2021 has felt like a dance with very complex steps, back and forth. In the first half of the year, the economy took a step back with severe semiconductor chip shortages, persistently high levels of COVID-19 infections across the country, and challenging labor shortages. As a result, the seasonally adjusted annualized rate (SAAR) for August dropped to 13.09 million, reflecting a steady decline since the April peak of 18.5 million according to Motor Intelligence. The August reading was the weakest of the year and the lowest since June 2020’s 13.23 million rate, early in the COVID-19 pandemic.
Now, we are experiencing a different story. According to TD Economics, in October, U.S. vehicle sales took a step forward, rising by 6.5 percent month-over-month to 13.0 million SAAR units. Last month’s gain came in well ahead of expectations, which called for a more modest gain to 12.5 million units. These forward steps brought an end to five consecutive months of declines.
However, inventory availability is still taking a step back, putting a false cap on consumer demand. New vehicle inventory remains compressed, with estimates for October revealing that dealership supply slipped to an all-time low of just 20 days. The combination of strong demand and limited inventory has continued to exert upward pressure on new vehicle prices, which are estimated to be up nearly 20 percent from last year’s levels. The October gain indicates that at current depressed production levels, 12 million seems to be the natural floor for sales.
Moving into the end of the year, low interest rates, continued progress toward a post-COVID economic recovery, and pent-up demand portend a continued upward trend for retail sales. According to industry consultants J.D. Power and LMC Automotive, while inventory remains constrained, consumers likely will continue purchasing more expensive vehicles despite smaller discounts, boosting profitability for automakers and retailers. It’s time to break out those dancing shoes!
Looking ahead to 2022
As we look forward to 2022, EFG foresees several potential market opportunities for the retail automotive and F&I industries, tempered by supply chain and inventory issues in the first half of the year. According to The Conference Board economic forecast issued October 13, the U.S. economy will grow by 3.8 percent year-over-year in 2022, reflecting a slight cooling of the rebounding economy. Year-over-year inflation rates are also expected to continue to remain high through the end of 2021 and into early 2022. However, consumer spending is expected to accelerate as supply chain challenges ease, and spending on travel and entertainment increase through the coming months.
At EFG Companies, we believe the forecast for the overall 2022 automotive retailing space is strong with numerous opportunities for revenue generation. Retail automotive has seen first-hand just how financially prepared the average consumer is right now. Between securing record trade-in amounts for their current vehicles and government stimulus checks in hand, demand for vehicles is not only high, but more consumers have more cash to put down on their next purchase.
However, with supply constraints continuing into next year, we are counseling our clients to focus on the following areas to increase their market share in the coming months:
- Taking a realistic approach to pricing
- Enhancing customer engagement
- Implementing value-added products and services
Pent up demand for new vehicles is expected to continue to build. As a result, OEMs have reduced incentives by 45 percent over the past year. Strong consumer financial positions and favorable credit terms spell revenue opportunities for those dealers who know how to manage purchasing. This means selling into their pipeline of inventory, rather than just what’s on the showroom floor.
As the global supply chain woes begin to unwind, consumer willingness to pre-order units with flexible financing can mean the difference between a sale or a missed opportunity. Additionally, the line between online and instore sales continues to blur. Between vehicle pre-orders and a hybrid sales model, a new road to the sale is emerging. This will require new training models and a different set of skills for sales professionals. Lastly, compliance should remain front and center, as a new CFPB director increases the agency’s focus on discriminatory lending and advertising practices.
We encourage our clients to leverage the team at EFG Companies as a strategic business partner. We bring a wealth of industry expertise, business acumen, and tools to drive value for our dealer clients. We’re not just your F&I provider – we are your business partner. Contact us today to learn more about our profitable solutions that can drive success for your business in 2022.