The Not-So-Perfect Storm: When the Auto Industry Reopens From COVID-19

There have only been a few times in automotive history that a disruption has caused so much harm to the world’s economy that has dramatically affected it. We are in one of those times right now.

 

Let us explore a few of the variables:

 

1. Dealer Inventory – Most dealers buy vehicles on credit (i.e. floor plans.) If dealerships pay off those individual cars within 30 days, they don’t necessarily accrue any interest. Inventory turn is very important. Because of COVID-19, however, not only are dealers holding used car inventory that could be 6+ months old but they are also holding NEW inventory that could end up being that old. Manufacturers will resume producing the next model year vehicles and expect dealers to take their allocations which presents a quandary. Dealers will be scrambling to get rid of their aged inventory while being encumbered by new inventory. It won’t be unheard of for some dealers to have three model year vehicles in stock.

 

2. The Race to the Bottom Accelerates – Once dealership sales departments reopen, Dealer Principals will be pressuring their sales staff to sell… sell… sell. If you thought automotive sales was hyper-competitive before, wait until every dealership is trying to offload inventory. As it stands, there is a glut of inventory sitting on dealership’s lots. What about all of those expired leases that consumers have not been able to return? Manufacturer finance companies are telling consumers that they need to coordinate those returns with the dealership while the dealerships are telling consumers they need to talk to the respective finance companies. An infinite loop that only irritates consumers.

 

3. Vehicle Values – Just like in any industry, supply and demand will definitely impact vehicle values. Dealers will find themselves in the precarious position of either taking a vehicle in on trade at a higher price than they could acquire at auction just to sell a unit. Valuations are going to become extremely trickier since there will have to be a balance between consumer expectations and transactions that are beneficial to the dealership. Dealerships will be forced to further decrease the small front-end grosses that existed pre-virus in order to move another unit thus resetting the floor plan clock. It’s almost like robbing Peter to pay Paul.

 

4. F&I Profit Will Decrease – Because of the race-to-the-bottom that existed even before COVID-19, dealers began relying on finance income in order to be profitable in sales through finance products like warranties, etc. but, most importantly, through finance reserve. No consumer with excellent credit is going to accept a marked-up interest rate when they can go with a manufacturer offer of 0% interest over 84 months unless they need the rebates to overcome negative equity. Dealers will not only have to acquire a trade-in (probably at a higher price than they could get the same vehicle at auction) but will have to have some great salespeople in finance in order to get any income whatsoever on the backend.

 

5. Digital Retailing Just Had a Growth Spurt – Consumers embraced digital retailing even prior to COVID-19. How do you think Amazon became the largest retailer in the world? Now, however, consumers have been stuck inside for months and have become even MORE reliant on being able to complete transactions online. Dealerships (or at least the ambitious ones) have responded by embracing digital retailing products and services in order to continue operations. While digital retailing may have only accounted for around 2 percent of sales in the past, consumers are now going to be more likely to desire these types of services moving forward. Services like a complete online sales transaction, pick-up and delivery in service and even mobile service at a consumer’s house or job site that are being offered right now will entice consumers into wanting those services moving forward.

 

This pandemic has not only created substantial lifestyle changes presently, it will also be a catalyst for the future of retail. In the automotive industry, it will no longer be acceptable to reply “just get them in” nor will a disparity in pricing or trade-in value be acceptable any longer. Consumers are going to not only expect but demand dealerships to adapt to their desires. Dealerships who do - and have the technology to do so – will flourish while those that believe that they can continue operating as they have for decades will find themselves either playing catch up or out of business. Is this harsh? Yes. But it’s meant to be a wake-up call. If you need some coffee. Drink it and read this again.

 

Until next time.

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