The Tides of Change: How Market Normalization is Reshaping Auto Retail Profits
Babak Rosenthal Mohammadi
? General Manager | Automotive Retail & Fixed Ops Strategist | Profitability & Process Optimization | NADA Academy
The auto retail industry has ridden a wave of unprecedented profits in the last few years, a byproduct of the pandemic's sweeping impact on supply chains and consumer behavior. As we step into the post-pandemic era, the Q3 2023 reports from the top six publicly held auto dealers—AutoNation, Penske Automotive Group, Lithia Motors, Sonic Automotive, Group 1 Automotive, and Asbury Automotive Group—paint a revealing picture of a market in transition.
Inventory Levels and Consumer Urgency: A New Equilibrium
During the pandemic's peak, dealerships were thrust into a seller's market, where inventory shortages and heightened demand allowed for vehicles to be sold at or above MSRP. This scarcity-induced urgency led to a surge in profits per unit, a trend that was unsustainable in the long run. As reported in the latest quarter, the normalization of inventory levels is bringing balance back to the market. This shift is reflected in the reduced gross profits per new car unit, signaling a return to traditional dealership strategies and consumer behaviors.
Competition Heats Up
With the day supply of inventory increasing, competition among dealerships is intensifying. No longer facing an inventory drought, dealers must now pivot to attract buyers who have regained the luxury of choice. Strategic discounting and value-added services are becoming paramount to maintaining sales volumes and customer interest.
The Pricing Power Pendulum Swings
The Q3 reports underscore a significant shift in pricing power back to consumers. As the urgency to purchase vehicles at high premiums wanes, so does the leverage dealers once held. This new dynamic is leading to a squeeze in profit margins, evidenced by an average 18.3% decrease in new vehicle profits across the board.
Source: The data is from the Q3 2023 reports from the top six publicly held auto dealers see the links to the reports.
Adapting to the New Normal
Dealerships are now facing the critical task of adapting to this new normal. Enhancing sales processes, bolstering customer service, and implementing rigorous cost-control measures are just a few strategies that dealerships must consider to thrive in a more competitive market.
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Frontline Insights: Dealership Responses
The frontline of this transition is where the most insightful strategies emerge. Dealerships that continue to innovate, focusing on customer experience and operational efficiency, will likely navigate this shift more successfully. The Q3 data reveals that while new vehicle profits have taken a hit, the used vehicle segment and F&I services remain valuable revenue streams, albeit with decreases. These areas offer a buffer, allowing dealerships to diversify their profit strategies.
Looking Ahead
As we forge ahead, the auto retail industry's landscape is set to evolve further. Dealerships that maintain a pulse on market trends, embrace change, and prioritize customer relationships will be well-equipped to steer through these shifting tides. The key to sustained profitability will lie in a balanced approach that values both sales volumes and profit margins.
In closing, the Q3 2023 reports are a testament to the resilience and adaptability of the auto retail industry. They serve as a clarion call for dealerships to reevaluate their strategies, innovate, and remain agile in the face of a market that never stands still.
The data was collected from the following sources:
This analysis is based on the reported figures and trends observed in the Q3 2023 earnings summaries of these dealerships.