Who are the real winners from the record high car prices? Not the automakers.
Despite sky high prices and surging customer demand, most automakers are about to report that revenue is down from where it was in the second quarter of 2019, a “normal” period before the pandemic that is being used for many financial results comparisons.
The downturn stems from the shortage of computer chips that has limited production of new cars. The tight inventories are a big part of the reason that prices for both new and used cars have hit record levels, raising inflation pressures on the overall US economy.
According to Edmunds, the average new car transaction in June was just shy of the record $41,000 set in May, and up 10% from June 2019. The average used car price soared even more, rising 28% in that two-year period to reach a record $26,500.
The real winners in this current price environment? Car dealers.
Dealers are independently owned businesses that buy new cars from automakers at fixed prices. And those wholesale prices have generally not increased of late, leading to unprecedented profit margins on new car sales.
Typically, selling new cars is the least profitable sector of a car dealer’s business. Used car sales are more profitable, while service and repairs account for the most lucrative part of the business.
The overwhelming majority of dealerships are privately owned, although there are a handful of publicly traded dealer groups, led by AutoNation, the nation’s largest, with roughly 2% of the US market. But whether it’s a publicly-traded group or a single, locally-owned dealer, these are the very best of times, said Ali Faghri, an analyst at Guggenheim Partners, who follows dealership stocks.
“All will deliver record earnings,” Faghri said. “I think prices have probably peaked. But these market conditions will probably continue until 2023.”
A timely U-turn
A year ago, dealerships were in dire straits. With many closed down by stay-at-home orders and record job losses temporarily killing demand for cars, the second quarter last year was a particularly tough time for the sector.
A survey of more than 1,000 dealerships conducted by Cox Automotive put dealer confidence in the second quarter of 2020 at an all-time low index of 20. A number over 50 indicates more dealers view conditions as strong or positive rather than weak or negative.
What a difference a year makes. The most recent survey conducted in late April and early May found a record high confidence reading of 70.
And Faghri sees even better times ahead for dealers because the traditional flow of service revenue still hasn’t returned to normal. He expects that to be the next area to see a big increase in demand.
“A lot of people weren’t driving much during the pandemic, and didn’t have work done,” he said. “I’m generally a big believer there’s a lot of pent-up service demand and deferred maintenance that will need to be taken care of.”
Dealers are having to pay more for used cars, especially those bought at auction. The supply has been squeezed by rental car companies — which typically put a lot of cars into the market — putting the brakes on sales of their vehicles.
In 2020 as travel ground to a near halt, the major rental car companies sold off roughly a third of their fleets to raise the cash they needed to survive. Now, because of the chip shortage, they are having trouble replenishing those fleets. With a rebound in demand and rental prices more than double what they were before the pandemic, the rental companies are holding onto the cars they have, feeding the record used car prices.
Some dealers are now advertising to buy cars rather than sell them in a bid to build inventory. There are also robocalls going out from companies offering to buy used cars.
But even with the increased costs to acquire used car inventories, car dealers are making more than ever before on used car sales. Carmax, the largest used-car only dealership, has already reported record profits. AutoNation is due to report results Monday, kicking off a string of record earnings in the sector. With increased costs from the chip shortage, the automakers won’t be able to say the same thing when they start reporting results later this month. Ford is forecast to report a loss, despite the record prices.
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