AutoNation CEO Warns Industry To Avoid Lofty Incentives In 2016

AutoNation CEO, Mike Jackson, warns that although the U.S. auto industry experienced record sales in 2015, a flat December may indicate a difficult road ahead.

The head of the largest U.S. auto dealer group said in an interview the auto industry is entering a new chapter where the underlying demand for new vehicles, particularly cars, is weakening. He said automakers and dealers must avoid the problems that occurred in the years immediately following 2000, when lofty incentives kept sales volume high but cut profits.

“We really have to watch the quality of volume,” said Jackson. “We have to find the right balance between price and volume.”

According to figures from research firm Autodata, U.S. auto sales totaled a record 17.47 million in 2015, even as December numbers trailed expectations.

“The industry calendar moved three days and a January weekend into 2015,” Jackson said. “So that’s 9 percent more days. And we have 9 percent more sales. If you correct for the calendar, that means sales are basically flat [for the month]. I’m looking at significantly higher inventories; higher incentives from the manufacturers; and bigger discounts from us, the retailer. We had to discount an additional $250-$300 a car, compared to a year ago.”

Jackson’s warning, combined with disappointing industry wide sales results for December, have resulted in a punishing performance for auto stocks in 2016 so far. For this year through Wednesday of this week, Ford shares have declined 7.0 percent, while GM shares have dropped 8.1 percent and Fiat Chrysler shares have fallen 7.2 percent.

To put his concerns into perspective, Jackson said, “Go back to 2000, the last time we had records. If you look at the next five years, industry sales were very good. However, the quality of the earnings [at that time] deteriorated dramatically as the industry really couldn’t manage flat sales. You’ll hear a lot of happy talk from everybody else in the industry, but I’m saying we’re in a new chapter here.”

Jackson expects margins and earnings to suffer at AutoNation for a quarter or so, while the company re-positions itself through cost cutting, a reduction of inventories, and finding the right balance between volume and quality.

Overall, the U.S. auto market has shifted away from traditional cars in recent years, and moved toward SUVs, crossover vehicles and trucks.

“Cars are the problem,” Jackson said, while “trucks are beautiful” when it comes to recent sales performance.

Although he said that he isn’t pointing his finger at any specific automaker when it comes to layering on incentives to push sales, Jackson clearly warned the entire industry to avoid raising incentives to inflate sales, as it did in the years immediately following 2000.