Survey shows dealers increasingly worried about the economy

Dealers are increasingly worried about the economy and the possibility of recession even as improving inventory levels have them more optimistic about the new-vehicle business in 2023. 

Dealership executives who answered Automotive News’ 2023 Dealer Outlook Survey say economic conditions that took root in the last year have caused their concerns about maintaining profits to grow. Several now believe rising interest rates and a potential recession, on top of intensifying vehicle affordability challenges, could ultimately disrupt their business this year.

“We’re in an affordability crisis,” said Patrick DiCesare, dealer principal of Eastside Volkswagen in Willoughby Hills, Ohio, a suburb of Cleveland. 

Eastside Volkswagen’s customers are largely driven by budget and payments and have historically gravitated to the leasing market, DiCesare told Automotive News. But with some lease payments up 50 percent for the same product compared with years past, customer demand is cooling, he said.

The 264 dealers and dealership managers who answered Automotive News’ survey in January have mixed outlooks. One-third of respondents said they expect their dealership’s overall performance to worsen in 2023, with the rest expecting performance will be similar to or better than last year. About 44 percent of respondents said they believe their profits will worsen in 2023, while nearly 30 percent expect profits will be flat compared with 2022, a year in which some said their stores recorded record profitability. By contrast, just a quarter of respondents to the 2022 survey said they expected profits to improve.

Dealerships generally have enjoyed three straight years of record profits since the onset of the coronavirus pandemic, though clear metrics are no longer available from the National Automobile Dealers Association, which has long tracked the financial performance of the average U.S. dealership. NADA stopped publicly releasing that data in late 2021. Up until then, the numbers had shown the average dealership setting record profit in 2020 and again in 2021, though the 12-month number for the latter year — $4.1 million in pretax profit for the average franchised store — had to be estimated after NADA reported data only through October. Profits for many dealership groups increased again in 2022, according to anecdotal reports by dealers, though it’s not clear how the profit picture changed for the average store.

Results in 2023, respondents to Automotive News’ survey said, will hinge on the possibility of a recession and whether higher interest rates stunt consumer demand. Profit margins could shrink if more new vehicles are produced but demand weakens.

Higher interest rates are dealers’ top worry, with 70 percent of respondents identifying rates as the factor they’re most concerned about in 2023. A potential recession and vehicle affordability tied for the next most-concerning factor, with about 42 percent of respondents selecting those. Respondents could select up to three top concerns. 

Higher rates will mean higher monthly payments, and that could push some new-car buyers into the used-car market. And used-car buyers could reduce their budgets, said Kjell Bergh, dealer principal of Borton Volvo Cars in Golden Valley, Minn.

“Instead of buying a $40,000 used car, they might buy a $30,000 used car so that they can keep their monthly payment in the range that they’re comfortable with,” Bergh said. 

Jim Farkas, general manager of Germain Honda of Ann Arbor in Michigan, said dramatic increases in new-vehicle prices in the last three years may reach a tipping point, especially as consumers mull how much in-vehicle technology they actually need. 

“With the higher interest rates coming about, some people are starting to sit back and say, ‘Is it reasonable for me?’” Farkas said. 

Though new-vehicle supply has modestly improved, supplies haven’t recovered to the degree dealers are seeking, the survey results showed.

About 71 percent of respondents said new-vehicle inventory levels for the brands they represent are not back in line with demand. Several respondents individually noted the model mix they’re getting is off or doesn’t align with the market.

Germain’s Farkas estimated that better new-vehicle sales, helped by increased production for the Honda brand, will deliver a 6 percent increase to his dealership’s bottom line in 2023.

“I believe production is going to pick up,” Farkas said. “I don’t think it’s going to be at the same level that the manufacturer’s suggesting at this point, but I do see an increase.”

As new-vehicle supply has improved, it’s clear that dealerships have begun to pull back on the markups over sticker price that have been persistent the last couple of years. One-quarter of respondents to the 2023 survey said they continue to charge markups, with the most common percentage increase over sticker being 5 percent or less. In the 2022 survey, 38 percent of respondents said they were marking up, with the most common percentage increase ranging from 6 to 10 percent over sticker. 

Nearly half of 2023 survey respondents said they expect inventory availability to be back in line with demand sometime in 2024. Nearly a quarter are expecting that to happen by the end of this year. 

Used-vehicle inventory will remain hard to get, too, said Ted Marshall, dealer principal of Marshall Ford in Philadelphia, Miss. 

It’s more difficult to buy and retail used vehicles, not only because supply is limited, but also because vehicles with reasonable acquisition prices are hard to find, Marshall said. He noted his dealership is carrying some used vehicles in inventory that were purchased at wholesale for more than their likely current retail prices.

“We’re selling [used] vehicles for some losses and also taking huge losses if we go to auction,” he said. 

With cost pressure up and profit concerns rising, some dealers are exploring how to improve their operating efficiency, said Stephen Dietrich, a partner with the Holland & Knight law firm in Denver. He said his dealer clients are examining all costs as they enter 2023 and are being careful about what they spend for. 

“They’re not tightening the belt,” Dietrich said, “but they’re saying we’re going to watch the belt.”