Race to the Bottom: Incentives at Highest Level Since Recession

U.S. car buyers wandered onto dealer lots in healthy numbers in September, but only because automakers heaped a record pile of cash on the hoods.

So lofty was the snow-capped peak of incentives required to move vehicles last month, it easily exceeded the previous record set in late 2008, when car buyers lived in boxes and sold old shoes on Craigslist to afford the downpayment.

Figures published by J.D. Power show new vehicle sales down by 7,000 units compared to September 2015, a drop of 0.5 percent. Average transaction price rose by $533 per vehicle, which, coupled with a 1.4 percent boost in consumer expenditures, propelled $37.2 billion into OEM coffers — a September record.

Whoa, put that cork back in that champagne. For all the cash flung at manufacturers, those companies are flinging it right back.

Compared to the same month last year, incentives rose by an average of $490 per vehicle, an increase of 13 percent. Every vehicle driving off dealer lots last month did so with a glove box bulging with incentive cash — $3,921 per vehicle, higher than the previous record of $3,752 set in December of ’08. When viewed as percentage of MSRP, September’s incentives amount to only 10.8 percent of selling price, below the 12.4 percent seen during those dark days eight years ago.

How high will incentives go? For automakers, it more a question of how high should they go — a lesson always tempered by the need to boost sales for fear of losing market share to competitors. There’s worrying signs of a slowdown in the marketplace, making this incentive storm an attempt to turn a potential sales slump into a plateau, at least until the money runs out. Automakers can only hope they’re in a good enough financial standing to outlast their competitors.

Despite the incentives, it’s increasingly difficult to move cars off the lot in a timely manner. Compared to the previous September, days to turn increased by eight days, leaving vehicles on the lot for an average of 66. For cars, days to turn increased from 71 to 74, while the once red-hot truck market saw vehicles linger for 59 — an extra four days on the lot.

As for segment popularity, automakers with car-heavy lineups aren’t happy. The midsize car, once a juggernaut, remained the worst-selling segment in September, with its market share dropping by 1.9 percent over last year. Midsize pickups were the bright spot, with its share (3 percent) growing by nearly two-thirds compared to the same month a year prior. Small SUVs continued their upward course, gaining one percentage point for a 5.8 percent market share.

[Imahe: Faris/ Flickr ( CC BY 2.0)]