In October of this year, average new car transactions were about 21 percent higher than the same month three years ago when no end was in sight for the pandemic. Conversely, average transaction prices are also about 20 percent higher than in October 2020. Despite moving more metal, falling profits have dealers feeling particularly uncomfortable; hence, the automotive industry saw declines in the Q3 2023 Cox Automotive Dealer Sentiment Index, which declined for five consecutive quarters.
According to Cox Automotive economist Jonathan Smoke, “The latest index indicates that persistently high interest rates and lingering concerns about the economy and market conditions are dampening overall dealer sentiment. Franchised dealer optimism is on the rise, whereas independents are less hopeful due to affordability issues that more acutely affect the used-vehicle market and their businesses.”
With the UAW strike in the rearview mirror and inventory strong, there is room for optimism for dealers facing a hesitant buyer’s market. According to Kelley Blue Book data, new car average transaction prices (ATP) stayed flat month-over-month in October at $47,936. Cox Automotive reports that new vehicle transaction prices fell more than 3.5 percent year-to-date as downward price pressure continues to favor buyers in the market. Manufacturer incentives also increased to an average of $2,400 in October as OEMs lent support to move units off dealer lots.
These data points are buffered by continued interest rates and loan financing concerns. While the Federal Reserve has signaled to hold interest rates at the current level, the cost of financing an auto loan – especially for rates outside of prime and super prime – remains very concerning. According to Experian’s State of the Automotive Finance Market Report: Q3 2023, the average new vehicle loan amount decreased to $40,184, from $41,543 in Q3 2022, and the average used vehicle loan amount went from $28,684 to $27,167 year-over-year.
Experian believes this is an indicator that the market is continuing to stabilize. Despite average loan amounts declining, data shows that average monthly payments experienced a slight increase, likely due to higher interest rates. The average interest rate for a new vehicle went from 5.26 percent in Q3 2022 to 7.03 percent in Q3 2023, and the average rate for a used vehicle increased from 9.38 percent to 11.35 percent in the same time frame.
Three-prong focus to generate revenue
While we firmly believe strong revenue and profitability potential exist in the retail automotive and auto lending markets, the days of pent-up demand sales have passed. Inventory is largely available, and consumers are less likely to overspend for a vehicle. As a result, dealers must decide whether to squeeze as much front-end profit as possible or capitalize on more lucrative back-end profitability options in F&I that drive consumers back to the dealership.
Leveraging our award-winning strategic business model, we recommend dealer principals take a three-prong focus:
- Prioritize F&I training and improve menu selling skills.
- Re-evaluate reinsurance positions to counter rising parts and labor costs.
- Solidify succession planning focused on long-term profitability.
High interest rates and expensive vehicles create an affordability issue for both consumers and sellers, impacting dealer profit margins, holding reserves and overall profitability hostage. Rather than focusing on front-end margin, prioritize generating revenue on the back-end by improving menu selling skills with your sales and F&I teams. A successful sale is a collaborative effort where sales, F&I, and service team members work together to support the customer. Our training modules can refresh existing teams or guide new team members on the right way to finish a sale – with solid revenue available in all three areas.
Speaking of service, supply chain challenges and a shrinking labor pool have dramatically impacted parts availability and the labor rate for technicians to install them. These rising costs can have a surprising effect on dealer reinsurance positions. We encourage our clients to leverage vehicle service contracts to boost service revenue and work with our team of strategic advisors to re-evaluate reinsurance positions to counter losses from rising costs.
Finally, while re-evaluating the reinsurance position, now is also an excellent time to solidify succession planning. While these conversations are always challenging, they are critical to the long-term success and profitability of the business. Our strategic advisors can provide helpful counsel and scenarios to support business decisions.
As you plan for 2024, capturing revenue on the sales front end, the F&I back end, and the service drive will be necessary. Wrapped around these three components are protection products that generate measurable revenue, and completing the package are strategic business decisions on reinsurance and long-term wealth management. Remember, at EFG Companies, we’re more than an F&I provider; we’re your business partner with years of expertise in the retail automotive industry. Contact us today to learn more about how our team can help you achieve your winning strategy.