October 26, 2021

Tight Inventory Presents New Challenges for Auto Dealers

The auto industry is undergoing a painful period where chip, foam, and rubber shortages are forcing many car manufacturers to severely limit the number of new cars produced. The effect is evident with the news both Ford and GM have temporarily suspended production at domestic locations, while Toyota has slashed production at 14 factories overseas. The limited amount of inventory has forced many consumers to consider purchasing a used car rather than wait for new models to become available. However, for independent auto dealers, it appears the mix of demand and limited inventory are creating new challenges. The Cox Automotive Dealership Sentiment Index for Q3 2021, found that while the used car sales environment is much more favorable overall profitability has not increased. In fact, some are even experiencing pressure to lower prices. Despite this, it appears used car sales will remain strong until new car production issues are resolved. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key survey findings below.

About the Survey

The survey was conducted online between July 26th and August 9th and includes online responses from 524 independent auto dealerships from across the nation. Dealer responses were weighted by sales volume to be representative of the national dealer population. It is important to note that data is used to calculate an index (from 0 to 100) where a score of 50 or greater means more dealers view conditions as strong or positive and lower scores reflect the opposite sentiment.

Key Survey Findings

• Top Business Priorities – The report wanted to identify the top business priorities for independent auto dealers. It was found that 51% identify inventory acquisition as a top concern, 18% staying in business in general, 6% improving operational efficiencies, 6% enhancing sales and service solutions, 5% gaining market share, 4% retaining customers, and 3% retaining employees. It is not surprising that inventory acquisition is a top priority given the issues currently impacting the industry.
• Factors Holding Business Back – Apart from inventory issues, the report wanted to identify the other factors which are creating challenges. It was found that 38% identify current market conditions as a top issue, 31% business impacts for COVID-19, 20% operating expenses, 15% credit availability for consumers, 14% competition, 8% staff turnover, 7% regulations, and 4% credit availability for the business.
• Used Car Sales Environment – The report also wanted to understand the current environment for used car sales including changes to inventory levels. It was found the used car sales environment has remained positive (a rating of 54) which is relatively consistent with the prior quarter but represents a significant increase over the first quarter (a rating of 40). Not surprisingly, there was a sharp increase in the amount of inventory available (a rating of 35) when compared against last quarter (a rating of 19).
• Profitability – It was also found that profitability has remained positive (a rating of 51) which is consistent with the previous quarter. However, it is a significant improvement over the first quarter where profitability was reported to be very weak (a rating of 31). It was also found that the cost of running a dealership is also growing (a rating of 68) but at a marginal rate.
• Pricing Pressures – Since the sales environment continues to be positive, the report wanted to understand how pricing pressures are impacting dealerships. It was found that pricing pressures are overall quite low (a rating of 41) but have increased slightly over the last quarter (a rating of 37). It is interesting to note pricing pressures have dropped significantly since the first quarter (a rating of 59).

Contact Us

It appears from the report that inventory acquisition is a key issue facing many Atlanta independent auto dealerships. As inventory challenges continue, dealerships need to carefully review pricing strategies and cost drivers to ensure increased profitability. If you have questions about the information outlined above or need assistance with a dealership tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.