Time for a profitability reality check

Hey, everyone. I polled my audience about whether they would buy a Chinese car if — in theory — it was cheaper and they could save $200/mth. The results were… interesting, with ~40% saying that they would. Will be a fascinating case study in consumer adoption if (when) Chinese cars make it to the U.S.

—CDG

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Today’s Biggest News

What’s Next for Dealership Profitability?

If I had a dollar for every time I heard an industry expert say we’re in a period of “normalization,” I’d have enough money to buy a Cybertruck on the secondary market. It seems we’ve all accepted it as universal truth: We’re in an era characterized by getting back to normal after a frothy few years post-Covid.

But what does normalization actually mean for the dealers doing their books every month? How can we leverage data to understand where dealer profits might go once we’re done with “normalizing” and things are just…normal?

That’s what we’re talking about today: the reality of dealership profitability. Let’s dive in →

Reality #1: Things could be a whole heck of a lot worse. As my friends at Haig put it in their recent trends report, “Life is getting harder for auto dealers, but it’s still pretty darn good.”

Let’s unpack what’s making life harder for auto dealers:

• Profits per dealership for publicly traded retailers fell an estimated 23% in 2023, Haig reported.

• Vehicle supplies continue to increase (see below), which can lead to a ramp up in dealer discounting and manufacturer incentives—aka lower profits per vehicle. That can also precipitate higher floor plan and advertising costs for dealers.

• All in, this inventory turnaround was the biggest force behind last year’s profit declines…giving up pricing power meant the average gross margin per new vehicle retailed fell 27.1% to $3,354.

So what gives the experts reason to believe life is still pretty darn good?

• Even that 23% decline in profit isn’t all that bad, historically speaking. The average dealership’s net pretax profit last year was still more than 2.5x what it was in 2018.

• Inflation is falling, GDP is growing, and consumer sentiment is up (more on that in a sec), suggesting the overall US economy is in fighting shape.

• More favorable pricing and expectations that the Fed will begin cutting interest rates this year could also pull consumers back into the market after being priced out for quite some time. By many accounts, we’re through the worst of the affordability crisis.

• And with that, new vehicle sales are trending in the right direction…

Bottom line: Understanding this market is all about understanding nuance. Which brings me to…

Reality #2: Brand makes all the difference. A dealer with a portfolio of Toyota stores, for example, is facing an entirely different set of circumstances than a dealer with one Stellantis store.

Breaking it down:

• Toyota and Lexus have again cemented top spots on the list of most desirable brands, according to Presidio’s rankings (makes sense—affordability issues make shoppers prefer reliable vehicles that aren’t expensive to maintain). Both brands reported significantly higher throughput last year—1,312 new vehicles per store for Lexus, and 1,558 per store for Toyota.

• And two brands on the up and up: Honda and Subaru, each of which climbed several spots in desirability rankings.

This graph charting days supply by franchise shows just how big the jump from the top performers to the stragglers really is →

Another trend impacting dealer profitability: category. Luxury players have largely outperformed their downmarket peers in retaining pandemic-era profits. Why? Luxury stores are more resilient to the negative headwinds impacting autos right now—think about their bread-and-butter clientele. Are they all that concerned with a $3,000 difference in price when they’re buying a $100K car?

That resilience earned the average luxury dealership a hefty gross profit of $6,583 per new vehicle in 2023. While that’s down a bit annually, it’s well above the average domestic brand’s $3,132 in per-vehicle profit last year.

Reality #3: Consumer sentiment gives us a clue re: the future. In January, the Consumer Sentiment index reached 79…the highest level since July 2021 (those were the days). And the jump in consumer sentiment from December to January was the highest monthly increase ever observed.

So what does that mean for dealers? Consumer sentiment and seasonally adjusted annual rate often move together. When people feel good about their finances and the economy, they’re more likely to make big purchases…like cars.

All said and done, normalization isn’t a bad thing. The outlook for dealers is still pretty positive, even if profitability is a little harder to come by than it was a couple years back. 

This Week’s Episodes of the CDG Podcast

Can AI fix a broken credit system? Alex Rouse, VP, GM Auto at Upstart, explained that and so much more—including the most glaring inefficiencies in lending, the biggest modern challenges for dealers, and whether 40% of US drivers are overpaying for car loans. Check it out here.

What’s it like selling 1,200 cars in a slow month? Julie Herrera, President of IDEA Auto Group, broke down her playbook for me. Her journey from being totally broke to becoming a millionaire Toyota dealer is really inspiring. Listen to it here.

Listen to the episodes here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts. And thank you to Auto Hauler Exchange, Upstart, and CDK Global for making these episodes possible.

Together with Fullpath

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The data is clear: Car shoppers are spending more time on the internet than on the dealer lot. So how do you maintain personal relationships with your customers? 

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• How do we do it? Using the industry’s leading Customer Data Platform (CDP). Fullpath’s platform unifies all the data sources in play at your dealership.

• The result? Data-rich profiles for every individual shopper and a richer customer experience. Using Fullpath, your dealership can create exceptional experiences and drive valuable, long-lasting customer relationships.

Click here to learn more about Fullpath’s CDP and book your personalized demo today.

The Latest from CDG Media

For those who tuned into my first episode of the CDG Market Update, brought to you by Edmunds—hope you got a lot of value out of it. Expect a monthly segment moving forward, covering all the market-moving insights into the auto industry.

Also, dealers: As part of this launch, Edmunds is offering 50% off for 90 days on Edmunds Premier, helping you reach more shoppers. Take advantage today.

Have any feedback on the show? Hit reply and let me know (I read all replies).

Highlights from the CDG Job Board

We’ve got tons of great jobs hitting the CDG Job Board right now. Here are some standouts for anyone looking for their next move—today, CDG Jobs: Startup Edition.

• BizzyCar is a tech company that develops software for automotive dealers. Want to help them make customer experience the best it can be? Apply to become their VP of Product, Account Executive in Orlando, or Account Executive in LA.

• Traxtion is a software-forward company focused on helping dealerships sell more alignments and tires. Think you could help them further the mission? Apply to become their Director of Marketing.

• TradePending makes software for over 6,000 car dealerships. Want to make it 6,001? Apply to become their Customer Success Manager.

Looking to hire? Add your roles today—it’s 100% free.

The Backlot

• Porsche says the US is the “backbone” of its recent sales momentum (FYI, sales hit a new record last year).

• Lucid Motors is raising a further $1 billion from its biggest investor, Saudi Arabia, in a bid to stop the financial bleeding.

• Fisker has had a tough start to Q2: The NYSE plans to delist Fisker stock due to “abnormally low” share prices, Tesla is reportedly no longer accepting Fisker vehicles as trade-ins because of market volatility, and Fisker announced it had scrapped a deal with a major automaker (thought to be Nissan).

• These two brothers in Mississippi just joined Forbes’ billionaires list thanks to their booming investment in the tire and dealership businesses.

• This was a great look at what makes Toyota one of dealers’ favorite brands.

• It looks like Ford’s aggressive price cuts are working.

Thanks for reading. One more thing: I was on All the Hacks to talk about buying, selling, leasing, and trading in cars—really all things cars. Give the episode a listen.

See you next time.

—CarDealershipGuy

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