Will automotive ad spending on TV ever return to pre-pandemic levels as we saw in 2018 or 2019?
Well, the answer is...Maybe. But it’s complicated. That’s not much of an answer, is it? If you expected the answer to be an emphatic, “Yes, automotive spending will rebound when the pandemic is over.” or “No way” then we're overlooking a myriad of factors beyond just a pandemic that has impacted automotive manufacturing, retail, and consumer behavior.
Obviously, the worldwide Covid-19 pandemic that began in December 2020 was the catalyst that changed the automotive landscape leading to the downturn in ad spending, but it’s not the sole reason why ad spending has declined. So rather than try to figure out a definitive answer, let’s look at the pre-pandemic factors that led to the downturn in spending:
- There has been a tremendous auto surplus of vehicles because manufacturers have historically over-produced compared to consumer demand - too many cars and too little demand.
- Manufacturers have forced dealers to take the surplus of vehicles because of antiquated dealer allocation and floor plan financing requirements built into dealership franchise agreements.
- Manufacturers granted more dealer franchises and dealership numbers grew to the point that the industry became over-retailed with too many vehicles and too many dealers.
- Oversupply and over-retailing created a highly competitive market whereby dealers had to compete for consumers with discounts, incentives (financing, rebates, loyalty programs, etc.), and increased spending on marketing. Basically, spend more, to sell more, but make less profit on every unit you sell (which is an unsustainable business model).
- Dealer profit margins have been capped by the manufacturer’s dealer franchise terms, such as vehicle allocation limits, financing, dealership modernization requirements, etc. The only way a dealership could generate more profit was to limit supply (impossible), increase used vehicle sales volume, decrease or eliminate consumer discounts and incentives, increase trade-in incentives to persuade consumers to trade more often, or
- Spend more on marketing in an attempt to sell more new vehicles. Which dealerships did. A lot. On network TV, Sports, local broadcast TV, and digital media.
This is an overly simplified model of the auto industry, but you get the point. Prior to the pandemic, the industry was dysfunctional. Then the pandemic hit. Shift gears. (pun intended)
What happened? Ad spending didn’t disappear overnight with the start of the pandemic right? Well, it did, but you may not have noticed because dealers were flush with dealer group and allocation money and manufacturers were still pumping tier 2 money into Q1 and Q2 2020. Nobody recognized (or was willing to admit) that a downturn was coming and fast!
- Dealers and manufacturers still had a huge surplus of vehicles, as much as a 90-120 day supply.
- Tier 1 supply chain issues were not an issue or even considered.
- Consumer demand for vehicles was still strong coming off of Q4 2019 with SAARS vehicles shipped at an all-time high.
- The US economy was still strong.
- Nobody thought that the pandemic would last long.
But, the pandemic did last. Consumers were shuttered in their homes. We began working from home. Work commuting disappeared. We didn’t drive to dinner, shopping, hardly anywhere. As the world was shutting down, we began to hear about parts supply chain issues and diminishing output due to decreases in workforce and staffing. The kids stayed home. We stayed home. And the automotive surplus of vehicles began to dwindle as consumers bought up remaining inventory while manufacturers were unable to continue flooding the market because they couldn’t get parts, semiconductors, or people to build cars.
Without cars and trucks to sell, auto started cutting back on marketing in a big way. First, it was huge cancellations in Q2 and Q3 of 2020. Then it was massive cuts in planned spending in 2021. The thought was if we are going to sell less, then we need to spend less and marketing spend was the first area to cut. To the ad industry, it was like bleeding to death from a thousand little cuts.
However, consumer demand was still strong. Remember your economics lessons from college? When supply decreases and demand stays constant or increases, prices must go UP! Manufacturers started bleeding profits but dealers that could get inventory were selling vehicles at huge profit margins. Incentives were gone. Discounts were gone. Markups became common. Used car prices were spiking by 20 to 30 percent. The dealer that I bought my Chevy Tahoe from in early March of 2020 was now offering me 20% more to buy it back so they could sell it for even more. Dealers that couldn’t get inventory were closing.
So, the pandemic fundamentally changed the auto business. Dealerships were making more profit on lower sales volume, offering fewer discounts, selling at higher margins, and spending less on marketing because they were no longer getting co-op or allocation money. Dealerships, especially those in small markets and/or who carried luxury brands, were closing, eliminating competition. One dealership general manager I talked with asked “Why would I advertise heavily when I have no cars on the lot to shop?” They flipped the message to “We want to buy your car” or “Come on in and order your new vehicle”. And they spent less.
Manufacturers cut spending too because they were losing money, building and delivering fewer vehicles, eliminating auto production lines, rolling out fewer new year models, and investing more in the development of EVs (electric vehicles). That last point is key to keep in mind - investing more in the development of EVs - as it relates to the traditional dealership model and marketing spend. Here’s why: Tesla, Rivian, and several other consumer and fleet EV manufacturers have a DTC model. Direct to Consumer. There is no dealership. If you want a Tesla, you order direct from the manufacturer. They eliminate the sales franchisee altogether, resulting in higher profit margins, less overhead, and (probably) a better car buying experience; all while spending less on marketing. When is the last time you saw a Tesla or Rivian ad on broadcast TV? Ford likely believes in DTC too as they spun off their EV production as a separate company, presumably to avoid being tied to a dealership model. It remains to be seen what the other big two will do with their EV plans.
The pandemic changed how cars are built, marketed, and sold over the past several years. Will the auto industry return to its old way of doing business?
I doubt it, but let’s fast-forward to today.
Supply chain issues still linger, limiting vehicle output, but it’s getting better. The economy isn’t great with prices on virtually everything increasing (except the spot rates for Local TV). Unemployment is improving. Interest rates are not. Semiconductor plants are being built on US soil, but they won’t be operational until at least 2024 or 2025. Used car prices are starting to drop. New car prices remain high but we are starting to see more new inventory on dealer lots with an occasional incentive or promise from the dealer that they won’t pass on a 20% dealer delivery markup to you. Investment in EVs is huge and coming at us like an electric freight train, but consumer demand (or even interest) for EVs is anemic at best.
We have seen a (slight) increase in spending from the Tier 2 Dealer Group and local dealers in many markets across the country in the first quarter of this year. It’s still not back to pre-pandemic levels but just as Sir Paul McCartney sings, I've got to admit it's getting better, (Better) a little better all the time.
But is it enough? Will automotive ad spending on TV ever return to pre-pandemic levels as we saw in 2018 or 2019?
Maybe. But it’s complicated.