How Low Will They Go? Dealers Face Plunging Profits

NEW YORK — Many dealers on the sidelines of the 2024 New York International Auto Show are concerned that after a couple years of low supply, high demand and high profits, some automakers already are overproducing cars and trucks which must be discounted to move the metal.

In turn, that leads to lower margins per unit for OEMs and dealers, and all without stimulating enough additional sales to make up for the per-unit difference — in short, a return to the Bad Old Days before the pandemic that the Centers for Disease Control reports was from January 2020 to May 2023.

“My personal bet is a reversion to the mean,” but per-unit grosses may not slide all the way back to pre-pandemic levels, says John Oyler, dealer principal of Faulkner Nissan, Jenkintown, PA.

“We know we are not going to make up for lower gross by bigger volume,” he says. Therefore, the Faulkner Automotive Group is working to improve other profit centers besides new and used gross car sales profits, such as customer-pay service work and collision repair, Oyler says. Faulkner Automotive has 33 dealerships, all in Pennsylvania.

The dealer’s comments are part of a retailer panel discussion moderated by Alan Haig, president of the dealership buy-sell firm Haig Partners, at the New York Auto Forum here.

The Auto Forum is sponsored by the National Automobile Dealers Assn., J.D. Power and the Greater New York Automobile Dealers Assn. The New York City-area dealer association hosts the New York International Auto Show, which is open to the public March 29 to April 7.

David Hult, president and CEO of Asbury Automotive Group, Duluth, GA, says in the same retailer panel he hopes dealer gross margins don’t go all the way back down to 2019 levels. He says dealership costs, including wages and floorplans have increased. “We’re hopeful grosses will be higher than 2019,” Hult says. Floorplans are akin to revolving credit that allow dealerships to purchase inventory.

Thomas King, president of the Data & Analytics Div., and chief product officer at J.D. Power, speaking at the Auto Forum, adds that it’s going to take time – maybe a few years – before the auto retail industry fully reverts to pre-pandemic business practices in pursuit of 17 million-plus light-vehicle sales annually.

King characterizes those past practices as “high production, high sales, high inventory, high discounts and small profits.” J.D. Power says those first four variables are all headed higher, and dealer profits are headed lower.

For example, retailer inventory for the end of first-quarter 2024 is an estimated 1.7 million units, up from 1.2 million a year ago, J.D. Power says. That’s also way up from 900,000 in the first quarter of 2022. But in March 2020, it was 2.9 million.

Importantly for dealers, the average retailer new-vehicle gross profit per unit was about $2,500 for the first quarter, down from $3,700 in first-quarter 2023, but still way up vs. $1,300 in first-quarter 2019, J.D. Power says. 

“Things are moving back the way they were. But they’re still very, very good. There’s still a long way to go on that journey. There are challenges ahead, but the industry is fundamentally healthy,” King says.

King also emphasizes that certain brands, which he did not identify, are in distinctly different places in terms of reverting to higher inventory, higher incentives and lower profits.

But Stellantis, for instance, is widely reported to be overstocked with high-end versions of some of its models. At the NADA Show earlier this year in Las Vegas, Stellantis executives told dealers the automaker was repricing some models, adding some incentives and reducing its mix of some high-content versions in order to reduce inventories.

The Toyota and Lexus brands already are nearing the lean-inventory end, Jack Hollis, executive vice president of sales at Toyota Motor North America, says in an Auto Forum fireside chat. For instance, the Toyota brand, is down to  a five-day supply of hybrid models, with Lexus hybrids at about a 10-day supply.

The Auto Forum chat was moderated by Jason Stein, host of SiriusXM’s “Cars & Culture” and managing director of the Presidio Group, a banking and investment group located in Denver and Peachtree, GA, near Atlanta.

Hollis says Toyota doesn’t manage to a particular days-supply number, but the company tries to manage production and inventory to avoid sharp ups and downs. “I never want to put a dealer in the position of having to say no to a product” due to oversupply, he says.

Auto industry veteran Mark LaNeve, automotive partner for Franchise Equity Partners, a New York-based private-equity firm that invests in dealerships, is frankly skeptical the OEMs can resist the temptation to overproduce.

“OEMs don’t make any money unless they ship to dealers,” he says. “Hopefully, it won’t get crazy like it did.” LaNeve retired in 2021 as vice president of marketing for Ford. He’s also a former vice president of sales, service and marketing for General Motors.