Are Dealers’ Good Times Coming to an End?
Fixed Ops Profitability could be the Saving Grace for the Future of Auto Dealerships
If you’re feeling haunted by high interest rates, slowing new vehicle sales, a potential recession, and falling profits, chances are you’re not alone. Automotive News asked the question many in the industry are thinking in a recent article titled, “Are dealers’ good times coming to an end?”. A 2023 Industry Outlook Survey of 264 dealership executives revealed that 44% of respondents believe their profits will worsen in 2023. Since the onset of the pandemic, many dealerships experienced record growth and profitability in both 2020 and 2021. In fact, the National Automobile Dealers Association found that the average U.S. franchised dealership reported a $4.1M pretax profit in 2021.
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Top 5 Issues Plaguing Fixed Ops Profitability
Many dealership executives believe rising interest rates, potential recession, supply chain and chip issues, and vehicle affordability challenges, could ultimately disrupt their profitability this year.
High Interest Rates
In early February 2023, the Federal Reserve raised its benchmark interest rate by a quarter percentage point, making the target range 4.5%-4.75%, the highest since October 2007, with the looming potential for future increases. The rising federal interest rate trickles down to directly affect the demand for vehicle purchases.
“The average used-vehicle loan arranged by a dealership in May carried a $546 monthly payment, an 8.2 percent interest rate and a 70.8-month term, according to Edmunds. That rate was up 0.2 point from April and 0.5 point from May 2021.” –Automotive News
Dealerships offering subsidized interest rates will find it to be a costly marketing incentive. With higher vehicle prices and interest rates paired together, one needs to give to make vehicles affordable for the average consumer. Many experts are expecting more rate hikes in the coming months, so consumers hoping to wait it out for rates to drop will find that it may be best to shop sooner than later.
Potential of a Recession
There are several factors that lead many to believe we are on the cusp of a recession including record high gas prices, an annual inflation rate of 8.2%, and volatile stock markets. What does this mean for the automotive industry? For most consumers, the threat of a recession means scaling back spending, which often includes making large purchases such as a new vehicle. What we have found is that typical consumer behavior during a recession may not have typical impacts…here’s why.
A 2023 recession would look nothing like 2008, where new vehicle sales fell almost 40%. In 2008, there was far more supply of new vehicles than the demand. In our current environment, dealerships are coming off the supply chain crisis and only beginning to fill their lots back up. What we’ve seen is that the demand for new vehicles has been exceeding the supply, a key differentiator between present day and 2008.
“It is now more important than ever to ensure a dealerships price is optimized. That does not mean inflated. It means that we are collecting the most profit possible while still being market conscious. With things being uncertain it is best that a dealership maximizes every opportunity with confidence”. – James Grogan, Senior Vice President of Client Success | Dynatron Software
A looming recession that weakens the demand for new vehicles would not drive down car prices as in 2008, and even shortly in 2020. While new car inventory is still catching back up to normal, a recession may scale back the demand for a lesser supply. In turn, inventory may have a chance to continue to build back up.
“A recession may help to increase inventory as buyers pull back on spending.” –CarEdge
Supply Chain Crisis
While it is clear the supply chain crisis has greatly improved as we head into 2023, many are still experiencing chip shortages as problems still exist. Manufacturers have resorted to shipping vehicles without certain features due to the inability to source the semiconductors needed. Analysts at AutoForecast Solutions predict the chip shortage will result in nearly 3 million fewer vehicles being built in 2023.
“The market clearly prefers upper-trim vehicles with the latest infotainment and safety technology, which is great, because there’s more profit at the higher end. But adding those features requires more chips.” – Automotive News
As the push for EVs continues, the vehicle segment is feeling the worst of the effects as they use nearly 30% more chips than traditional internal combustion engines, according to Vehicle Service Pros. In August 2022, President Joe Biden signed the CHIPS and Science Act into law, which gave U.S. chipmakers grants and tax breaks. As the relief shows up in supply chains, the shortage is expected to ease over time.
New and Used Vehicle Supply
In the last two years, new inventory levels reached record lows due to supply chain and parts issues affecting production. Many dealers are rethinking their used vehicle strategies as consumers are looking to purchase less costly vehicles. 75% of Automotive News’ survey respondents say they expect a greater emphasis on used vehicle business even after new vehicle supply normalizes.
“…dealers and automakers must figure out how to solve two problems at once: how to sell vehicles that consumers don’t want and how to deal with the shortage of popular models.” –Hotcars.com
In order to ease these strain on sales volume, many dealers are adjusting their plans to accept less gross profit per vehicle, paying less for trade-ins, and cutting retail used prices.
Consumer Profile Changes
Moody’s Analytics Vehicle Affordability Index shows that the average new vehicle costs what the typical American makes in a year. That average transaction price reached a May 2022 record of $45,502, according to J.D. Power. Despite the fact that the median household income jumped 4.78% from 2022 to 2023 at $94,300 for the average American, it still doesn’t accommodate the price tag of a new vehicle.
According to J.D. Power Vice President Dave Sargent, “It means they must buy used vehicles — or wait. And when inflation is high, as it is now, the market can eventually run out of people who can afford a new vehicle.”
“In the last few years we have learned that dealers do not survive on profitability from car sales but profitability from their Fixed Operations. This rings true now more than ever. As consumers become more tight with their spending, the essentials become more important than ever. Well what is more essential than ensuring your vehicle can safely take you where you need to go. With that being said the ability to drive gross profit through Service and Parts is more important than ever. If a dealer does not have a clear and focus strategy for this then 2023 will be challenge.” – James Grogan, Senior Vice President of Client Success | Dynatron Software
What do these volatility in the market mean for dealerships? The answer is still unclear, but what we do know is that there is something your dealership needs to be doing to pick up the slack you may be experiencing in the sales department.
Increase Fixed Ops Profitability Through ELR Price Optimization
Can Fixed Ops Profitability Save Your Dealership?
While things like high interest rates, slowing new vehicle sales, a potential recession, and falling profits are on everyone’s minds, there’s still a silver lining to be found.In CNBC’s article “10 Auto Industry Predictions Investors should Keep an Eye on this Year”, predicts service operations volume and revenue to climb. The lack of vehicle inventory and the rising purchase prices are leading many to hold on to their vehicles longer than ever before.
Fixed Ops profitability is expected to largely offset declines in the sales department. Turning to the Fixed Ops Department to pick up the slack is what every dealership should be doing to ease the Sales Department strain.
The road to meeting your goals runs through your Service Department and price optimization is your ticket maintaining and even increasing your revenues in 2023! Dynatron’s PriceSmart solution can help you increase your ELR! Typical dealers see significant results within 90 days, and 5x-15x ROI each year they work with us.