Consumer spending, interest rates, energy prices, and technology innovation will continue to be the drivers for vehicle demand. These factors should keep auto dealerships on their toes, but here are other factors to consider that impact U.S. auto sales.
Automakers remain optimistic for 2019 despite a weaker finish in 2018’s fourth quarter than expected and the predictions of a down year. As the year begins keep the optimism by considering how the likely challenges ahead can be shifted to business opportunities for your dealership.
Challenge: Consumer Spending, Interest Rates, Energy Prices
Economic conditions are a significant factor used by analysts when forecasting auto sales. Fluctuating interest rates and energy prices greatly impact consumer spending. U.S. consumer spending on durable goods fell 1.4% in October of 2018 compared to the same month in 2017, and the bank prime loan rate rose 4.5% compared to this time last year. Furthermore, 0% loan offers are becoming few and far between.
According to Edmunds analysts, in August 2017, 14.6% of auto transactions were financed through 0% loans, but in 2018 that number dropped to 7.4%. Responding to the rising interest rates, manufacturers including Toyota, Nissan, and Chrysler are moving away from 0% financing offers. This increase in interest rates will undoubtedly impact consumers’ ability to buy a car.
Opportunity: Continue to Diversify Revenue Sources
As economic conditions continue to disrupt the traditional sales pipeline, analysts encourage dealerships to offset lost gross profit by diversifying their revenue sources. Experts recommend dealership focus on their finance and insurance department or more business-to-business partnerships, such as fleet management.
An automobile’s service department is also often an overlooked opportunity to diversify revenue. In the evolving marketplace, consumers are turning to dealerships for the maintenance of their cars throughout their lifecycle. Expanding your dealership’s service department is an essential part of your business development plan.
Challenge: Force Majeure Events
Mother nature is notorious for disrupting the automotive industry. Many analysts blame the 4% decline reported for third quarter 2018 on the 2017 and 2018 hurricane season, which was one of the busiest and most destructive hurricane seasons on record. When a catastrophic event strikes it can severely affect dealership operations. According to an analysis by Cox Automotive, approximately 400,000 vehicles needed replacement after Hurricane Irma ripped through Florida. Hurricane Harvey added to the damage, destroying 300,000 to 500,000 vehicles in Houston.
Dealerships in affected areas not only have to replace damaged inventory, but they also need to account for missing day-to-day operations. Vehicle production plants in the path of a weather event can also disrupt U.S. auto sales due to production losses.
Opportunity: Have a Preparedness Plan
The widespread media coverage of natural disasters has left dealership owners with few excuses to be unprepared for hurricanes, floods, and superstorms. While you may not be able to avoid mother nature, there are steps that can be taken to provide your dealership the best chance at mitigating total devastation or significant business disruption. Your dealership should have a comprehensive business continuity plan to ensure there is a plan to re-open your doors after a disaster.
Challenge: Used-Car Sales Continue to Outpace New Car Sales
Used car sales were up 1.8% from 2017 and conversely, new car sales were down 2% according to Cox Automotive’s 2018 Used Car Market Report. Consequently, dealerships are losing money on new vehicle sales. The average gross profit on a new vehicle sale is about 5.6% of the sale price, while the average gross profit on a used vehicle sale is about 11.6% according to The National Automobile Dealers Association’s 2018 midyear report.
Savvy consumers are opting for certified pre-owned cars instead of up-sells and vehicles with higher margins. Some consumers are also choosing to keep vehicles longer due to reduced warranty lengths and long-term loans.
Opportunity: Emphasis on Aftermarket Services
Many dealerships will decide to invest in expanding their used vehicle departments. Whether you expand your used vehicle department or re-direct your attention to aftermarket services, remember customer retention is key. Creating loyal customers is more critical than a one-time new car sale. Dealerships should consider the opportunity behind profitable aftermarket services such as financing, insurance, and vehicle maintenance and repair.
Challenge: Alternative Ownership Models
A recent mobility survey by Cox Automotive found that ride-sharing, subscription services, and autonomous vehicles are expected to reduce personal car ownership, thus cutting into auto sales and over time ultimately transforming the industry.
Opportunity: Alternative Ownership Models!
Consider how driverless technology and ride-sharing services could have the potential to become a profitable revenue stream for your dealership. How can you shift your perspective and start looking at these untapped services as an opportunity rather than a threat? Begin the process by researching how these changes are disrupting the traditional sales pipeline, and then consider the ways your dealership can leverage car subscriptions, car sharing, and other mobility services.
Dealerships that remain profitable, regardless of the state of the economy, identify challenges and seek out opportunities for continuous growth. If you need assistance or have questions about the challenges your dealership is facing, Selden Fox can help. Our team has considerable experience in this area and can identify the appropriate solution for your needs. For additional information please call us at 630-954-1400 or click here to contact us.