News about Auto Dealerships under pressure is common, but EkaLore is looking at some less obvious pressures on them. This post names four more trends that are putting pressure on the current dealership model. The full series can be found at www.ekalore.com/alien-invaders
Higher interest rates upend the concept of building an expensive dealer showroom that can be used for bank collateral.
The prior dealership model of glamorous buildings, expansive inventories, and bustling employees is directly threatened by direct-to-consumer business models. The investment (frequently in the tens of millions of USD) required by manufacturers from their franchised dealers contributes to a large real-estate footprint. The financing, real-estate costs (like taxes, maintenance, and service fees), and capital (balance sheet) costs are materially increasing for traditional dealerships while held down by direct-to-consumer business models. The increasing asset value of the real estate, helpful to dealerships to secure loan values with banks, has slowed with the higher interest rates.
The increased interest rates (from the Federal Reserve) also directly affect dealers as they hold vehicle inventories. Traditional inventory levels for ICE vehicles were 45 days in the finished goods supply chain. In contrast, in 2022, with many popular models in shortage, the levels were 38 days for domestic and 27 days for imported models. The 'floor planning' interest costs can either be supported by manufacturers (who already had USD Billion of incomplete domestic vehicles due to parts shortages) or paid directly by dealers in bank interest fees. Lower inventories also see the value of large real estate footprints reduced as manufacturers move to "build to order" and not "build to inventory" business models.
Fewer Internal Combustion Engine vehicles will be produced. Newer EV/NEV sales are more likely to be directly provided to consumers.
The demand side of sales from a dealership will see reduced quantities of ICE vehicles as traditional manufacturers transition to EV/NEV sales by the proportion of volume. Along with the product line transition have come moves to eliminate 'new car selling' tactics (like negotiated prices), seeing local increases in prices above 'MSRP' (manufacturers suggested prices). The short supply during a Covid-19-affected shortage allowed dealers to add substantial and material increases which are counter to the interests of manufacturers (such as Ford threatening dealership franchise agreements for EV sales).
High prices and high-interest rates will depress the sales of vehicles in general.
The high costs of vehicles and the much higher interest costs for vehicle loans will reduce volumes in the near term. More impactful are two additional trends affecting sheer volumes. Vehicle buyers react to the high transaction costs (>USD$50000) and higher interest rates (>8% new vehicle, and >10% used vehicle in many markets) at a time when interest rates increase housing costs. For manufacturers, this also increases capital costs as leasing represents 17%+ of vehicles while captive finance units grab up to 50% of new vehicle loans. This has been a good source of funds while interest rates have been very low though no longer.
Demographic trends are also pointing towards lower vehicle sales
The second trend is simply a demographic change in buyers as traditional "baby boom" demographics age out. Older buyers talk of buying "maybe one more" vehicle in their lifetimes. Increased car sharing, higher usage of electric vehicles in car sharing (Uber has pledged a goal of 400M shared-ride EV/NEV miles in 2023 alone), and longer ownership periods are reducing volumes. The affordability crush of prices is happening at the same time as older buyers want to reduce their buying. However, as the hybrid work and work-from-home changes play out in the economy, the total miles driven for commuting by older drivers will likely reduce. Social support by home deliveries of food, medicines, and goods (online e-commerce) also reduces requirements for vehicles in urban areas. [The aging out of the Baby Boomers, the rise in the average vehicle price, and longer ownership of cars will reduce volumes to the traditional dealer base]
The final post in the series will lay out four other challenges for Auto Dealers in the US. You can find related posts at www.ekalore.com/alien-invaders
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