"Cash for Clunkers" is a Bad Deal for Independent Retailers
There's been a lot of conversation about the "Cash for Clunkers" program, and for good reason. With government rebates of up to $4500, auto sales have jumped to an annualized rate of as much as 15 to 16 million units, after dropping below 10 million last winter and spring. And from a consumer's perspective, what's not to like.
I have an older car, and I probably would have traded it in this past spring if it weren't for the caution I felt along with everybody else about committing to a hefty car loan. Now, like a lot of other people, I'm seriously thinking about buying now. And why not, it's a great deal!
This raises the question of whether "Cash for Clunkers" is helping the car companies catch up after weak sales in the last year, or is it pulling future sales forward. No matter how you look at it, however, when "Cash for Clunkers" does end, it's a lot easier to imagine auto sales plunging back below the 10 million unit pace once again than it is imagining auto sales being able to maintain a 15 million unit pace.
There's been some talk (I heard it on CNBC this morning) that this surge in auto sales is going to take money out of the broader retail sector, at least on the margin represented by those consumers who will have taken advantage of the program. That may be, but I think that a relatively minor concern compared to what really concerns me.
All retailers have struggled mightily in the last year to maintain price points and margin percentages. This has been a problem particularly for independent retailers, who don't have the deep pockets and access to financing that the major retailers do, and who have generally experienced greater sales decreases than the majors. The deep discounting that's been necessary to generate sales and move inventory has left every retailer asking, "How will we ever get our customers to pay full retail again?"
"Cash for Clunkers" is further training consumers simply to wait for the deal, in a profoundly impressionable way. Wait long enough and the retailer (or, in this case, the government) will have to cave. And what a deal! As much as $4500! It would have been far more constructive, if we had to incentivize auto sales at all, to offer a much more modest rebate and let the impact of it play out over a longer period of time rather than this deep discount that blows out in a few weeks.
(This also raises the question of what happens if car sales return to an annualized rate of below 10 million units after "Cash for Clunkers" ends, and stays there even as the economy begins to recover. Does that set us up for a second "Cash for Clunkers" program later in the fall or winter? At what point will we have trained the consumer so well that it takes 15% to 20% discounts to sell cars? That would have a pretty significant impact on the profit structures of the car companies, just as deep discounting is impacting the profit structures of retailers.)
The bottom line, after this all plays out, is that "Cash for Clunkers" isn't a very good deal for retailers, particularly independent retailers. It's now going to take a lot longer than it otherwise might to get consumers to pay full retails again. And that means that independent retailers are going to feel the price point and margin percentage pressures that have hit them so hard already for quite a while longer.