Wednesday, May 9, 2012 | Edited by Daniel Moores
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Detroit's Welcome Sticker Shock Auto companies and dealers are succeeding in an area where other industries have failed: convincing U.S. consumers to pay more. In April, the average new light vehicle fetched $30,303, according to research firm TrueCar.com, excluding the average $2,446 incentive dealers put on the hood. A year ago, the average price was $1,219 lower and the average incentive was $146 higher. Higher prices and lower incentives came despite two countervailing forces. First, cars, which are usually cheaper than SUVs and pickups, accounted for a greater share of light vehicle sales last month than a year earlier. Second, April last year was when the supply-chain shock from Japan's tsunami began cutting into U.S. vehicle inventories, giving dealers more pricing power. Used car prices also are rising. By the Labor Department's measure based on data from the National Automobile Dealers Association, used cars and trucks fetched 3.2% more in March than a year earlier. That may understate what's actually happened. A dearth of used inventory -- the lagging response to the sharp fall in new-vehicle sales that began during the 2008 financial crisis -- has led to a drop in the quality of used cars and trucks on the market. While the Labor Department adjusts its price measure to reflect changes in vehicle ages and mix, it probably understates the trend. Curiously, higher prices don't appear to be weighing on sales. An annualized 14.4 million new light vehicles and trucks were sold in April, up 10% year-on-year. As for used cars, publicly held dealerships including AutoNation, Group 1 Automotive and Penske Automotive Group have lately reported that first-quarter sales were well above year-earlier levels. Other industries can only look on with envy. Last year, apparel retailers tried to pass on higher cotton costs to consumers, who promptly bought fewer clothes. Nielsen scanner data compiled by Morgan Stanley suggests food companies still struggle to raise prices without volume getting hit. Pent-up demand is one thing working in the car industry's favor. A sense that General Motors, Ford Motor and Chrysler are making higher-quality vehicles also has supported pricing. A virtuous cycle also is developing: Higher used-car prices make new cars more attractive, while smaller incentives will slow the pace of depreciation on new cars, pushing resale values higher. This better pricing environment could persist. With many of its old retirement and health-care obligations shed, Detroit is less likely to push production to the point where supply overwhelms demand. There also appears to have been some learning following last year's tsunami-related shortages, notes Mike Rosenberg, president of dealership consultancy Rosenberg & Associates. Dealers are figuring out they didn't need to give as much away to sell cars. The upshot? Dealers should be able to operate more profitably. Meanwhile, auto makers should continue to see the U.S. drive earnings -- and wish forlornly that their European operations were in just as good shape. (Source: The Wall Street Journal, 05/04/12) Click here to email to client Back to Radio Sales Today |
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