January 6, 2015 — Automaker shares took a hit yesterday as December’s auto sales were much softer than analysts projected. Predictions of a December SAAR (Seasonally Adjusted Annual Rate) being the fourth straight month exceeding 18 million missed by nearly a million units.
But this is where you have to dig into the numbers. The softer than expected sales in December may be a sign of the industry’s strength, however, for several reasons.
First, despite the analysts’s miss (trust me, analysts usually are way off on their SAAR predictions), it was still a record December for sales. Furthermore, 2015 proved to be a record year also — although, barely as 2015 exceeded 2000’s record by a mere 37,000 sales according to data from WardsAuto.com, which pegged sales last year to be at 17.386 million units, beating 2000’s 17.349 million. Meanwhile, 2015 was nearly 6% higher than 2014. (December’s numbers, though are a bit misleading and likely would have been flat if the industry hadn’t added three additional selling days by including the New Year holiday in 2015’s numbers).
One reason December’s numbers fell short of analysts projections is because incentive spending held firm last month, according to TrueCar’s estimates. Incentive spending per unit actually dropped 0.4% from November. For the year, incentive spending rose a modest 4%.
The incentive number is important because it’s shows that automakers are practicing pricing discipline. For example, despite being engaged in a race for 2015’s luxury crown, BMW and Mercedes incentive spending from December 2014 decreased 12.4% and 17.2% respectively. (To see more of TrueCar’s incentive numbers, click here). Steve Cannon, who retired as the U.S. head of Mercedes Benz at the end of the year) said in November the automaker would not engage in heavy incentive spending in December.
AutoNation Chairman and CEO Mike Jackson believes there is reason for caution, though. The nation’s leading dealer group, whose 35,962 sales in December were 9% higher than December 2014, reported the per-vehicle-gross profit on its new and used sales declined $300. The drop in gross margins were driven by significant incentives — specifically in the premium luxury category, according to Jackson. (AutoNation’s numbers are contrary to what TrueCar published. And to be fair, OEMs in the past have privately taken issue with TrueCar’s incentive data).
But overall, automakers appeared to maintain their discipline in December. As a result, average transaction prices for the industry continue to increase — now more than $34,000. Also pushing transaction prices up is the continued growth of SUV and light truck sales, which are being driven in part by lower fuel costs. This means higher profits for both automakers and dealers.
The industry is in a strong position going into 2016. Even if sales stay at the current level and do not grow, automakers will be churning out record profits. But all indications are that 2016 will be another record year and should jump to the 17.5 million to 18 million level. Still, if automakers start piling on incentives early in 2016, it could mean trouble ahead.
Meanwhile, certified pre-owned sales should continue to hit record levels as approximately 800,000 vehicles are scheduled to come off-lease this year. As leasing continues to grow (now at approximately 30% of new vehicle sales), dealers should have a steady source of late-model vehicles over the next few years — not to mention, a healthy influx of off-lease customers ready for a new vehicle.
Other signs pointing to a healthy sales environment for at least the next couple of years, include increasingly older vehicles on the road; a significant number of millenials entering the market; interest rates that continue to be low and relatively healthy economy.