The automotive industry is steadily returning to pre-pandemic norms, with excess inventory levels building up and steep discounting needed for dealers to move vehicles off lots. While new car sales saw a strong recovery in 2021 and 2022 following pandemic slowdowns, inventory has now outpaced consumer demand. Many manufacturers significantly overestimated how quickly buyers would return to showrooms, leading them to ramp up production.
Now dealers are facing excess inventories of 2022 and 2023 models, with discounts and incentives from automakers required to clear out the excess stock. After two years of constrained inventory, the market has overcorrected into a situation with too much supply and softening demand. This puts dealers in a difficult position of having far more vehicles on their lots than their sales teams can realistically move each month. The industry is reverting to pre-pandemic norms of excess inventory and reliance on promotions to drive sales.
Pent Up Demand Has Been Satisfied
During the early months of the pandemic in 2020, many consumers put off purchasing new vehicles due to uncertainty and economic constraints. This led to pent up demand for new cars and trucks. As the economy reopened and stabilized, there was a surge in new vehicle sales as consumers moved forward with delayed purchases. Most industry analysts agree that this pool of deferred sales has been largely satisfied at this point.
Most consumers who wanted to buy a new vehicle but delayed that purchase due to the pandemic have now completed those transactions. With fewer buyers in the market for a new car right now, sales have slowed from their breakneck pace in 2021 and early 2022. Thus, the initial pent up demand that boosted the market after pandemic lockdowns has now been satiated.
Higher interest rates reducing demand
As interest rates have risen substantially in 2022 and early 2023, monthly payments on new car loans have become much more expensive. Historically low auto loan rates in 2021 have given way to rates now over 5% for 5-year loans, according to Bankrate. The Fed's moves to raise rates is directly impacting auto financing costs.
According to Statista, the interest rate on 60-month new car loans reached a low of 3.85% in December 2021. But that rate has climbed to 5.14% as of October 2022. Most experts don't forecast auto loan rates declining meaningfully in 2023 as the Fed keeps rates elevated to fight inflation. With monthly payments ballooning due to higher interest rates, consumers are shying away from taking on expensive auto loans on new vehicle purchases. Many are now opting to hold onto their current vehicles longer instead.
Manufacturers overestimated demand
During the COVID-19 pandemic, automakers significantly cut production due to plant shutdowns and supply chain disruptions. As the economy began to recover in 2021, manufacturers ramped up production to meet anticipated demand. However, OEMs overestimated how quickly buyers would return to showrooms.
Inventories of unsold new vehicles hit a two-year high in May 2022, with over 1.2 million vehicles sitting on dealer lots nationwide. This represented a 68% increase versus May 2021. While still below pre-pandemic levels, the influx of new inventory exceeded sales volumes.
Automakers continued to push additional 2022 and 2023 model year vehicles on dealers to make up for lower production volumes during COVID. But with buyer demand cooling amid inflation and rising interest rates, OEMs are now stuck with an oversupply of current model year inventory.
Limited sales capacity
Dealers are facing a difficult situation of having excess new car inventory that is piling up on their lots, while lacking the sales capacity to move this excess stock. During the pandemic, many dealers cut back on sales staff due to the uncertainty. Now as inventory levels have ballooned, dealerships are undersized in terms of the sales teams needed to sell down this excess.
With the sales momentum in new vehicles slowing dramatically due to higher interest rates and inflation, dealers simply don't have enough salespeople currently to sell down the excess 2022 and 2023 model year inventory. This presents a major problem as the aged inventory continues to pile up on dealer lots with each passing month. Unless sales capacity can be increased quickly, dealers will be stuck with an oversupply of new vehicles that will be increasingly more difficult to sell as they age further.
Car subscriptions can monetize excess inventory
With a number of car dealerships struggling with high inventory levels, an issue exacerbated by a slowing market, car subscriptions present an interesting opportunity.
Car subscriptions allow dealers to take their excess new car inventory and put it into a subscription fleet to generate revenue from monthly subscription fees.
Rather than letting vehicles sit on the lot waiting for sales that may never materialize, dealers can leverage car subscriptions to immediately begin generating cash flow.
This allows dealers to monetize inventory they may struggle to sell otherwise. With car subscriptions, they can take even their hardest to move vehicles and use them to develop a lucrative subscription fleet.
Dealers can then use the steady income from monthly car subscription fees to cover their holding costs and overhead until market conditions improve and demand accelerates.
In this way, car subscriptions provide dealers with an avenue to turn their excess new car inventory from a liability into a strategic profit center for their business.
Generate high-margin used car stock
One of the key benefits of using car subscriptions to monetize excess inventory is that the subscription vehicles can be returned as used car inventory after 1-2 years. Used cars typically have much higher profit margins for dealerships than new cars. The average gross profit margin on a used car can range from 15-30%, compared to just 1-5% for new vehicles.
After being in the subscription fleet for 12-24 months, those vehicles can be returned with relatively low mileage and in good condition. The dealer can then sell them as certified pre-owned models. This generates a valuable stream of used inventory that commands higher sticker prices and margins. Rather than sitting on unsold new inventory, car subscriptions allow dealers to turn that excess stock into high-demand used cars.