2021/03/31 Strategy Analytics: COVID-19 - The Gift That Keeps on Giving to Car Dealers

Some observers of the automobile industry would have you believe that it is caught in a downward spiral driven by semiconductor and foam shortages, EV convulsions, a decline in commuting, and COVID-19 fueled dealer visit hesitancy. The reality is something quite different.

These are solid selling salad days for car dealers. Even as car makers are temporarily closing plants in the face of supply chain challenges, dealers are raking in the bucks.  An automotive retail market that tip-toed to the brink of oblivion a year ago is surging forward profitably on the strength of rising retail prices for new and used cars and limitless demand.

COVID-19 has ransacked the ride hailing market, dimmed mass transit, trashed the car rental industry, and stressed taxi drivers to the breaking point. But new car dealers are sitting pretty.

New car dealers, generally, and Tesla Motors, in particular, have seen the greatest benefits from the onset of the global pandemic beginning approximately one year ago as car plants and dealerships re-opened.  The flight from mass transit back to personally owned vehicles has amped up demand and depressed inventories.

Depressed inventories of new cars has stimulated interest in used cars, all of which has combined to put new car dealers in the driver's seat.  Wes Lutz, President of Extreme Dodge in Jackson, Michigan, and former Chairman of the National Automobile Dealers Association put it best many years ago at an industry event: “I sell new cars to legitimize my used car business.”

Wes is just like thousands of other red-blooded new car dealers across the country.  Every year, 40M used vehicles change hands, dwarfing the 17M or so new cars that are sold.  New car dealers account for a substantial portion of that volume and, in most cases, account for some of the highest quality inventory thanks to vehicles coming back to the dealership as leases terminate. Most important of all, though, the profits are higher in used cars.

While recent news accounts have noted the drumbeat of plant closures throughout the industry due to shortages of chips and seat foam, the churn of used cars continues and prices are up.  Cox Automotive’s Manheim division reports:

“Wholesale used vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) increased 3.74% in the first 15 days of March compared to the month of February. This brought the mid-month Manheim Used Vehicle Value Index to 175.5, a 23.7% increase from March 2020.”

That’s really good news for dealers.  But the news gets better.  Chatting with one dealer principal this week I learned that in spite of a rapid pivot to vehicle deliveries at the outset of the pandemic and an outbound-focused model created a year ago within days of nationwide dealer shutdowns – this principal discovered something amazing: Customers WANTED to come to the dealership.  They didn’t want cars brought to them.

Turns out, there’s nothing like seeing, feeling, and driving that potential new car.  Shopping from the couch may be good enough for some, but for most it is not a substitute for an on-site visit. Once dealerships re-opened, customers returned to showrooms.

The onset of electric vehicles is another dealer-threatening narrative.  Interest in EVs spike during the early days of the pandemic with multiple car makers announcing plans to terminate production of internal combustion (ICE) vehicles within 10-15 years. New car dealers would need to get on board the EV train or it would leave the station without them, right?

Well, the leading makers of ICE-based vehicles are not putting the advertising dollars behind their new EVs.  It’s all talk and no co-op, so each successive EV launch, be it the Audi e-Tron or the Volkswagen ID.4 is met with indifference.  Dealers can’t be blamed for the lack of consumer enthusiasm. Dealers follow the money.

Tesla Motors has no complaints. Looking back on 2020, Tesla was one of only two new car makers showing growth for the year.

So, don’t cry for your local new car dealers.  Stop in and take a look at the goods. They uniformly faced an existential crisis just one year ago – but the picture has clarified and business is looking rock solid for the foreseeable future.  Turns out chip and foam shortages may be bad for car makers, but they’re great for car sellers. We all, including dealers, hope the pandemic goes away, but while it's here the good times are rolling...off of dealer lots.