Winners and losers of the car market recovery

Hey, everyone. Here’s a question for you: You’re back in the car you learned how to drive in, and you have a cassette tape adapter (real ones know, 😉). What’s the first song you’re playing? Hit reply and tell me—best submission gets added to the playlist.

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—CDG

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Today’s Biggest News

SUVs Are Winning the Post-Pandemic Sales Recovery

Picture this: It’s the spring of 2020. Everyone is watching Tiger King to distract themselves from reality—our industry has been thrown into chaos. In February of 2020, auto sales in China fell 71%. By April, sales were down 47% in the US and 80% in Europe. And we were only starting to hear whispers about the forthcoming chip shortage. 

Things were not great.

But there was good news ahead. The auto industry has regained its footing in 3.5 years of ambitious, tenacious growth. And now? US new auto sales are on the way to recovering to pre-pandemic levels.

• US light vehicle sales in the third quarter came in at 3.8 million units, up 17% annually. 

• The seasonally adjusted annualized sales rate for September was 15.2 to 15.5 million vehicles, up from 13.7 million vehicles a year earlier, according to GlobalData.

• And while total inventory last quarter was up a significant 60% from the same time last year, it was still 35% lower than pre-pandemic levels in 2019.

There’s been one category that’s dominated the rest in this post-pandemic recovery, though. And that’s SUVs. Makes sense—inventories shrank sharply during the pandemic and the subsequent semiconductor crisis, leading automakers to focus on high-profit opportunities…like large SUVs.

The numbers don’t lie: US retail sales are projected to come in at 15.4 million units this year, up from 13.9 million in 2022. According to registration data from the first half of 2023, full-size utilities accounted for 3.5% of the cumulative market (up from 1.9% a decade ago and 2.6% pre-pandemic).

Breaking it down by model, via S&P data:

• For the mainstream players through the first half of 2023, year-over-year registrations for the Ford Expedition were up 44%, Chevrolet Suburban were up 31%, and Chevrolet Tahoe (the segment leader) were up 4.5%.

• Some outliers worth noting? The Jeep Wagoneer is down 33% and the Grand Wagoneer has fallen 39%. GMC's Yukon has slid 23%.

• And in luxury: Mercedes-Benz is showing momentum with its electric EQS model, which helped offset a 16% decrease in GLS sales to lead Mercedes to overall growth in full-size SUV sales. BMW, on the other hand, tallied a 4% sales drop for its X7 model.

Something to keep in mind: A lot can change in the span of six months, and we don’t have a complete picture of the data for the back half of 2023 just yet. What we do know, though, is that inventories are up over the last month for several mainstream SUVs including the Nissan Rogue, Chevrolet Equinox, Hyundai Tucson, and Ford Escape.

What do you think lies ahead for SUV sales? Tell me what you’re seeing on the lot:

This Week’s Episode of the CDG Podcast

Why hasn’t the affordability crisis crippled the car market? I asked Alex Vetter, CEO of Cars Commerce, and this was his answer: It all comes down to not underestimating the importance of the car for all American consumers, no matter how high interest rates get or prices climb. Want to hear more about Cars Commerce’s $1.5 billion playbook, from acquisitions to tech strategies and everything in between?

Listen to the episode here, and subscribe to the CDG Podcast on Apple, Spotify, or wherever else you get your podcasts. And thank you to the sponsors of this CDG Podcast episode: AutoFi and Cars Commerce.

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In Other News

The Dealers’ Case for Marketing Maintenance

It seems like the strategy of “Hey Siri, remind me to get an oil change next week” isn’t quite working. According to new data from CARFAX, 29% of Americans are behind on oil changes and 44% haven’t had their tires rotated as required. And one in five Americans are behind on both services.

Breaking it down by state:

This creates a potential opening for dealers. As profit from selling and financing declines for some dealers (margin compression), service lane business could boost the bottom line—that is, if American drivers can be effectively sold on the necessity of regular maintenance.

This is part of a telling trend: During the third quarter, several auto groups cited service and parts revenue as a buoy for their businesses, thanks to vehicle complexity, a recovering technician work force, and technological innovations. FYI, car repair costs were up almost 20% annually earlier this year, putting them among the largest annual price increases of any household good or service at the time.

Strike Impacts Start to Materialize

“We wholeheartedly believe that our strike squeezed every last dime out of General Motors,” UAW President Shawn Fain said as the union’s tentative deals with Detroit’s Big Three started to take shape. Turns out…he might have been right.

The UAW’s tentative agreements, which include a 25% general wage increase over four years, look poised to raise labor costs considerably for automakers. Ford, for example, said the UAW contract would add $850 to $900 per vehicle in additional costs and shave 60 to 70 basis points from its margins.

And those additional costs will have to be offset somehow. But it seems the major manufacturers aren’t too worried. Already, the Big Three have voiced confidence in the long-term effectiveness of their cost-cutting measures. And for what it’s worth, the Big Three might not be at a labor-cost disadvantage for long—some experts have suggested that the UAW’s big win on wages will likely put pressure on non-union automakers, too.

Overheard at the Dealership

What are dealers really paying on their inventory lines of credit (floorplans)? Here’s an anonymous message I received recently:

“Many dealers are clueless about their true [floorplan] interest rate because of the games these lenders play. I saw a lender with a base rate at 11.25 in July and I believe they’ve increased since to 11.75.

The way they list interest on most documentation is B+4 (4 is just an example). Meaning their base interest rate of 11.25+4. Many people misunderstand this as paying a rate of 4%.

While many of your [followers] seem to be from people that are in tune with their financials I also see a few saying “probably around” or others throwing out numbers so small that they’ve either got massive institutional lines or they’re clueless about their true cost of capital.

If you have a LOC with one of the big players you’re paying north of 10% at minimum.”

My thoughts on this: I fully agree with this. Floorplan rates haven't been this high in our industry in a very long time. There are some dealers out there paying over 15% interest on inventory right now — insane numbers. That means they have to super lean and tight operations in order to keep their businesses from getting dragged down. The name of the game is efficiency, thanks in large part to where rates are today.

Have unique insights into the car business? Shoot me an email or DM on X/LinkedIn!

The Backlot

• Taiwanese electronics giant FoxConn (they probably make the chip in your iPhone) wants to get into EV production.

• Carvana is all about efficiency after reporting an 18% slip in revenue in Q3.

• Subaru will join Tesla’s NACS charging port system in 2025.

• Hertz is pulling back on its massive EV plans. Plummeting resale value and high repair costs of its EVs have turned out to be significant headwinds.

• Wholesale used vehicle prices (on a mix, mileage, and seasonally adjusted basis) fell 2.3% month-over-month in October.

• Here’s a useful rundown on the latest in the labor market. The bottom line? Job growth slowed.

Thanks for reading. I’m curious: What’s a model, SUV or otherwise, that you’re consistently surprised by when it comes to sales? I’d love to hear from you. Hit reply and tell me what you think.

—CarDealershipGuy

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