Auto Industry Hits Some Headwinds in February with 2.8% Decrease in Sales – Karl Brauer, Autotrader & KBB

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Top auto industry analysts have cited rising interest rates, import tariff costs, and cold weather as some of the reasons for February’s slow down in new vehicle sales. Here to talk to us more about February’s numbers is Karl Brauer, executive publisher for AutoTrader and Kelley Blue Book. Karl shares with us, his insight about this month’s winners, losers, and what dealers can expect as we head into March.

VIDEO TRANSCRIPTION:

Jim Fitzpatrick: It’s always a pleasure when you join us.

Karl Brauer: Hey, great being on with you guys as always.

Jim Fitzpatrick: Sure. Now, this time it might not be as good news as last month that we spoke about the numbers. It looks like the industry has taken a little bit of a hit. Talk to us about that.

Karl Brauer: We saw the January numbers come in and we tried not to be too worried about it. You had January, which is generally a slow month, you had some very cold weather for large parts of the country, and of course, you had a government shutdown, so there was plenty of reason to believe that January, even more so than the typical January was slow, but kind of an enigma, hopefully not indicative. We just got February’s numbers and unfortunately they stayed pretty similar to January’s trend, meaning disappointing, lower than we expected, down by 2.9%, I believe, leaving us at 2.6% down after the first two months of the year. Two pretty down months.

Karl Brauer: A lot of people would rightfully say, “This is still early in the year.” If January’s the slowest month, February’s typically the second slowest month, so we try not to assume this is an undeniable trend for the entire calendar year, but we’re also trying to grasp the fact that these are some of the lowest numbers we’ve seen in 10 years in terms of the percentage being down. Prices are very high for new cars, so there’s a lot of things that are playing into this. Interest rates are going up. There’s a lot of reason to believe that we may still have more headwinds versus tailwinds before us.

Jim Fitzpatrick: Yeah, for the dealers right now that are the ledge of their window sill right there in their office going, “Oh my gosh. If Karl keeps going here …” We don’t make the news. We just report it here, right?

Karl Brauer: Precisely, yeah. For them, there are positive signs too. There is consumer confidence, there is rising wages and earnings. We still feel like there’s a lot of great health in the economy, but we’re hitting some headwinds we haven’t really seen before.

Jim Fitzpatrick: Sure. Talk to us about some of the winners and losers for last month.

Karl Brauer: We had a lot of them that were down. I think FCA, even their ability to kind of fight the trend with Jeep doing so well and RAM, they were struggling. We saw big drops from some of the bigger names. Nissan, we know has kind of been all over the map in the last year, but they were down again. I think GM was very slightly down, they were almost flat, but they were down. Toyota was down. Really it was a pretty tough month in all. I think Jaguar, Land Rover was up, obviously, but they’re not a big part of the market. I keep hearing rumblings that as long as Subaru has been going and been this kind of consistent bright spot, the rumors are that we may finally see a hiccup there, which given how long they’ve grown, it’s like every time you grow in a year or a month, you think it’s that much harder to do again. Well, they’ve doing it for, I don’t know what … we’re approaching a decade or something. It’s crazy. They might finally not have a record year for the first time in a decade.

Jim Fitzpatrick: Imagine that. Time to replace that CEO. I mean, what they heck.

Karl Brauer: Geez, I know, gosh. What are you doing over there? Your 10 year streak, very disappointing.

Jim Fitzpatrick: That guy’s name is Doll and he is a doll. He’s a great guy. He’s done just a phenomenal job with that brand. If they did get rid of him, I’m sure somebody would pick hi up very quickly. He wouldn’t make it to his car by the time another OEM called and said, “Come work your magic over here.”

Karl Brauer: Tom’s a great guy. You’re absolutely great.

Jim Fitzpatrick: He really is. Talk to us about some of the repercussions of tax checks, maybe getting to tax payers and the refunds being a little bit slower this year, the possibility of that.

Karl Brauer: It’s really ironic when you think about it, because most indications with suggest that people have been getting more money throughout 2018, because less was held back, so they had more to spend, but I think both of us would agree that probably personally and certainly through our social circles we know that people tend to maybe not save as disciplined as they should.

Jim Fitzpatrick: Imagine that.

Karl Brauer: Imagine. That the government ends up being, and their tax return ends up being kind of the forced savings account that people otherwise don’t have, so when that money rolls in, even if that means you overpaid throughout the year and the government had your money instead of you, until you finally got it back, that’s still a lump of sum of money that you get that you otherwise don’t have in your savings account, unless this year they took less or this past year they took out less during the year and you’re not giving your money to the government, you’re getting to keep most of it, but that means you don’t have a lump sum waiting for you in the spring time like so many people are used to. It could be an interesting psychological impact that we see in the car world, because we know from statistics that a lot of people utilize that lump sum tax return for car purchases.

Jim Fitzpatrick: That’s right. Talk to us a little bit about what we’re looking for for March or what we’re looking at for March and what the sales might come out, and then of course that with be the end of the first quarter, so talk to us about what that might look like.

Karl Brauer: I think we’ve seen incentives be cut back because they’re not generally an inventory problem with car makers, so they’re being a little more disciplined about their incentives, so that’s making the prices not look as desirable to people. I think what we’re going to hope for in March is that between the weather and between people getting whatever tax returns they’re going to get starting to flow in. We might just see something that’s more indicative of a longterm trend here. Hopefully it’s a longterm trend that we haven’t seen the first two months of the year.

Karl Brauer: Those are really kind of the big factors is, will the consumer confidence, and warming weather, and some level of tax return be enough to overcome the rising interest rates and really the prices that are going up as we’ve talked about, and there isn’t even really a lot incentive activity to help offset those. Those are kind of the forces battling each other. I think March will probably give us a pretty clear picture. I think if we see it up, we can start to write off January and February as circumstantial and not longterm. If it’s down again in March, that might be indicating something a bit more longterm that we’re not happy about.

Jim Fitzpatrick: Mm-hmm (affirmative). You mentioned pricing. Let’s talk about affordability. $36,590 is the average price of a new vehicle today. That’s crazy. It’s $993 higher than this time just last year. Where’s this headed and what impact will it have?

Karl Brauer: Well, we know what drives a lot of this price creep is the switch from cars to trucks and SUVs. Trucks and SUVs tend to be more expensive than a car that someone might have otherwise bought. Those generally have a higher profit, which is great for the manufactuers, but again, it starts to push the average price into a region that a lot of people can’t afford. I feel like I’d want to tell people, “Look, if you’re having trouble affording a new vehicle, get away from the trucks and SUVs and go look at the sedans, where you’re going to see higher incentives, more rebates, and more opportunities to buy something that doesn’t cost as much.” This price growth, it’s also be driven, don’t forget, by things that aren’t usually seeing.

Karl Brauer: We’ve seen this transition to trucks and SUVs for awhile, but we haven’t seen tariffs and the rising cost of materials. Aluminum and steel are more expesnive than they were a year ago, because of tariffs. Then of course interest rates are higher than they were a year ago. It’s not just the price of the car, that’s really one issue, but then the cost of loaning the money or borrowing the money to buy these higher priced cars gives people a higher monthly payment.

Jim Fitzpatrick: That’s right, that’s right. Tesla has announced its long awaited $35,000, Model 3, what do you think this means for this company?

Karl Brauer: I’m pretty impressed, truthfully. I think Elon took an area of his company that he full control over, his cost structure and he found a way to cut it. It was an aggressive move, but it also allowed him to get to the $35,000, Model 3 that he’s been promising for years. He’s going fully online, which also feels very forward thinking. This is a challenge, you can’t just decided you’re going to service every car virtually and sell every car virtually. You’ve got to have a system in place to do those things. That will be the next big question mark that myself and plenty of other people will want to see how it’s answered.

Karl Brauer: Certainly, the concept of going fully online, making the cars very quick and easy to purchase, and then being able to service them, again very agile with a mobile kind of service fleet out there of people or machinery that can go to your house even. That’s very forward thinking. If he can actually string this all together at a level that satisfies his customer base, that’s really something that no one else has done. Once again, he’ll be plowing fields that no one else has ever plowed in this industry.

Jim Fitzpatrick: One other thing here, Ford is the latest OEM to join GM in announcing that they’re not going to show the monthly airings, and reports, and such, and switching over to quarterly. Talk to us a little bit about that. Do you think that’s going to be a trend we’ll see now among other OEM’s?

Karl Brauer: I think we will see it. I think we’ve kind of broke the new ground here and I think all the auto makers will prefer this. I’ve talked to them about this and really what their opinion is that every month is a certain amount of data, but it represents a very tiny sliver of a longterm plan. As you and I know, car companies, really the whole industry operates on a fairly long time horizon. When you’ve got three years to plan a car before it gets to concept to production and you have model years that go for seven years on a generation, five to seven years, any given month really isn’t very telling. I think the auto makers were tired of feeling like every month they had to answer questions about strategies that that particular month may have very little to do with or represent in very little if any way.

Karl Brauer: I think they really enjoy the idea of quarterly, because I think they feel like it’s a larger chunk of time and it’s much more indicative in terms of trends and future planning. I think we’re going to see a lot of other ones jump on board with this. They’re going to like the freedom that it gives them to not have to worry and answer questions on their monthly basis.

Jim Fitzpatrick: Yeah, I agree. With these two slower months, January and February, will that change your forecast for 2019 with regard to this [inaudible 00:11:26].

Karl Brauer: I don’t think we’re going to make an adjustment yet. I think we are going to give it one more month. We do want to keep perspective on what January and February represent. 2.9% isn’t a great number to be down, but I think all of us have been in this industry long enough, we’ve seen even harsher numbers, even harsher percentage drops that were much more scary. I think we’re going to take these two in stride, see what happens in March, watch the economic factors. Like you said, we’re going to be at the end of the quarter soon and that will be as a whole much more telling than just one or two months. It’s something to keep our eye on and I think we’re going to be watching carefully and considering a revision, depending on what happens this current month.

Jim Fitzpatrick: Sure. Karl Brauer, Executive Publisher for Auto Trader and Kelly Blue Book, I want to thank you so much, for joining us on CBT. It’s always a pleasure. Your insights are priceless to us, so thank you so much.

Karl Brauer: Always nice talking to you guys. Happy to discuss industry, it’s never boring.

Jim Fitzpatrick: That’s for sure. Thanks again.

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