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A Soft Landing for Dealerships?

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No doubt, it’s been a rough few months for dealerships. The pandemic has delivered a gut-punch to the US economy which contracted at a 32.9% annual rate from April through June, its worst drop on record, according to the Bureau of Economic Analysis. Business ground to a halt during the Spring lockdown, idling retail automotive OEM and parts manufacturers. As the U.S. has started to re-open in places, there were some upticks in retail automotive sales in June and July. U.S. retail auto sales rose by 1.2 percent during the last two months, aided by $600 weekly unemployment assistance payments, which expired at the end of July.

While sales rose over the last couple months, many believe that the U.S. has plunged into its first recession in 11 years, putting an end to the longest economic expansion in U.S. history. Whether this is a long-term recession lasting more than two quarters, or merely the bottom trough on the graph, struggles remain for retail automotive dealerships to maximize revenue opportunities in the second half of the year.

At EFG, we predict continued softness in light vehicle sales with greater downside performance risk than upside opportunity. We expect U.S. new light vehicle sales to finish 2020 around 14.0 million, representing a decline of 18 percent from 2019, and we expect a recovery to approximately 15.6 million retail units in 2021. However, we do see evidence that retail automotive dealerships are successfully managing the impact, and strengthening in F&I is boosting revenue.

One looming question is consumer confidence. Measured by The Conference Board, the Consumer Confidence Index® decreased in July after increasing in June. Specifically, the Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – decreased from 106.1 in June to 91.5 in July. If the pandemic continues in a negative trend and unemployment trends upward, vehicle sales could once again stall.

Opportunities in the Rough for Dealerships

While many indicators are flashing red, there are a couple of markers showing signs of opportunity. Many retail dealerships learned good lessons from the last recession. They quickly implemented cost saving measures, put good online measures in place, and strategically put forward the right inventory for their customers. These dealerships were ready when customers came knocking – likely on their website or phone lines! An easy pivot enabled them to meet their customers where they were most comfortable, and captured the sale. They also made sure their teams were trained and effective in the new sales environment.

These dealerships also maximized their potential revenue by attaching the right protection products to those sales. F&I profit per vehicle rose for all six publicly-traded dealership groups in the second quarter. Recent research from IHS Markit shows that consumers are now likely to retain their vehicle for up to 12 years, making all engine and body protection products more valuable.

Additionally, service drive opportunity abounds. The pandemic has shown a recent increase in visits to the service bay as consumers ventured out to make necessary repairs. Strategic dealerships are investing in more than simply training their service team on customer service. They’re differentiating themselves in the market with at-home service appointments and providing service customers with video overviews of recommended vehicle maintenance and repairs.  They are also training their team how to sell credit-card sized F&I products.

Strategic dealerships are taking this time to double-down on the programs and initiatives that we all know cushion the retail auto industry in down economies and exponentially increase revenue opportunities in expanding economies – service drive customer retention through superior customer service and F&I products. Remember what NADA says, 83 percent of customers who return to the selling dealership for service will return for their next vehicle.

Regardless of the economy, money can be made with the right strategic steps in place. The next 60 days will give us a better view of whether auto dealers will experience a soft landing.