Consumers In For Disappointment As Incentives Shrink

Automakers used generous incentives to spark a temporary sales spike in April and May helping to clear dealer lots. Combined with assembly plants still not up to full production, inventories are low, leaving little reason to sweeten the spiffs. Now, for consumers who waited to jump into the market, or weren’t in a position to buy, disappointment, or tough choices await.

“Consumers have a choice and in the month of June they’re gonna have to decide— do they want to have a similar payment, or do they want to have a similar vehicle,” said Tyson Jominy, Vice President, Data and Analytics at J.D. Power during a webinar this week. 

Automakers that were offering zero percent financing over 84 months are, in some cases, reducing the term to 72 months. Two examples, Jominy, noted are the popular Chevrolet Silverado and Ram pickup trucks. 

“84 month loans are continuing to fall back toward pre-virus levels,” Jominy noted.

Further evidence was noted by George Augustaitis, Director of Automotive Industry and Economic Analysis at CarGurus.com in an analysis titled “5 Tailwinds That Propelled Vehicle Sales in May Explained,” posted Friday, pointing out, “As production is limited and days’ supply declines, incentive spend will be pulled back for popular vehicles. For example, the Motor Intelligence Days’ Supply report shows the Chevrolet Silverado is down to a 37-day supply, so if Silverado plants don’t reopen soon, incentive spend is likely to decline fast.”

How does reducing the financing term from 84 to 72 months affect monthly payments? Plenty, says Jominy who showed the math using two different vehicles. 

The monthly payment for a $43,000 pickup truck over 84 months would be about $512. Reduce the term to 72 months, and that payment jumps 17% or about $85. If the consumer needs to stick to a budget of $512 month, he or she needs to lower their sights to a truck about $6,000 cheaper, according to J.D. Power research

For a compact SUV, the disappointment could be almost as severe. Over the course of an 84 month finance deal, the monthly payment for a $28,500 vehicle would run just shy of $345, said Jominy. Shrink the finance term by a year to 72 months and the payment jumps to almost $400. Again, if the buyer insisted on a payment around $345, he or she would have to be satisfied with a vehicle priced at about $24,400. 

It all adds up to deflated expectations for consumers and thinner profits for dealers.

“So we’re talking about stepping down a major trim or losing several major option packages that tend to be quite profitable,” said Jominy. 

It’s not only the value of incentive that’s falling, it’s the sheer number. According to a Cox Automotive report posted this week, the volume of incentives, meaning the number of different incentive programs in the market in each month, “has moved closer to the levels from 2016 and 2017, when demand was strong and new-vehicle sales were less dependent on fresh incentive programs.”

The month is still fairly young but the industry will be keeping a close watch on how consumers react to fewer and less generous deals. Given this most unusual year, upended by the coronavirus pandemic, the results could go either way.

“If we see demand remains strong, that’s one of the positive signs for the industry that says consumers are still willing to buy vehicles, and will be happy to do so, without those deals,” said Thomas King, President, Data and Analytics and Chief Product Officer at J.D. Power. “On the other hand, if we see things slow down, then there’s every chance that we could see some escalation of incentive programs throughout the month.”