Temporary, Or ‘New Normal?’ Naturally, Dealers Prefer The Latter

It’s well documented the nation’s auto dealers have low supply and high demand working in their favor — but that’s not all dealers have going for them, so consumers should expect high prices to persist.

To be sure, new-car production will begin to get back to normal, maybe as soon as next year or so, as supplies improve for computer chips that have been in short supply, analysts said. Even then, it will take time for the U.S. auto industry to catch up with millions of cars and truck worth of pent-up demand.

But eventually, there will come a day when today’s record-high prices moderate somewhat. With that in mind, U.S. dealer groups are already looking ahead, and working on ways to keep right on earning higher margins compared with before the coronavirus pandemic.

For example, Michael Manley, CEO of AutoNation, says the group is selling a higher ratio of used cars to new, and sells more finance and insurance products, like extended-service contracts.

Gains in those areas tend to “decouple” profitability from new-vehicle sales volume, Manley said, in a recent conference call to announce first-quarter earnings.

“Performance efficiency, and effectiveness in these areas, in my view is sustainable,” he said.

In support of higher margins, dealer groups like AutoNation and its competitors have held back from hiring back all the positions they dropped early in the pandemic. They’re keeping a sharp eye on costs. And by making greater use of digital retailing, they’re selling more vehicles per salesperson.

AutoNation, Fort Lauderdale, Fla., reported April 21 that its selling, general and administrative expenses represented 56.6% of gross profit in the first quarter of 2022, down from 62.7% a year ago. Net income was $362.1 million, up 51%.

In a separate call on April 20, Lithia Motors and Driveway, Medford, Ore., said its first-quarter net income more than doubled vs. a year ago, to $342.2 million. In addition to the overall sellers’ market driven by low supplies and high consumer demand, Lithia’s profits also increased in part because of acquisitions.

Dealers argue that despite high prices, customer satisfaction has improved with the shift to digital retailing, and customers ordering cars with the specific features and options they want, instead of compromising on whatever the dealership has in stock.

At the same time, it’s clear high prices have also prompted many customers to postpone purchases. It’s also clear affordability is an issue, especially for customers who don’t have the highest-rated credit.