Why Honda Kept Incentives Low In November
Honda Motors (NYSE:HMC) saw its U.S. sales decline in the month of November, while fellow Japanese auto makers Toyota and Nissan posted sales gains in the same month. [1] Based on year-over-year comparisons, Honda saw its sales decline by a shade over 5%, while Toyota and Nissan posted gains of 3.4% and 4% respectively. One factor that explains the decline is the unfavorable comparison to last year’s November, which had two extra selling days, i.e. days excluding Sundays and other public holidays. However, that does not explain why Toyota and Nissan posted gains.
Incentives Drive Growth For Toyota and Nissan
One possible explanation for the growth in sales of Honda’s competitors is that they boosted incentives last month. According to estimates by the auto pricing website truecar.com, Nissan’s incentives, which include cash-back on purchase and cheap financing options, exceeded $3,500, a level usually reserved for American auto makers like Ford, General Motors and Fiat-Chrysler, whose lineups are usually filled with SUVs and pick-up trucks. Meanwhile, Toyota also boosted its incentives by around 14% compared to November 2014, offering an incentive of around $2,200 per vehicle sold in the month of November. One example of the incentives offered by the company was the zero percent financing option on its top selling sedan Camry. In contrast, Honda’s incentives stood at around $1,900, down 6% from last year’s levels.
Why Honda Didn’t Increase Incentives
Incentives are heavily advertised in the media and online. They’re pretty much part and parcel of how the industry now operates. Most vehicles are priced taking into account some level of incentives, even though they’re borne completely by the auto makers and cut directly into profits. However, Honda just introduced two new models to the market: the 2016 versions of the Civic and Accord. These are two of the highest selling vehicles for the company and their newest versions are significant improvements over the outgoing 2015 versions. Moreover, they reflect the best technology the company has to offer.
Typically, when introducing new models auto makers tend to keep inventory levels at dealerships low, while demand is higher than usual. This allows them to extract higher than usual transaction prices. Keeping this in mind, it is easy to understand why the company was hesitant to offer higher than usual incentives like its competitors. Sales of the Accord rose by 1.2% last month, while those of Civic rose by 8.6%. To be sure, other Honda models such as the compact SUV CR-V saw its sales decline by 20%, despite incentives and that is a worrying sign for the company, but by restricting incentives on the Civic and Accord, the company squeezed out higher profits from higher demand. The new models could result in higher sales gains in the coming months as they have historically been best sellers in the passenger car market in the U.S.
Understand How a Company’s Products Impact its Stock Price at Trefis
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- Toyota, Nissan Gain Share as U.S. Market Booms a Third Month, Bloomberg, December 2015 [↩]