September 2021
At a recent DealersEdge Webinar, Alan Haig of The Haig Partners, provided an overview of the
Current Trends in Retail Automotive as well as the Current Trends in Dealership Buy/Sells.
While the financial performance of retail new car dealers has been amazing over the past 18
months… current conditions are raising questions about what comes next.
Retail dealership earnings have been robust, to say the least. See the Chart on Dealership
Earnings below.
What are the Conditions That Have Contributed to this Remarkable Growth in Profits:
COVID Pandemic- When businesses across the continent and the world were forced to close
their doors, few would have predicted that dealerships would not only weather the storm but
would benefit financially. For many, this was a totally unexpected turn of events.
Furlough of Employees
The immediate response for most dealers was to furlough their employees and drastically cut
other expenses as well. For most, this was the reasoned response to a drastic situation.
Vehicle sales not only slowed down but stopped for many.
The immediate response for most dealers was to furlough their employees and drastically cut
other expenses as well. For most, this was the reasoned response to a drastic situation.
Vehicle sales not only slowed down but stopped for many.
As business started to open back up with new COVID protocols, dealerships started to recall
furloughed staff, albeit slowly. Staffing at dealerships, suddenly cut to zero by the emergency,
started to creep back… but in most cases, at levels still lower than pre-pandemic norms.
People costs are a huge share of dealership expense. Short and long-term reductions in head
counts resulted huge savings. An added benefit was the ability to pick and choose (to some
extent) those that were brought back to the job. Dealership crews indeed became leaner and
more efficient.
Pent-Up Demand Aided a Strong Recovery
As the Haig Partners previous chart shows… in spite of the pandemic closures and loss of
business activity, average 2020 private dealership earnings are estimated to have improved
some $500K over 2019 results… even more if you factor back in PPP Forgiveness money.
The buying public returned and started to purchase vehicles again. Due primarily to assembly
plant COVID-required shutdowns, inventories were lower than typical (see the New Day’s
Supply Chart) and as expected, lower inventories and pent-up demand improve dealership
profits for the balance of 2020.
PPP Money
Some would argue that the government’s intervention in many business sectors was not
needed. Auto dealers certainly were doing well… PPP money or not. Without commenting on
the right or wrong of what occurred, PPP money (especially the forgiven amounts) provided an
additional financial windfall. (See the previous Dealership Profits Chart.)
Chip Shortage
The world-wide shortage of chips added a new factor impacting vehicle production at the
OEMs. In 2020 it was the COVID shutdowns restricting the inventory. In 2021 the main driver
to lower dealership inventories is the shortage of computer chips to power the many features
common to today’s new vehicles.
As the Haig Day’s Supply Chart shows dealer inventories of new cars have shrunk from pre-
COVID norms of 80 days in 2019 to just 32 days as of the last weekly numbers. With the
reduction of supply and a robust consumer demand, new vehicle gross profits have soared.
(See the New Vehicle Gross Profits Per Vehicle Chart).
It appears that the COVID after-effect and the chip shortage have combined to drive 2021
dealership profits even higher… so far. It truly has been a remarkable and unexpected profit
improvement period for North American franchised auto dealers.
Is This Party Close to Being Over?
Predictions of what the future will bring are more than difficult. Prior to 2020 few, if any,
predicted the financial damage that COVID brought to the U.S., Canada, and the World. And
DealersEdge does not recall anyone sounding the alarm over a pending chip shortage and how
much that would impact vehicle manufacturing and dealer inventories. So this is more of a
question, than a prediction. Our ability to predict the future is no better and anyone else’s.
However, the news of OEM factory stoppages seems to get louder each day. Some OEMs have
been reported as saying that they do not expect this production limiting factor to improve
until 2023.
If this means a further reduction in day’s supply of new vehicle inventory, how will this impact
dealership financial health in the last few months of 2021?
2021 dealership profitability has grown largely because you were able to sell down your
inventory and have not added in the cost of replacing those sold units. Dealerships
commanded much higher gross profits, while also enjoying lower costs of doing business.
But… what happens when the day’s supply drops further and there are just too few or no
vehicles to sell. Gross profit per New Vehicle Retailed will undoubted still expand. However, if
you have nothing to sell the amount of gross profit you can demand means little.
Added to the reduction to gross profit dollar totals, dealerships will also suffer a loss of F&I
income as well as related fixed operations sales and profits.
Of course, this can all be rectified if the chip shortage goes away, and the OEMs restart the
many idled vehicle assembly plants. When the shortage eventually goes away, we will then be
back in a pent-up demand situation with an inventory that is still universally reduced. Dealer
inventories will take some time to rebuild. So it appears we could be in for a whipsaw market
until this disruption is cured for the long-term.
Is there Anything Dealerships Can Do Now?
The car business has always been subject to boom-and-bust situations. In the over 40-year
history of DealersEdge, we have witnessed and experienced many.
The answer is almost always the same. Concentrate on those areas that are producing profits.
Seek out inefficiencies in your processes and squeeze more net profit out of those things that
are less impacted by new vehicle inventories.
It is only natural to ignore the fine points of dealership management when you are making
money by the truck load. In boom times the car business appears to be easy and all that is
needed is for you to open the doors and allow the consumer in to spend money.
This is when you and your best managers can shine. Challenge your teams not to complain
about what they cannot control… but to do everything they can to improve the factors that
are in their control.
In preparation for this presumed downturn, DealersEdge will be focusing in the coming
months on workshops that will help you navigate the rocky and uncertain near future. And if
the downturn turns out to be a false worry… you’ll still benefit from a leaner and more profit-
efficient operation.
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This post is based on materials and comments supplied by Alan Haig of The Haig Partners during a DealersEdge Webinar on September 9, 2021. Alan expresses a willingness to respond to your questions and comments. alan@haigpartners.com
Comments to Jim Muntz at DealersEdge can be addressed to jim@dealersedge.com