Huge Auto Inventories May Trigger Large Car Price Discounts

New analysis by research firm Kelly Blue Book (KBB) shows:

 … inventory levels are rising and days supply is high compared to 2007. If this trend continues, as expected with weather issues, automakers will have to continue to show some discipline instead of pushing incentives on vehicles to sell more cars.

However, car companies and dealers have very few tools to clear supplies beyond price concessions. And increased discounts and financing deals have become part of what auto manufacturers use to prune inventory.

Normal industry “days to turn,” a measure of the time dealers have cars on their lots, run in the 40 to 50 range. KBB sees a rise in these numbers as probable cause for decades-old practices to lure buyers. Karl Brauer, senior analyst at KBB, said:

Automakers like GM have stated they won’t compromise residual values and profit with excessive incentive spending, but the automaker is losing sales and market share for its brand new Silverado and Sierra. The critical role those trucks play in GM’s overall revenue might force it into an incentives play if inventories remain bloated throughout February and beyond. And if one automaker starts an incentives war several more will almost certainly join in.

The problem is compounded by January sales drops among some of the best-selling vehicles. Chevrolet Silverado sales were down 18% for the month. Sales for Toyota Motor Corp.’s (NYSE: TM) flagship, the Camry, were off 27%. Sales of its hybrid Prius plunged 23%. Sales of the Honda Motor Co. Ltd. (NYSE: HMC) Accord dropped 16%. And sales of the Ford Motor Co. (NYSE: F) Focus were down 26%. All of these are among the top 20 selling cars in the United States.

In the meantime, after a near-record year of U.S. car sales in 2013, sales dropped 3.1% in January to 1,012,582. Sales for each of the top three car companies — General Motors Co. (NYSE: GM), Ford and Toyota — dropped more than that.

The goal of manufacturers to keep margins high has begun to meet the need to sell cars at a rapid rate to lower backlogs. Price wars among these companies are about to break out. And consumers are about to be offered a wide array of discounts and attractive financing packages.