Paycheck-to-Paycheck Consumers Could Put Brakes on Replacing Their Aging Rides

The fundamental principle of economics, of business in general, boils down to matching supply with demand.

If the scales are out of whack, so to speak, then friction lies in the mix.

Too much demand, and too little supply, spurs consumers to substitute one good for another. Or: Simply go without — which spells a rough road ahead for platform firms that sell cars.

The vehicle industry in the United States offers a bit of economics lesson unfolding in real time in the brave new world of surging inflation, triaging household budgets and supply chain snarls.

One recent stat, per S&P Global Mobility notes that the average age of vehicles on the road stands at 12.2 years.

The supply chain pressures are well-known, and chip shortages are exacerbating those shortages. Sky-high pricing is a headwind, too — there’s a delicate balancing act between what the market will bear in terms of the sticker price, and sticker shock.

The balancing act extends to the online companies seeking to bring vehicle buying fully into the digital age, streamlining the browsing buying and even delivery of cars, which can be among the biggest of big-ticket items.

Supply Chain Challenges 

Commentary on the recent spate of earnings reports from the platforms shows some of the challenges of doing so. On the Vroom call, for example, Bob Mylod, executive chairman, took note of the “the desire of customers to purchase their cars in a way that is consistent with what they have come to expect from the likes of Amazon or DoorDash. They want to transact digitally and they want their purchase delivered to their doorstep … this trend is only heading in one direction as newer digitally demanding generations grow up and have the means to buy cars.”

Drilling down into that trend, eCommerce units for the company were up 26% year on year — though we note that constraints likely, well, constrained that top line momentum. Sequential activity declined, however, down 8.3%.

In another illustration of what’s been deteriorating, and as noted in this space, Carvana’s results imply that the fourth quarter was a peak, with 7% declines in units sold in the first quarter.

Read also: Carvana Crashes Into ‘Challenging, Difficult, Deteriorating’ Environment

Carvana, for its part, has been boosting its logistics operations to streamline supply chains, and boost end to-end-last mile efforts.

Elsewhere, CarGurus said that gross merchandise sales moderated 30% quarter on quarter. Sam Zale, COO, said on the call that demand is “soft right now in the market — that does impact how dealers think about transactions and how much inventory they need.” CEO Jason Trevisan said in his own remarks that “as consumer demand does wane … we do feel that dealers are going to have to market more aggressively.” That may in fact have a positive impact on the company’s marketplace business, as Trevisan said.

You get a sense of the push and pull of the marketplaces themselves — where suppliers have to push a  bit if demand starts to soften. Since the marketplaces are essentially the online bridges that bring consumers and supply together, any recalibration of the market shows up fairly quickly.

But: What happens if consumers wind up  pulling back full throttle? We note that recent data from Equifax has shown that many tranches of loan delinquencies are creeping up, including auto loans. The data show that delinquencies marked 8.5% of car loans as of March, up from 7.9% a year ago and 7.1% just as the pandemic alighted in 2020.

We contend that the juggling act that marks the paycheck-to-paycheck economy is putting auto loans a bit on the back burner. P2P consumers, as we call them for short, are three times more likely to have credit card debt in place than their non-P2P peers. As they are already overextended a bit, consumers may be reticent to take on more debt, or rotate into new debt by buying a vehicle that replaces the 12-year-old models on the street — so any inventory replenishment may come in face of demand that is at best muted.

A new imbalance looms in what we might label the “connected car economy.”