Not only were vehicle sales in May up from April, they were better than expected—a welcome surprise for the automotive sector. The increased sales numbers came after COVID-19 caused dealership closures, a shift to online sales and appointments, declining confidence in job security, and one of the largest stimulus programs in the history of the US. And while many view these sales results as a leading indicator of growth in the sector, the better-than-expected sales numbers were more likely a result of pent-up demand and market tailwinds.
Below, I’ll dive into the five tailwinds propelling sales numbers the most.
1. Vehicle sales deemed essential
As COVID-19 spread across the US, each state had its own response to the virus. In states where vehicle sales were considered nonessential—Michigan, New York, and Pennsylvania, for example—dealership showrooms were closed for a portion of March and all of April. This forced consumers in these states who needed to replace their vehicle to delay their purchase for an extended period of time. Where vehicle sales were deemed essential, dealers were required to shift to online appointments and sales only.
As of May, nearly every state had updated vehicle sales to essential. This resulted in a favorable tailwind for dealers as many consumers came off the sidelines to purchase a new or used vehicle.
2. Increasing familiarity with 100% online sales process
For many dealers, the shift to solely digital sales happened within a period of weeks, if not days, and this brought on a steep learning curve. Although digital retailing tools have been around for years, using these tools for the entire sales process was an unfamiliar experience for many. Some deals were likely lost in April because of the newness of online car sales but recovered in May as customers and dealers became more familiar with the process and stores reopened.
3. Stimulus checks spark demand
The CARES Act, created in response to the COVID-19-driven recession, provided millions of Americans with a stimulus payment of up to $1,200 for individual tax filers and $2,400 for joint filers, plus an additional $500 per child under the age of seventeen. According to a CarGurus poll, 28% of consumers were planning to put their stimulus checks toward the purchase of a vehicle. With dealerships open and stimulus checks in the pockets of consumers, new and used vehicle sales in May were likely boosted.
4. Historic level of incentive spend
As sales demand declined because of COVID-19, OEMs increased incentives in the hopes of drawing consumers off the sidelines. This included offers like 0% financing for 84 months and high-value rebates. As customers saw the amazing deals being offered, they may have decided it was a great time to buy a new vehicle and came back in May to take advantage of the deals.
5. Confidence in job security
With jobless claims mounting since late March, consumers with jobs were nervous about their employment status. As time went on and companies in nearly every US city laid off staff, workers who remained employed, felt more confident in their job status. Those who remained employed and might have purchased in late March or April but didn’t, likely had higher levels of confidence in May, which brought them back into the auto markets. Confidence levels continued to improve as states reopened, and it appeared as if the economy was through the trough of COVID-19.
A few more months to understand the impact
Considering the impact of COVID-19, May was overall a good month for the industry. Though down 30% Year-over-Year (YoY) as compared to May 2019, new vehicle sales were up 56% as compared to April 2020. CPO sales were down an estimated 6% YoY in May, but up 87% compared to April 2020. Finally, used vehicle sales were down an estimated 32% YoY in May, but increased an estimated 110% from April 2020.
But while increased sales in May allowed dealers to clear a bit of vehicle inventory, it’s still too early to know if demand is on the upswing. May used and new vehicle sales were likely inflated from pent-up demand because of the positive tailwinds. The pent-up demand from May will not be as present in June, especially as new headwinds come to light, including:
- The tightening of credit availability. This could lead to consumers having trouble getting prime financing and limit what they’re able to buy.
- Decreased incentive level spend. As production is limited and days’ supply declines, incentive spend will be pulled back for popular vehicles. For example, the Motor Intelligence Days’ Supply report shows the Chevrolet Silverado is down to a 37-day supply, so if Silverado plants don’t reopen soon, incentive spend is likely to decline fast.
- Decreased inventory. Supply of both used and new vehicles is starting to decline. New vehicle supply will rebound as production comes back online, however, for many companies with just-in-time parts ordering, suppliers will need to come back online before OEMs can ramp up production. At the same time, staff reductions at auctions and fewer vehicles being reconditioned have created a bottleneck, resulting in used vehicles piling up at auction.
In the meantime, dealers should let consumers know they’re back to business and ramp up their marketing efforts again. Additionally, it’d be wise to focus on mastering digital retailing, which is likely here to stay and will lead to more sales in the long term.
Ultimately though, with jobless claims at 21,487,000 as of June 4, 2020, it’s hard to predict when exactly demand will return. June sales numbers will likely appear more mixed than May’s since the pent-up demand from March and April has passed. I expect it won’t be until the end of July that we’ll really know the state of demand in the industry.