Dealer Profits Soaring

We now live in a world where up is down, and down is up. Dealerships have overcome some crazy obstacles over the past two years - Covid restrictions, low consumer confidence, chip shortages, inventory shortages, staffing shortages, and so much more. Surprisingly enough, dealers have managed to keep up amid the chaos. 

The current situation: Inventories continue to find new lows, and dealers are getting  worried... It's frustrating for them and for customers. On average, a dealership now has 20-to-25 new vehicles per lot compared to the hundreds it would usually have.

Many large dealer groups’ inventories, such as AutoNation, Lithia Motors, and Penske, have hit record lows. Penske revealed that it has a 12-day-or-less supply of new vehicles, and that seems to be on the higher end compared to others. AutoNation said it recently had a 10-day supply of new cars. These numbers are way down from what they were just a year ago. 

One side says that the industry has ‘hit rock bottom,’ and things are about to turn around. The other side is expecting the current problems to remain well into next year and beyond. Truthfully, no one really knows when this craziness will end. Most can assume it won’t be magically fixed even when supply starts to catch up.

But there is one plus side to this crazy market. Dealers are seeing max profits. The numbers don’t lie: current profits are at least double, and in many cases triple, what they were last year at this time. It’s basic economics. When demand increases and supply decreases, prices will skyrocket.

Although price inflation is providing record profits right now, there are concerns that it’ll scare off new customers who are in the market for a specific make/model or need to stay under a certain price point. The average price of a new car in 2021 is $45,031. Before the shortage, it was relatively easy to find a new car under $20,000, that is no longer the case. While there are still a few cars left at this price point, soon this will be history. 

Sticker mark-ups and decreased factory incentives have facilitated the rapid  increase in dealer profits on new cars. With buyers scrounging for cars, new inventory doesn’t last longer than a day or two once it is dropped at the dealership, which means many consumers have been  opting for used vehicles, pushing those profits up substantially as well. 

Interestingly enough, buyers don’t seem too bothered by the increased vehicle prices because they’re being offset by historically low interest rates and generous trade-in values. Plus, I mean, If you need a car, you need a car. Do you really have a choice? 

Even if buyers don’t want to spend big money on a car, dealers are still getting their money.  Service departments are busier than ever. People can't buy new cars, so they're spending more on maintaining and servicing their current vehicles, especially as we go into winter. They may choose a major repair over a full vehicle replacement if they can’t wait two months for a new car to be delivered. That means a boost in fixed ops revenue as well, which is where dealers really make their money.

We know that this Covid/shortage wave won’t last forever, but for now, let’s just celebrate the record profits. It’s been a wild ride, and it is not over yet!