The cost of living in the United States has increased over the past number of years. Factors like the prices of food, housing, and work wages all contribute to a person’s spending habits. This effect on spending habits is causing car shoppers to hold off on buying a new vehicle, which is causing a deflationary period in the automotive industry. We’re going to break down the current deflation in the automotive industry, its impact on dealerships, and how you can prepare your dealership for this situation.
What is Deflation?
Deflation is a decrease in the general price of goods and services. An example of deflation in the auto industry is the prices for vehicles going down over a certain period of time.
What is Causing Deflation in the Auto Industry?
There are 3 factors behind the deflation in the automotive industry:
- Customer waiting
- Less spending
- High interest rates
Customer Waiting
Abraham Lincoln once said, “Good things come to those who wait.” This means that the good things in life often take time. In this case, car shoppers are deciding to wait to buy a vehicle, hoping to get a better deal later on. They believe the longer they wait, dealerships will eventually have to lower their prices or offer deals.
Less Spending
As mentioned earlier, the cost of living in the United States in 2024 is higher than previous years. With the need to pay for essentials like groceries and bills, purchasing another vehicle isn't a priority for many people at the moment. While people are saving more and spending less, car dealerships are facing the effects.
Even the electric vehicle (EV) market, which has been at a high point in recent years, is slowing down. As buyers are prioritizing saving money, high-priced EVs are reducing in demand.
High Interest Rates
According to Experian, interest rates for vehicles are ranging from 6.7% to 11.9%. Although this is the typical average for interest rates, people have still decided to wait it out and see if there’s any change.
How Does Deflation Affect Car Dealerships?
Deflation in the auto industry means more unsold inventory taking up space in dealership lots. According to Cox Automotive, as of June 2024, 2.96 million vehicles are sitting in lots. This is approximately 1 million more vehicles than this time last year, which was 1.95 million. While having a million cars to choose from is great for car buyers, unsold inventory is not good for dealerships.
Cox Automotive economist Jonathan Smoke noted that both new and used vehicle prices have been declining for the past 2 years. He says the industry is on the verge of what economists call a "deflationary spiral," which is when consumers hold off on making big purchases, reducing demand and causing supply to pile up, putting pressure on prices. And as the prices continue to fall, customers will continue to keep waiting until prices drop even lower down the road.
How Can I Prepare My Dealership for Deflation?
There are 5 ways dealers can keep business healthy during this deflationary period in the automotive industry:
- Inventory management
- Pricing strategies
- Financial preparedness
- Customer engagement
- Market intelligence
Inventory Management
With around 2.96 million unsold vehicles sitting in dealership lots throughout the U.S., it’s best to keep your inventory at a good amount to avoid overstocking vehicles that might depreciate quickly. You can do this by strictly stocking up on models that are in higher demand in your region, to ensure faster turnover.
Pricing Strategies
Car prices have decreased, due to customers waiting to buy. You’ll need to be prepared and flexible to adjust your prices in response to this customer behavior. You can also offer attractive financing options, trade-in deals, and other incentives to maintain sales volume.
Financial Preparedness
When times get tough, it’s always best to have some emergency funds to fall back on. Ensure you have some extra money saved up to help get through periods of lower sales and potential cash flow issues.
Customer Engagement
With car shoppers holding off on buying vehicles, you need to gain customer’s trust and build loyalty, as this can lead to them deciding on purchasing a vehicle from you. Treat your customers as nicely as possible. That way, they will stick with you through future low points. (This practice is not limited to deflation periods. Always provide good customer service.)
Market Intelligence
Just like any point in the year, you should keep a close eye on economic indicators and market trends to expect changes and adapt quickly. You can also regularly gather and analyze customer feedback to understand their evolving preferences and needs.
Am I Prepared For Deflation in the Auto Industry?
In the automotive industry, deflation can negatively impact your inventory and revenue. However, staying up to date with recent changes and adapting properly can help keep your dealership in a good condition.
Although there is deflation in the auto industry, not everyone is holding off on buying vehicles. With summer ending and back-to-school season coming up, families and students with their driver’s licenses are searching for vehicles.
If you’re looking to stock up on inventory for the upcoming season, you can click the button below to speak with our dealer registration specialist to get you registered with Big Valley Auto Auction.
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