Rumors of the new car business’ demise have been greatly exaggerated, but that doesn’t mean things have been easy in 2018. Total new vehicle sales have remained steady, despite the many challenging headwinds dealers are facing.
Three interesting trends emerged in 2018:
- The shifting automotive landscape: We’ve been hearing about this massive transformation coming to our industry with the rise of autonomous, connected, electric and shared cars, but the reality is that we’re barely in the first inning. That being said, it should be noted that Tesla outsold Mercedes-Benz one month this year, and last month the Tesla 3 outsold the Nissan Altima by 6,000 units! Incredible. Uber provided rides to over 41M people this year — 34% of whom were in the 16–24 age range. GM made noise at the end of November by booking $7B in quarterly profit and then laying off 14,000 employees, closing four plants, discontinuing seven sedans and upsetting the sitting president! Mary Barra is proactively “right-sizing” GM’s business to align with this shifting environment and to prepare for an economic downturn before it happens.
- Affordability: J.P. Morgan once said, “If you have to ask how much it costs, you can’t afford it.” Unfortunately, many new car shoppers have stopped asking! With an average price of nearly $36,000, new vehicles have simply become too expensive for many Americans, as real median household incomes have remained flat. Meanwhile, used vehicle valuations continue to soar — with the Manheim Used Vehicle Value Index hitting an all-time high last month at 140.9. In 2018, a new car cost 59% more than a 3-year old car, up from a 54% gap in 2013.
- Dealer profitability: NADA reports that the average dealer’s operating profit is down 57% this year. Dealers have increasingly become employees of their manufacturers, crossing their fingers for the monthly bonus paycheck on the 5th of each month! It’s a harsh reality for many franchises, but not all. Total net profit is only down 3.5% — but this is the 3rd consecutive year of declining dealer profitability. Dealers tell me they feel like they're working harder to make the same money.
The average franchise dealer will net over $1,000,000 in profit, and the ROI capital equation remains compelling. However, expenses are on the rise and volumes are likely to recede, if only slightly, in 2019. Dealers would be smart to take a page from Mary Barra’s playbook and take a hard look at their operations to identify ways to do more with less. There are always plenty of opportunities to improve the efficiency of inventory management, advertising deployments and human capital decisions.