Incentives Poised For Steady Rise in 2015

Incentives have long been a tool used to drive vehicle sales, and with new-car growth slowing and interest rates set to rise, manufacturers may double down on incentive spending in 2015.

Incentive amounts as a percent of MSRPs may hit 12% this year, up from the 10% range since 2010, according to an Auto Finance News analysis of CNW Research data. Before no-interest financing programs debuted in 2001, incentives averaged about 7% of retail prices.

In September, the incentive-to-MSRP ratio climbed to 12.7% — $4,915 on a $38,702 vehicle, according to CNW data. By comparison, the ratio in September 2013 was 11.1% — a $4,244 incentive on a $38,361 vehicle.

Should incentives rise another 5% next year, as J.D. Power and Associates predicts, and retail prices inch up 3% like they did last year, the incentive-to-MSRP ratio will average 12.1% according to AFN calculations.

Some industry analysts predict even slower MSRP growth in the 1% to 2% range, which could push the incentive-to-MSRP ratio as high as 12.1%.

Meanwhile, with new-car sales slowing, manufacturers will likely turn to incentives to stimulate growth, said Eric Ibara, director of residual value consulting at Kelley Blue Book. “The industry is sort of plateauing out,” Ibara said. “So what’s going to happen, we think, is it’s going to be harder to get incremental sales next year than it has in the past, which is going to force manufacturers to continue to increase incentive spending.”

Through November, new-car sales were on pace to close out the year at 16.5 million units, a 5.8% increase from 2013. By comparison, year-over-year vehicle sales grew 7.8% in 2013 and 13.9% in 2012.

An anticipated increase in interest rates will also likely send incentives higher. “The industry has been experiencing record-low interest rates — the only thing that they can do is rise,” said Thomas King, vice president of J.D. Power’s Power Information Network. “And if they do rise, that creates a bit of a threat to the industry.”

King predicted that consumers will be faced with the choice to buy fewer or less-expensive cars, while manufacturers may need to absorb the increase in rates to maintain sales volumes.

REBATE VS. INTEREST RATE

For now, while interest rates are at record lows, rebates have gained popularity as consumers look to reduce monthly payments and the amount financed, said Tyler Corder, chief financial officer at Findlay Automotive Group in Las Vegas.

“I think a lot of people use the rebate as their down payment, so they might not necessarily be borrowing less, but they are putting less cash down,” Corder said. “In any event, it lessens the amount financed if they were to make the same down payment and apply the rebate. But as rates rise, we’ll see more interest in the lower interest rate programs.”

Former dealer Sarah Richard Denton, however, said that when interest rates go up, rebates will become more popular if they lower monthly payments. “People still want to be able to have that $350 payment,” said Denton, an automotive consultant with 16 years under her belt at dealerships, most recently as F&I manager at Kelly Cadillac in Lancaster, Pa. “That $300 payment is such a seller for people. That’s why the lease payments are always $299 or $349 with $5,000 down, because everybody knows it’s that sweet spot.”

A Toyota Motor Sales USA Inc. spokesman told Auto Finance News that while the company offers incentives as a regional and tactical tool for dealers to respond to market conditions and customer demand, its consumers don’t favor one type of incentive over another. “With millions of customers each year, it’s impossible to generalize,” the spokesman said. “For some, a lower payment is crucial. Others appreciate cash, still others may opt to lease. And we do see some customers deciding to ‘step up’ to something nicer that becomes attainable.”

Toyota’s average incentive in September was $3,679, up 1% year over year. Broadly, Asian brands represented nearly 55% of all incentive dollars spent by manufacturers in September, according to CNW Research. Prior to the recession, that number was less than 20%.

 There were times, Corder said, when Asian manufacturers’ sales were “hot” and the OEMs didn’t feel the need to compete in the incentive game, but that time has passed. “The only thing I see differently is that everyone is trying to come up with an incentive that’s not an interest rate or a rebate,” he said.

In years past, Ford Motor Co. had its annual “White Sale,” where all vehicles painted white were on sale, said CNW President Art Spinella. General Motors has a credit card that allows consumers to accrue points that can be put toward the purchase of a new car, plus benefits such as cash back. And Kia Motors is offering a rebate-low rate combo.

“People are buying that car because they can get $1,500 and 2.9% that’s a big difference in payments,” Denton said. “If you have 640 to 680 credit, you’re probably not going to get 2.9%, and a lot of people have that credit right now, so they are getting $30 less a month, plus that lower rate.”

All manufacturers are playing the incentive game, Corder said, so it’s a matter of getting creative. “Everyone is trying to come up with something that will catch consumers’ attention,” Corder said. “And whoever comes up with the next big idea — that’s what will be interesting to watch.”