The industry has crossed the line into risky territory on automaker incentives, leasing levels and new-vehicle inventory, said AutoNation Inc. CEO Mike Jackson.
His comments came as publicly traded dealership groups released mixed earnings results for the first quarter. While other executives didn't explicitly endorse Jackson's view, most indicated that incentives, leasing and new-vehicle stocks have reached or exceeded healthy limits. The retailers are managing, but not easily.
"It's clear the industry intends to sell over 17 million vehicles this year, if I look at the inventory and the production plans," Jackson said.
But Jeff Dyke, Sonic Automotive Inc.'s executive vice president of operations, said that without hefty factory incentives, today's natural sales rate is closer to 15 million.
Jackson believes automakers are using incentives and leasing to reach the 17 million new-vehicle sales goal. Leases accounted for 31 percent of new-vehicle sales in 2016, according to Edmunds.
"To me, 30 percent leasing has always been a red line, where you've had a massive distortion if you take it above that," Jackson said. He called incentives that top 10 percent of sticker prices another red line, and inventories above a 70-day supply yet another. "So we have three red lines that the industry in total is over on new vehicles," he said.
Last month, automaker incentives increased 13 percent to an average of $3,511, Jackson said. Average per-vehicle incentives have reached 10.5 percent of the sticker price, he added. And AutoNation's new-vehicle supply was 71 days in the first quarter, vs. the industry's 73-day average in April.
"If you level off incentives [and] leasing and bring inventories into line, then most likely you have some sort of modest decline in new-vehicle volume," Jackson said. In 2018, if automakers' production plans incorporate raising incentives even higher, "I don't know whether that's doable or not," he said.
Sonic and Penske Automotive Group Inc. said incentives softened on luxury vehicles in January and February, which slowed those sales.
But in March, incentives "went berserk," said Sonic's Dyke. He expects incentives to fluctuate all year, with the next spike in June.
"The incentives are all over the board," and will remain so, he said. "I expect to see a topsy-turvy incentive environment." Most automakers "have a good amount of supply so they will continue to push incentives on us," Dyke said.
Penske Automotive Chairman Roger Penske urged automakers to exercise caution on incentives as they approach 10 to 11 percent of sticker prices, "which people say is the top end."
Lithia Motors Inc. CEO Bryan DeBoer called factory incentive programs stable, but predicted they will accelerate by autumn. Lithia's new-vehicle inventory fell to a 76-day supply, a two-day decrease from a year earlier. But he offered a defense of the push to keep new-vehicle sales going.
"It starts with that new-car sale," said DeBoer. New-vehicle operations contribute only a fifth of Lithia's gross profit, he said. "So it's a small amount, but that contribution is what generates the trade-ins that generate the service and parts business in both new and used that creates that future opportunity to sell that next vehicle."