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Since the COVID-19 pandemic struck nearly three years ago, the auto industry has moved at a breakneck speed. Dealers constantly discover new processes, tools, and strategies to interact with customers in an increasingly digital landscape.
Automotive industry challenges are widespread, and most dealers have thus far kept pace. Profits have been record-breaking amidst supply chain breakdowns and nationwide chip shortages, dealers are adjusting to the impending EV takeover, and new technologies are helping to digitize and streamline customer experiences.
However, the only certainty in the post-pandemic environment is uncertainty, and a global evolution looms large. Surging gas prices, a possible economic recession, and manufacturer business model revamps could disrupt the market entirely.
This article outlines some of those current and potential scenarios of which all dealers should be aware and provides possible strategies for adaptation.
High Demand and Low Supply Means Record Profits – For Now
So far, the 2020s have proven a financial windfall as a seller’s market has dominated the industry.
The Lingering Impact of COVID-19
Selling vehicles has been a disrupted enterprise since the onset of COVID-19 in early 2020. Domestic dealers reported substantial profits after taking specific steps to reflect the new, post-pandemic sales model, including:
- Reducing on-site staff
- Offering more online services
- Reorganizing operations
Over the past two years, customers have waited weeks – if not months – for new cars due to inventory shortages, while dealers have benefited. Despite a drop in prevailing sales volume, U.S. dealers’ profits increased by nearly 50% in 2020. These trends continued in 2021, fueled by the following:
- A shortage of chips required to manufacture new automobiles
- Supply chain challenges
- Changing customer habits
Despite continued lower sales volumes, record profits in 2021 resulted from increased online activities. Consumers now perform much of their car research via the internet, meaning fewer or shorter visits to dealers. While this was initially a dramatic and sudden shift, dealers have now embraced this sales strategy and reduced labor costs, lowering operational overhead.
The high demand for depleted inventories continues, and in-person price-haggling is declining. The latter means that dealers spend less time with each customer and can sell almost all their automobiles for the MSRP, if not more.
Profits Continued at a Record Pace in Q1 2022
New car inventories remain historically low, causing even further rising prices. As a result, dealerships are not just surviving but prospering at an all-time high, according to data from the first three months of 2022, which indicates the gross profits for new vehicles continue to soar.
What seems to be an ever-increasing per-vehicle profit is the primary force behind dealership revenues that have never been higher. According to the research, publicly owned new-car dealerships made slightly over $7 million in profits on average in the previous 12-month period, which ended in March 2022.
These results represent a nearly 250 percent spike over the pre-pandemic world of 2019.
New Vehicle Sales Dropped in Q2 2022
However, consumer buying patterns changed in Q2. Sustained inventory shortages and rapid inflation continued to push new vehicle costs even more. In June, the U.S. experienced another surge, with the average price hitting a record-setting $43,279. This number represents a 0.37 percent increase from May and 11 percent from June 2021.
As a result, sales of new vehicles fell by more than 20%. Analysts contest that demand is generally solid, and sales volumes would improve with a healthy injection of new cars into the market. However, those conclusions remain conjecture and speculation until put to the test by a boost in manufacturing.
Q3 2022 Offered a Mixed Bag
Q3 provided mixed results, as each piece of good news seemed fused with a bad one.
On the positive side, inventory recovered in many areas following Q2’s supply chain interruptions and the resulting (and abovementioned) inventory shortages.
However, other variables hindered growth. The FOMC’s (Federal Open Market Committee) decision to continue raising the Fed Funds Rate (currently sitting at 3.25%, up 3.00% on the year) to combat inflation resulted in higher borrowing rates, making financing harder for the average consumer.
Worsening the impact is the lag time. These rate hikes do not provide immediate inflationary relief. Costs will continue to rise for a time before the higher rates slow down borrowing and spending, meaning a period of higher rates and prices.
Another bright spot was U.S. light vehicle sales. August saw the SAAR increase to 13.2 million units, representing a year-over-year increase of 0.7%. In September, that number improved further to 13.5 million units.
Dampening that result is Q3’s value relative to Q2. Despite the late surge, the overall SAAR of 13.3 million units was flat compared to the prior quarter, a blow to expectations given inventory improvements.
Automotive Industry Challenges Will Include an EV Surge
According to industry analysts, recent developments – including pending government legislation, environmental initiatives, and more significant make and model selections, are expected to stimulate EV sales.
Automakers will have little choice but to shoulder the load of maintaining an increasingly electric-powered inventory as the industry transitions to EVs. Recent developments affecting these changes include:
- Increased manufacturing. The increased variety of EVs on the market today has aided their growing popularity, and many of the country’s most well-known automakers are now developing electric cars.
- The construction of EV-friendly homes. The most cost-effective and convenient approach to charging an electric vehicle is to do so overnight at home. As a result, many home builders might start including charging stations throughout the construction process.
- Popularity in Europe will affect domestic growth. Automakers have prioritized Europe in EV production, and the development of the European market has slowed EV sales in the United States. However, if sales in Europe climb, this dynamic might stimulate quicker long-term growth in the U.S., as automakers will accelerate their global migration to electric vehicles.
The Rise of Direct-to-Consumer Auto Sales
Not all recent or potential developments are positive news for dealerships, and one EV-related one could bear severe long-term ramifications.
Earlier this year, Ford raised eyebrows by announcing a plan to sell EVs separate from ICE vehicles as part of a stand-alone, direct-to-consumer sales model. Many experts believe this to be the infancy stage of a project to bypass dealership sales altogether, with consumers gaining direct access to the manufacturer in the coming years.
These events would put dealerships in the precarious position of staying afloat without sales revenue, and with those new sales would go profits made on customer financing.
If that happens, an avoidable evolution will require exploring alternative strategies for cutting costs and boosting revenue.
Investing in Smaller Spaces
Dealers may be able to cut costs by shrinking their property due to having fewer cars in stock. Although this has yet to happen on a large scale, it is another potential efficiency driver for all dealers.
Honda, for example, revealed in May that it is introducing a new dealership design that uses less space and is modular and adjustable, allowing what was once showroom space to become employee offices.
It will also contain electric vehicle charging stations since the company wants to produce 2 million electric cars annually and sell 500,000 in the U.S. by 2030, coinciding with legislation to ramp up consumer EV use by that same year.
The reality is dealers eventually must search for additional methods to digitalize their businesses, which will likely include smaller spaces as fewer and fewer cars arrive on dealership lots.
However, retrofitting a facility requires substantial time and money, and such a transition could take years or even decades. It will be a challenging program for dealers to adopt immediately, but it should be a direction they gradually head as they rebuild and improve.
Enhancing Service Departments
The good news is that car owners are keeping their vehicles longer than ever, so a dealership’s fixed ops services should become an increasingly substantial source of income.
Dealerships can ill-afford to lose service customers if other traditional cash generators gradually disappear, and defection typically occurs:
- Between the time of purchase and the first service visit,
- After a poor service experience, or
- When the manufacturer’s warranty expires
The first event could gradually become a moot point in an environment where dealerships no longer sell vehicles directly. However, the second two – and more particularly the latter – can be avoided by taking specific actions before warranty expiration, including:
- Sending targeted service emails using CRM (Customer Relationship Management) to existing customers and those who buy that dealer’s brand from the manufacturer.
- Providing maintenance and repair discounts for vehicles no longer covered by the manufacturer’s warranty
Dealers may also want to consider using OEM-specific inspection tools that:
- Send service reminders through email and text, including appointment hours and repair details
- Distribute mobile tablets to service staff to confirm servicing, repairs, and extra document requests.
- Provide customers with the option to arrange pickups and drop-offs
- Allow for online payments and digital signatures
- Keep clients informed about the status of their vehicles
Charging for Test Drives
As things stand, dealers act as middlemen, selling vehicles from manufacturers and representing those brands to customers. In a “traditional” market (i.e., not the current abnormality), those dealers have an adequate supply of cars on the lot for prospective customers to test before making a financial commitment.
There is an internal cost for these services that do add up over time, including, but not limited to:
- Employee hours
- Gradual wear and tear of vehicles
Not all would-be customers who test drive a vehicle make a purchase; those are sunk costs to dealers. However, those are acceptable expenses, given that some customers will purchase a car. Those sales, in theory, compensate the dealer for the time and resources spent on unrealized business.
That business model changes if dealers no longer sell cars on-site. If manufacturers were to sell vehicles directly, and a dealership’s role was to provide test drives only, every one of those interactions would become a sunken cost.
If the manufacturer-dealership paradigm were to move in that direction, dealers would need some income source to finance those test drives. The first (and most ideal) would be compensation from the manufacturer, but if they refuse, dealers might have little option to charge a fee.
While this scenario might seem unfathomable, a lot can change if dealers can no longer sell vehicles.
Facing These Challenges Requires the Best Digital Solutions
Dealerships will continue to face various challenges in a competitive and volatile market. Long-term survival necessitates adjusting to the post-pandemic digital evolution, the impacts of surging gas prices, economic downturns, and manufacturers’ potential for direct sales.
However, successfully navigating automotive industry challenges requires technologies that can help your dealership scale, discover new revenue sources, and find the right customers who want what you offer during uncertain times.
Contact us today and learn how Affinitiv’s innovative data-driven solutions can help you adapt to an unpredictable market where foresight and ongoing evolution are paramount to combating automotiv
All | September 19, 2023