- Though consumer affordability concerns persist with high interest rates, parts and labor costs, and record insurance premiums, there is opportunity for dealers to increase sales and profit through customer-centric processes and technology improvements.
- Dealers are adapting to an industry that’s working to normalize post-pandemic, and properly equipped business managers who adapt to each customer’s unique needs are most likely to thrive.
- We are shifting out of a seller’s market, and new car purchasing is beginning to favor consumers. As new cars sell for less due to more OEMs bringing back incentives, used car values and prices will drop too. Pricing will be a trend to watch and dealers will need to adjust accordingly.
- We offer up tips for driving performance, upskilling your teams and finding paths to profitability at your dealership despite current obstacles affecting the industry.
Below, we analyzed the sales performance from 2023 against 2022 and 2019 so you can have a broader scope of reference with how recent data is trending against the last normalized year for automotive sales.
Dealers, OEMs and automotive professionals have worked to quickly pivot in the face of extreme challenges nationwide, but the effort continues.
Cost inflation is the most notable trend affecting both customers and dealers. Labor expenses increased domestically due to the new union regulations, and there is pressure to raise wages at import OEMs too. The cost of parts and labor, plus more advanced technology in cars is making them more expensive to build, sell and repair, and those increased costs will eventually trickle down to buyers. The key here is to be thoughtful about how this impacts your dealership and how it impacts your customers to find a balance between profitability and customer experience.
F&I and Front PVR
F&I PVR continues to see the impacts of high interest rates and affordability concerns from customers wary about the state of the economy. We saw lower PVR in 2023 compared to the year prior. However, when looking at pre-pandemic data, F&I PVR was higher last year than in 2019. This shows that certain areas of the automotive industry continue to rebound from the pandemic years, or even push past records we previously saw. We anticipate F&I will be a strong opportunity for dealers to reach more customers this year.
Although supply by brand varies, we’ve seen an overall increase in inventory, and a decrease in Front PVR. Like F&I PVR, this metric is still above 2019 levels. Even as the rumors of a recession become quieter, it is still crucial for dealers to adapt their selling strategies and business plans. Competition seems likely to increase this year as more OEMs cut prices or add extra buying incentives to entice customers back. Dealers should continue to find opportunities to maximize each sale by improving the customer experience to attract and retain buyers. Whether through leasing options, vehicle service contracts or finding competitive financing options and interest rates for buyers, this crucial area will remain a focus for many dealers this year.
To position your dealership for success, we recommend having a full suite of F&I products available to your customers for all deal types to enable your business manager to personalize the customer experience and match products appropriately to the customer, increasing customer satisfaction and retention. As we look back at 2023 and prepare for 2024, it can be a good time for dealer teams to revisit your product strategy and realign pay plans.
Used Car Values Fluctuate in a High Interest Economy
In our mid-year 2023 report, we anticipated the value of used cars would continue to decline, and after a small peak in September, we saw a continued dip through the remainder of 2023. As compared to the Manheim Used Vehicle Value Index, they noted that valuations were down nearly 25 points in June 2023.
MANHEIM USED VEHICLE VALUE INDEX
January continues to be an interesting month to review data – as a new year begins, it is easy to look to immediate data as a source for the upcoming year. However, remembering that January comes after a heavy-sales month for many dealers because of the holidays, sales may ebb and flow during the first few weeks of a new year, especially with significant winter weather across much of the nation.
If inventory continues to improve, we anticipate manufacturers will increase incentives and some dealers will feel the pressure to discount prices. With new cars being priced lower, we can expect used car valuations to continue to decrease as well in 2024.
It's important to note that while today's consumer is still concerned with getting the best deal, they're also seeking the best customer experience. By prioritizing this, dealers can lead their market while also protecting profits and offering options to their customers.
Used Car Days on Lot Sees Huge Swings in 2023
At this time last year, we were seeing new cars parked on dealership lots around 43.4 days - a high that dipped significantly at the start of the year, then swung upward through December, ending slightly above January 2023. As new vehicle supply and incentives return, we can expect used car valuations to continue to dip, even as demand for used vehicles remains strong in the still-inflated market.
USED CAR PRICES VS. DAYS ON LOT
New Car Costs Begin to Favor a Buyer’s Market
Prices for new cars remain high, and we ended December as the most expensive average price ($48,899) we’ve seen in more than two years. The number of days on lot is also significant to note – from January 2022 to December 2023, dealers have mostly experienced a rise in the number of days that new cars remain unsold. We anticipate customers may get a reprieve as inventory continues to rebound and OEMs slash prices or add more incentives to compete with other manufacturers. Lower interest rates will also provide relief to consumers and help reduce monthly loan payments.
Greater incentives will make this an attractive market for new car buyers, especially among those consumers who have been holding onto their aging vehicles and waiting to make their next vehicle purchase until interest rates and prices begin to drop.
With formerly hesitant buyers preparing to enter the market and a new influx of used vehicles about to become available, dealers should encourage ongoing sales training to keep their staff up to date with consumers’ changing needs.
NEW CAR PRICES VS. DAYS ON LOT
Car Sales Decline Over the Past Year
Overall, car sales fluctuated less in 2023 than the previous year, and December marked the first month of year-over-year volume, a welcome change for sales teams everywhere. Although December is typically a high-sales month for many dealers, if interest rates dip and manufacturers continue to offer attractive incentives, we could see this trend improve in 2024.
Vehicle Service Contracts and Products Per Deal Decrease Over Previous Year
Vehicle service contract penetration remained lower than 2022 levels, though we ended the year with only a slight differentiation. As the industry continues to normalize and vehicle purchase prices regulate, we believe contract sales will rise to levels we’ve seen in former years.
Products per deal also dropped slightly over the last year compared to 2022. With the rising cost of repairs and labor rates, there's an increased opportunity for business managers to reinforce the value of VSCs by educating consumers on the benefits of buying service contracts and avoiding the shock of unexpected repair costs in the future. Training your business managers in consumer experience and effective communication techniques can help your dealership effectively sell more F&I products to new and returning customers.
GAP product penetration trends are similar to VSC and PVR, trending lower than 2022. With economic uncertainty in 2023, higher interest rates and tightened loan parameters, consumers on average opted for higher down payments and shorter terms, decreasing the need for GAP. Consumers may also feel less risk or perceive GAP as less necessary when they write checks for larger down payments or benefit from record high used car values that result in positive equity on their trade-ins.
Automotive Industry Updates
New and Used Car Interest Rates Remain High
As financing terms extend to help customers afford vehicles, we examined the average interest rate for new and used vehicles on a 72-month loan. From October 2022 to December 2023, interest rates for new car loans ranged from 7.0 - 8.3%. Despite a brief reprieve from April to July, rates continued their climb in the latter half of 2023 to historical highs. December 2023 saw a dip, but new and used car interest rates are still well above December 2022.
AVERAGE 72-MONTH AUTO LOAN INTEREST RATE
For price-conscious consumers who worry about the risks of numerous repairs for used vehicles, financing new vehicles at lower interest rates can be more attractive than a car with miles on it. The intriguing incentives that OEMs are offering – and the flexibility with term lengths – are great examples of how manufacturers are meeting people in their buying journey in ways that still promote sales despite the current economic climate. Cash incentives have been increasing (with a few dips) since October of 2022, with significant jumps in recent months.
NEW CAR AVERAGE PRICE VS. CASH INCENTIVES
Leasing Continues to Rise While Cash Deals Decrease in Volume
While finance deals remain a strong majority of sales, dealers would do well to keep an eye on lease and cash transactions, which are an attractive option to customers looking to avoid high interest payments. In the last 15 months, lease deals have jumped more than 4 points in the overall sales mix, which is a more than 50% increase in transactions, and cash deals are also holding strong, representing about a quarter of all vehicle sales.
In total, lease and cash deals combined made up 37.2% of deals in December, which means finance deals have dropped a full 5 points since October 2022.
As customers come into dealerships with a positive equity trade in, combined with the lower payment, leasing has become a very attractive option.
Educating your teams on how to maximize lease transactions and having the right F&I products for leased vehicles can help dealers find greater profitability while still respecting customers’ wallets.
Tips to Drive Sales Performance and F&I Revenue
The big questions for this year revolve around affordability. How can you reach customers who are navigating affordability issues? How do you continue to drive profitability in the service drive and finance departments when interest rates, sales prices, insurance premiums, and labor and parts costs remain high?
The key is to learn to sell in new ways to today’s more informed consumers. Inflation is something everyone is experiencing in real-time. Vehicles are getting more expensive to make, which will make them more expensive to buy and maintain. More than ever, service contracts have a real and immediate value. So when affordability is the top concern for your customers, remind them that they can help shield themselves from future inflation associated with car ownership by taking advantage of vehicle protection products when they buy their car.
Even as the industry normalizes, you will always find success by building and sustaining quality, customer-centric practices at your dealership.
Consider prioritizing these:
- Create a customer experience that is seamless, consistent and efficient to build trust and make it easy to do business with you.
- Look at your dealership’s website the way a customer would. Can you find transparent pricing, information about available financing options, pictures of vehicles and an easy path to purchase?
- Make sure your in-store processes seamlessly integrate with your online experience. Inventory, prices, financing options and protection products should be consistent across all buying channels.
- Encourage your staff to find opportunities to establish and build long-lasting customer trust through honest and empathetic practices that are practiced across your dealership.
Finding Pathways to Dealership Profitability
This year appears to be trending towards a more consumer-friendly market. Dealers will need to find consistent ways to be competitive and maintain customer loyalty.
Today’s consumers are tech-savvy and cost-conscious. By providing ongoing training for your staff, you can help create a culture of meeting customers where they are at that blends seamlessly across your dealership's departments.
As many customers will conduct some form of research ahead of visiting your dealership, make sure your in-store and online systems enable your team to effectively service your customer's needs – whether they are a new or returning customer.
Cost continues to be a big concern for consumers and dealers, but more than ever, people value a great experience. This presents the opportunity for sales, service and F&I departments to reach more customers through seamless technology and improved dealership processes.
Our industry is constantly evolving, which is why we love it so much. We hope the insights from this 2023 year-end report can help you strategize your plans for fine-tuning processes, accelerating performance and driving customer loyalty at your dealership throughout 2024. Let’s make this a great year!