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Economy Industry Trends

2023 – Firing On All Cylinders

2023 will require dealer principals and their teams to fire on all cylinders to successfully weather the numerous challenges on the horizon. Economic uncertainty, evolving dealership sales models, fluctuating profitability targets, persistent staffing challenges, and continued growth in electric vehicles (EVs) are just a few of the issues which will impact retail automotive dealers.

There is plenty room for optimism for those dealers who put strategic plans in place, implement focused training protocols, bolster pricing models and fixed operations, and keep an eye on compliance. Let’s break down some of the opportunities for dealers to succeed in 2023.

EVs, sales models and customer connections

Growth in EVs and the hybrid instore and online sales model has highlighted the issue of strengthening and maintaining customer connections at the dealership. As more EV manufacturers sell direct to consumers, and consumers become increasingly comfortable buying a vehicle online, dealerships face challenges communicating with customers before, during and after the sale. Dealers who invest in implementing targeted sales processes and training will exit 2023 with more profitable businesses, greater employee retention, and stronger customer relationships.

Categories
Economy Industry Trends

Successful Second Half Requires Flexibility

Do you have a strategic plan for the second half of this year? Granted, the retail automotive industry has been on a roller coaster lately. But now is the time to assess your dealership’s performance over the past two quarters and set some milestones to achieve your end-of-year profit metrics. A successful second half of 2022 will require some flexibility and willingness to change behavior.

Looking ahead, there are several factors which spell opportunity for dealers to capture notable revenue in the second half of the year. Strong consumer financial positions, credit terms which remain largely favorable, and continued pent-up demand bode well for savvy dealers. While the Federal Reserve has raised interest rates and recession rumblings linger, consumer financing is still discounted when compared to rates during the Great Recession. According to the Federal Deposit Insurance Corporation (FDIC) quarterly report, aggregate monthly personal income has rebounded to pre-pandemic averages and auto loan volume has recovered faster than in previous down-turns.

For dealers, these favorable credit terms also spell revenue opportunities for those who strategically manage their inventory purchasing and pipeline sales. While inventory and supply chains remain an issue, the wheels are beginning to turn and factories are cranking out more units, albeit maybe ones without heated seats or auto-folding mirrors. Used car inventory is also improving, with bulk-sellers like CarMax reporting sufficient inventory to meet 30 days’ worth of demand. Rising interest rates may also be working in the industry’s favor for once, prompting a bit of a cooling effect on demand and allowing OEMs to catch up.

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Economy

Will Interest Hikes Impact Dealerships?

Earlier this month, the Federal Reserve increased its interest rate by a quarter of a point, and signaled they planned six more increases throughout the year. In response, banks with large auto loan portfolios raised their prime rates from 3.25 percent to 3.50 percent. The theory behind this is relatively straightforward. By raising the federal funds rate a domino effect takes place, slowing demand for goods and tapping the brakes on inflation. Whether directly or indirectly, a number of borrowing costs for consumers will also rise.

Prices for new and used vehicles have skyrocketed so much in the past year that an increase in interest rates may seem like small potatoes. The average interest rate on new car loans was 4.39 percent in February, relatively flat from a year ago, according to Dealertrack. The average for used vehicles was 7.83 percent in February, down from 8.25 percent. Car buyers taking out loans for a new vehicle borrowed an average of $39,721 in 2021, an increase of over $4,000 from a year earlier, according to Experian. As a result, monthly loan payments hit a record high of $644.

Car loans tend to track against the five-year Treasury, which is influenced by the federal fund rate. But the rate a consumer pays is based on credit history, the type of loan, down payment, type of vehicle and other factors. Those buyers with poor credit could pay more than 20 percent over the prime rate. For a consumer qualifying at the prime rate, a quarter point increase on a $40,000 loan is about $5 a month, or another $300 over the life of a five-year loan. For a buyer at subprime or worse, a quarter point increase could make a significant difference on the type of vehicle, the terms of the loan or even a “no-go” decision to purchase a vehicle.