We are two years removed from the height of the pandemic and the automotive market has never been more volatile than it is now. Certainly, there are dealers still making record profits and new car sales were strong in the second half of 2023 to support used car day supply on dealers’ lots, but that’s only the first layer of the onion.
To understand our current 2024 tax season, we first must go back and remember what laid the foundation for the house we’re living in today. From 2020 through 2022, the U.S. market produced 8 million fewer new cars from a lack of production caused by the economic shutdown from COVID-19. That created a used car supply deficit that, according to many sources, won’t hit its plateau until 2027. Only then will we start moving towards building our used car supply back to 2019 supply levels again. So, it is expected to get worse before it gets better.
As in all inflationary environments, but more this year than in prior years, tax season has affordability as its primary demand driver. In 2023 the average growth in wages was roughly 5.2% whereas the average inflationary rate was 7.1%. Overall inflation has put a dent into saving, credit card debt, and overall consumer discretionary finances. According to IHS, affordability has become the major issue in all retail markets with six-figure-income households now looking for bargains and discounts.
How does all of this impact the 2024 tax season? From our research at The Automotive Advisor Team, we are seeing that the first half of 2024 will be a lower price point, affordability-demand-driven environment. Tax season refund buyers are usually driven by the need to upgrade to more reliable transportation. That is even more so this year with the average age of inventory in driveways up 60%. The catalyst for this upgrade is their tax refund. In contrast, new car interest rates buy-downs, and new car incentives typically drive a want-based buyer.
When we look deeper into the data, the inventory acquisition to retail value in the $20,000 to $30,000 price band vehicles are the ones turning the fastest. Their acquisition cost for dealers is increasing faster than any other price segment. This is supported by a recent Cars Commerce report that says cars priced under 30,000 dollars are up 63% year-over-year but still down 79% over 2019 volume levels. We are in a time and market where consumers need these cars and, if dealers can find them, they’ll have to pay to acquire them for retail lots.
Our guidance in volatile markets like this is to have your retail operations firing on all cylinders. Software like Agile Auto’s dealer health platform AAuto has a unique Dealer Operational Health monitor called the Agile Ratio that will measure and report on dealer operational efficiencies or inefficiencies in real-time with one simple gauge and score. This constant monitoring in real time helps dealers stay poised for sustainable growth while at the same time reducing the risk of overexposure in their P&L.
The caution we give dealers is to use tools like AAuto to keep from acquiring inventory for the sake of just having vehicles just to have a full lot. You can’t go with an unclear acquisition strategy. The pandemic allowed for that approach, but it is no longer a profitable operational strategy. As Cox Automotive has written recently, we are moving back to normal. That means pre-pandemic automotive fundamentals will be key to staying risk-averse in this post-COVID volatile market.
The focus we see is for dealers to incubate their acquisition strategy to match sales rate and market trends allowing them to grow market share in a calculated way. Having a daily, or at least weekly, acquisition goal that is benchmarked to your rolling 30-day sales rate will keep a dealer’s supply of inventory at levels that support their unit sales and revenue goals.
For dealers to aggressively take advantage of this tax season and front load the year, they will need to forecast the pivot point between tax season and ‘The Spring Bounce.’ That is typically when the market starts to soften as refunds subside. Being proactive is how we teach dealers to stay risk-averse and avoid missteps that lead to post-pandemic losses.
The good news is refunds are up 2% year-over-year for the needs-based buyers who didn’t reach the 7% inflationary wage growth or who filed for child tax credits. Couple that with the IRS filings and refund distributions being 25% behind year-over-year and dealers who are seeing a tax season sales lift today should continue to see that lift grow week-over-week through March and possibly through April.
At The Automotive Advisor Team, we expect this season to be one of our best tax seasons in quite some time for dealers who have the right inventory to match consumer demand. Reach out for a deeper dive into your strategy here: john@theautomotiveadvisorteam.com.
Happy selling!
John Ellis is the Founder and CEO of The Automotive Advisor Team, Agile Auto, Inc., and BEVEverything, Inc.
