts the purchase price by the amount of the incentive.
In addition, consumers sometimes postpone purchases, presuming that incentives will be higher in a month or two.
Still, automakers in this grim sales environment – particularly the domestics – have little choice but to respond with bigger incentives. U.S. sales in January “were the lowest monthly total since ’98,” Caldwell said.
“I think this was a pre-emptive strike. And at least until summer, I think they will keep going up.”
Even in areas like Dallas, where the new-vehicle market has been healthier than the national market, sales have remained sluggish.
“January, February and March have been soft,” said Drew Campbell, president of the New Car Dealers Association of Metropolitan Dallas. “Dealers are looking at gas prices and wondering what might happen.”
While incentives can spur sales in the short term, dealers lose a lot of their control of the retail process because they must wait for the factory’s decisions on incentives and order vehicles accordingly.
“I remember in the ’80s and ’90s, you might have one (sales) event a year when GM got involved,” said Tom Durant, owner of Classic Chevrolet in Grapevine, Texas, the largest Chevy dealership in the U.S. “I kind of miss that. We controlled more of our sales.”
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But he acknowledged their importance to sales today – despite occasional frustrations.
“We had a strong, strong January at the dealership,” said Durant, who also owns Hummer, Buick, Pontiac and GMC dealerships in the area. “We took a step back in February because the factory didn’t put incentives out that got people’s attention. I think we’re back on track now.”
Griggs of Park Cities Dodge doubts that incentives on domestic vehicles will ever go completely away.
“That’s the juice,” he said. “They will just get stronger and stronger.”
Dealers always want more incentives, said Ray Huffines, chief executive of Huffines Auto Dealerships, which includes Chevrolet, Dodge, Chrysler, Jeep and Hyundai stores in Texas. “The factories have been cutting back on production, but we’re probably going to need some help.”
The slide back to big incentives may just be a temporary retreat, said George Hoffer, an economics professor at Virginia Commonwealth University who follows the auto industry.
New labor contracts give the domestics more latitude in their production, and incentives may ultimately become a tool that manufacturers use only when the economy is really weak.
“We’re in a transition period until the full effect of the new contracts can be felt,” he said. “But under that contract, labor costs are more variable. Over the long run, I still think we’ll go to fewer rebates.”
