Dealers Take a Fresh Look at Cause of Rising Costs, Dipping Profits

Dealers probably don’t need a report to tell them that their costs are up and profits are down, but they may be comforted to know they are not alone.

The recently released Cox Automotive Dealer Sentiment Index shows the cost index hit an all-time high of 77 in the third quarter.

Here’s how the responses are scored: Dealer responses are weighted by dealership type and sales volume to closely reflect the national dealer population. Data is used to calculate an index, wherein a number over 50 indicates more dealers view conditions as strong.

But this rough patch where the majority of dealers believe the cost of running a business is growing, not decreasing — doesn’t mean dealers’ profits will remain neutral for the long haul.

“I’m just going to say this. Dealerships are resilient,” Skyler Chadwick, director of product consulting at Cox Automotive tells WardsAuto. “Dealerships figure out a way to get through things such as this. And I think one of the reasons why dealerships get through these things is partnerships. We at Cox Automotive think of ourselves as partners.”

And that gives Cox analysts a wide, historic view of the retail auto market.

“For more than two years now, after reaching peak profits in 2021, U.S. automobile dealers have viewed the overall market as weak,” says Jonathan Smoke, chief economist at Cox Automotive. “The retail auto business today is working through a lot of uncertainty, with the coming national election front and center, and also expectations of shifting market dynamics. U.S. dealers are feeling the effects of these dynamics in the market today and their expectations for the future.”

When asked, 44% of dealers noted “political climate” was a factor holding back business, up from 36% in Q2 and 27% one year ago. The 44% in Q3 is the highest percentage recorded for political climate since the factor was added in 2019. Franchised dealers are particularly concerned about how the political climate is impacting their business, with 49% noting it is a factor holding them back.

Dealers who talk with WardsAuto point to the tentative agreement with the dockworkers’ union that would raise workers’ wages by 62% over the life of the 6-year contract as another factor raising prices. Analysts say more than $37 billion of vehicle imports and about 70% of U.S. auto parts come through the U.S. East Coast ports.

So, what should dealers do to ease the strain on their bottom lines?

“I think dealerships really need to step back and really look at the big picture,” says Chadwick. “There are a lot of things that dealerships can do that I think they’re not doing.”

One example Chadwick gives is looking carefully at the software they currently use and determining if it’s a worthwhile investment for them.

Tully Williams, fixed operations director, The Niello Co., did just that. He used an AI software program to expedite telephone calls in the service departments of the 12 California-based dealerships.

“It failed miserably. Our employees, our customers, did not like it,” he tells WardsAuto. “They want to talk to a human being.”

The software he now uses routes callers who want to make appointments to agents employed by the software company with which he contracts. Those who want to speak with a service advisor are sent to the correct person.

“The agents convert those calls into appointments or sales,” Williams says. “That takes those calls away from our service writers so they can be more successful. This has been a huge success.”