Monday, March 27, 2023

Growth of New Car Inventories Is Bringing Back Competition and Lower Prices

Competition is a consumer's best friend, whether you're buying a loaf of bread, a house, or a new car. This is especially true for products like new cars. All new Ford F150s, Honda Accords, and Toyota Corollas (of a specific model) are identical. As you probably know, new car dealers of all makes charge different prices. Furthermore, any given new car dealer charges every customer a different price for identical cars!

The reason that new car prices have been at all-time, historic highs for the past 3 years is that supply dropped precipitously, causing demand to drive prices thousands of dollars above the MSRP (manufacturer's suggested retail price). If a customer walked into a Kia dealer's showroom and wanted to buy the only new Telluride in inventory (with no more expected anytime soon), the salesman could easily get $10,000 or more over the MSRP, if not from the current customer, then from the next one walking in the door.

It's important for new car buyers to understand that, to a Chevy dealer, Ford or Honda isn't the competition; it's the other, nearest Chevy dealer. If you try to negotiate a lower price on a new Jeep Wrangler by showing the salesman what a good price you got on a Ford Bronco, they'll just tell you about the "superior" features and benefits of Wranglers over Broncos. But, if you say that the Jeep dealer minutes away beat their price by $2,000, you'll get their attention and probably a much lower price.

State laws in all fifty states allow only franchised new car dealers to sell new cars. (Tesla, Lucid, and a few other exclusive EV manufacturers have been able to dodge this law in most states.) For years, auto manufacturers have oversaturated prime markets with new car dealerships. Car dealerships are almost as numerous as gas stations and bank branches – it seems like there's one on every street corner.

Then, along came the Internet and the birth of online buying. A buyer can now shop a dozen stores for the best price in the time it used to take to shop at one store.

Consequently, in "normal times," a shrewd shopper and negotiator could buy a new car at a very low price – sometimes, albeit rarely, at or below the dealer's true cost. Of course, a car dealer can't remain in business very long if they sell their cars at or below cost. That's why new car dealers take advantage of buyers who aren't sophisticated negotiators. The breakeven price on a new car includes all costs, not just the cost of the car, such as advertising, sales commission, utility bills, building lease payments, etc. Before the pandemic and the supply chain interruption, most car dealers broke even or lost money in their new car departments. They had to make it back in their service, used car, and parts departments.

This is why buying a new car has always been such an unpleasant experience. In order to not lose too much money in their new car department, dealers felt they had no choice but to take enormous advantage of those who weren't smart shoppers (the majority). I refer to these buyers as the "victims" - the very young (buying their first car), the very old (often widows who had relied on their husbands), those whose first language isn't English, and the uneducated. By selling an elderly widow a new car at $10,000 above MSRP, the dealer was able to average out their new car profits with the shrewd, sophisticated attorney who bought their new car at dead cost.

Bear in mind that we're not back to normal yet, but we're getting there. Whatever the "new normal" will be, I believe it should happen by the end of 2023. I expect there to be higher prices than three years ago, but nowhere near as high as last year. Dealers will inventory fewer new cars, and more people will order their cars rather than pick from dealers' inventories.

Unfortunately, the "victims" will still be exploited, but those who can shop extensively online for the lowest price and agree to order the exact new car they want will pay much lower prices for their cars.

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