Automakers are pulling back on vehicle incentive programs as sales slow, choosing instead to concentrate on maintaining profitability rather than chasing market share, industry research indicates.
In Canada, the average manufacturers’ incentive per vehicle was $5,000 in June, down from $6,400 in June 2018, according to J.D. Power data.
“That is a big drop, for one month, but it is consistent with the overall trend we see in incentive spending: its declining,” said Robert Karwel, senior manager J.D. Power’s automotive practice in Canada.
The average incentive in May was $5,200, down from $6,400 in May 2018.
“It’s a shift in strategy from going for market share,” Karwel said. “The automakers are saying, ‘We know we’re going to sell less this year so let’s ensure we maintain good profitability.’”
While that might see counterintuitive — in many falling markets, consumers expect to see more discounts, not fewer — automakers are choosing to cut production to match low demand, Karwel said.
Incentive spending climbed between 2012 and 2017 and peaked in 2018 at about $10 billion, he said. Automakers cutback due to slowing sales, higher interest rates, and a falling Canadian dollar, Karwel added. This year, total incentive spending is expected to be closer to $8 billion, he said.
Few automakers were willing to comment on their incentive spending, citing competitive concerns.
Not all brands have cut incentive spending equally, said dealer adviser Michael Lewicki of Lewicki Automotive Consulting Ltd. He said that incentive spending by the Japanbased automakers remains firm, while some European luxury brands and Fiat Chrysler Automobiles have reduced their discounts.
Cyril Dimitris, vice-president of sales and marketing at Toyota Canada Inc. said, “We develop our sales plan considering the demand in the marketplace and where we are in our product life cycle, and then put incentives as necessary to achieve that plan.
“We happen to currently be in a refreshed state of our core product — RAV4 and Corolla — that is naturally driving demand.”
Hyundai Canada, Ford, General Motors, Volkswagen Canada, Nissan Canada and Honda Canada declined to comment. FCA Canada referred to CEO Mike Manley’s comments in January, saying the company has focused on improving financial performance by bolstering pricing through the introduction of new vehicles.
When auto sales were reaching their peak at 2.04 million units in 2017, automakers ramped up incentive spending in a bid to grab greater market share, Karwel said.
“The retail environment was healthy,” he said. “In an expanding market, you can try to achieve those lofty sales goals.”
Most incentives, Karwel said, fall into three categories: Cash rebates; discounted interest rates; or favourable leasing terms.
But with sales expected to fall to 1.9 million units this year, according to Scotiabank’s Global Auto Report, automakers have been switching gears to protect their profit margins.
The fastest way to do that is to pull back incentives, said Brian Murphy, vice-president of research at Canadian Black Book.
“Incentives are a big part of the manufacturers’ budgets. The nice thing about them is they can turn them off and on at will.”
For dealers, any slowdown in sales is cause for concern, Karwel said. But profitability remains strong as consumers continue to opt for bigger, more luxurious vehicles.
“Every time you talk to dealers about less volume, they’re going to be concerned,” Karwel said. “But the sky isn’t on fire here. People love their SUVs, and the Bank of Canada just said interest rates are not going to change for the rest of the year. That means Canadians are not going to change their purchasing habits.”
The fastest-growing segment of the market is vehicles that sell for $40,000 or more, Karwel said, driven by low interest rates and longer-term loans that make monthly payments more affordable.
“I would be more concerned with consumers walking in paying cash, because that is a growing trend this year, and it inhibits dealer profit potential from arranging the financing,” Karwel said.
Dealers can offset some of the impact of lower manufacturers’ incentives by cutting gross margins, taking less profit on each sale in the hope they will make it up in higher volume, Karwel said.
In addition, they can try to boost their overall volume of business by offering more used cars for sale.
“Yes, we’re in a falling market, but new-vehicle deliveries are still phenomenally high,” said dealer adviser Lewicki. “Many dealers are still making a good buck in this market.”