Business

A weekend in Vegas with the nation’s auto dealers

The mood was very different the last time the National Automobile Dealers Association was able to hold its annual meeting in person. In a word, grimmer.

Just before the pandemic, pessimism reigned among the country’s nearly 18,000 new car dealers. Threats threatened the traditional distribution model – one of the great generators of localized American wealth for more than a century.

The unstoppable advance of electric cars with their higher prices and the assumed lower service requirements was also a concern. Autonomous cars hinted at a decline in car ownership (and purchases) with promises of expanded ride-hailing and carsharing.

Then, in March 2020, came the Covid-19 pandemic to deal the feared deathblow. While the year started with brisk showroom traffic, the bottom fell when April auto sales plummeted to an annualized rate of 8.8 million, about half the normal clip. Traders rushed to the exit doors, trying to divest companies that suddenly could only be worth the price of their underlying real estate, if at all.

But the pandemic has disrupted the economy in ways large and small, predictable and highly unpredictable. Jobs disappeared but recovered fairly quickly. Online trade continued to develop rapidly. Supply chains became chaotic and inflation just grew. And for car dealers, the unexpected happened.

Sales recovered quickly. And when traders gathered in Las Vegas last month for the 105th edition of their annual conference, they were ebullient, toasting at cocktail parties and stalking the exhibition hall. Salespeople who had everything a car dealer could need or dream of were armed with enough junk to fill several gyms.

There was a lot to celebrate. Instead of imploding in the pandemic, profits for automakers and dealers alike exploded and continued to soar. While some brands reported lower sales, transaction prices rose sharply to offset lost volume, allowing many manufacturers to post record profits, sales, or both. Lo and behold, the car dealers had their best year in their history.

“These are crazy times right now,” said Bruce Bendell, founder of Major World and City World chains with eight retailers in the Bronx and Queens.

Sheldon Sandler, a Wall Street accountant-turned-car dealership salesman, agreed. “Every trader today makes money with his fist,” he said. “Retailers make money from all brands, even second-tier and third-tier ones.”

Mr. Sandler is the founder and managing partner of Bel Air Partners, a New Jersey consulting firm specializing in the sale of private dealers and groups of dealers to public companies. If he has a problem these days, he said, it is finding traders willing to sell their businesses.

Fluctuations as the pandemic unfolded may still affect demand: After a strong first two months of the year, industry sales plummeted in March as coronavirus fears and stay-at-home orders kept consumers away from retailers.

But auto sales in America account for nearly $1 trillion in annual economic activity and create 2.3 million jobs. And this year’s industry convention, taking place virtually in 2021, harked back to the good old days when dealmakers closed deals, automakers outlined future products and plans in private meetings with their franchise dealers, and a staggering array of vendors sold everything from cars – washes and Tire changing equipment to giant outdoor display machines that can lift cars 25 feet off the ground so they can be seen spinning endlessly from a great distance.

“Dealers make a lot of money,” said David Rosenberg, president of DSR Motor Group and former owner of Prime Automotive, one of the nation’s largest dealership groups, which now owns seven New England auto dealerships. “The average Toyota dealer in the Boston area made between $2 million and $2.2 million in their prime. Last year the average net profit was $6 million.”

While it’s not a lot in absolute terms, the stimulus money was crucial, said Steve Greenfield, chief executive officer of Automotive Ventures, an Atlanta-based investment advisory firm. The government aid is “enough from a psychological perspective to make people feel like they can still spend it,” Greenfield said.

“The supply of both new and used cars was so limited that when consumers found a car, they immediately grabbed it and were completely insensitive to price,” he continued. “Dealers turned that into more profit with finance, insurance and extras, and for whatever reason, consumers were so desperate that if they found a car, they would pay anything for it.”

However, as I wandered the massive floors of the Las Vegas Convention Center and neighboring hotel suites, there were many concerns. On the one hand, customers are annoyed with retailers given limited stocks and rising prices.

“If I stock 15 to 20 cars per dealership now,” Mr. Bendell said, “I usually have 200 to 300. Nowadays, if a truck with eight cars comes in when they land on the concrete pavement, luckily I’m still there.” to have one left.”

His deals have even resorted to brokers. “As a dealer in the Bronx, I pay $2,000 over the sticker price,” he said. “Then the car is sold 30 seconds later. So we pay over the list just to get inventory, but customers blame the retailers for high prices.”

The list price or, as it is called in professional circles, the manufacturer’s recommended retail price is a sore point for Jim Appleton.

“You’ve been selling cars below MSRP for 40 years,” said Mr. Appleton, attorney and president of the New Jersey Coalition of Automotive Retailers, a lobby group. “Suddenly EIA is this glass ceiling that you can’t break through. Well, your expenses haven’t changed. You have 20 percent of the product you would normally get and you have the same cost structure.”

But, he said, manufacturers are happy to let retailers take the blame.

“Building and selling a vehicle makes X profits and the OEMs, well, nobody knows what they’re making from the cars they sell,” continued Mr. Appleton, referring to the original equipment manufacturers.

Mr. Appleton recognizes the ever-growing influence of Wall Street and private equity firms behind many of the problems facing traders.

“I’m stepping down as dealer attorney. I’m an observer and Wall Street hates these guys,” he said. “Wall Street hates the Main Street millionaire, the car dealer. In New Jersey it’s a $36 billion industry – 500 rooftops, shops on Main Street. The profits go straight back into Main Street causes and Main Street economic development, and Wall Street and Silicon Valley investors are saying, “What a shame. You know, we should have a piece of this action. Why don’t we have a part in this action?’”

Of particular concern is the global chip shortage, which is expected to continue into 2025, keeping inventories short. Some participants expressed concern about the trend towards electric vehicles, which require twice as many chips as fossil fuel cars.

A more optimistic mindset towards EVs also trickled through to the convention floor. The profits from electrics are waiting to be mined, said Buddy Dearman, a Memphis-based managing partner for the dealership practice at Dixon Hughes Goodman, an international accounting firm. “I read that 60 percent of customers would plan to take their EV to their dealer for repairs. I think there is a big opportunity in the EV service space.”

Merchants, Mr. Dearman said, now make up only 30 percent of the services market. “People take their cars to Pep Boys, they go to AutoZone,” he said. “And I don’t know if they’re going to do that that often with EVs, if dealers are willing to do that I think they can capitalize on that.”

Larry Vellequette, a reporter for Automotive News, a trade publication, saw further opportunity in dealer acceptance of electric cars and suggested that manufacturers’ enthusiasm for Tesla’s dealerless sales model may be waning.

“They finally figured out that Tesla’s Achilles’ heel is service,” he said. “If there is a problem, where can I fix it? And how bad does it look when I can only get my car fixed by tweeting the CEO?”

Another ongoing concern of those present was the need to recruit and retain good employees. A profession in chronic undersupply is the service technician. Meredith Collins, director of consulting firm Carlisle & Company, said the demand for such workers outstrips supply by a ratio of nearly 5 to 1. Still, an obvious solution is at hand, she said.

“Less than 1 percent of service technicians are women,” Ms Collins said, adding that ethnic minorities are also significantly under-represented, but not to the same extent.

“For years it’s been an ignored populace, just like, ‘Oh, women just don’t want to be techies,'” she said. “So there are no female engineers, and that fact hasn’t received much attention until recently.” Many of the speeches and panel discussions at the convention reflected current corporate social mores, issues of diversity, inclusion and equity, albeit more than a few Traders were seen rolling their eyes, moaning and yawning.

As long as inventories remain tight, it seemed to be the consensus on the show floor, dealers will remain in good shape.

“Dealers are very adept, so if something happens we’re the first to make changes, and manufacturers have realized that they can’t beat trying to become a dealer themselves,” said Mr. Bendell.

However, Mr. Rosenberg, the longtime New England trader, warned of caution. “When Covid hit, many retailers decided the model might need to be changed,” he said. “We all started selling cars online, bringing cars to people and doing things that we probably should have done a long time ago. Now that we’ve sort of gotten over that and there’s this huge shortage of product, I see a lot of bad habits developing again.”

He pointed out “dealer add-on stickers” with highly tagged add-ons and dealers charging thousands of dollars above list price.

“Often dealers no longer deliver vehicles to someone’s home,” added Mr. Rosenberg. “It’s sort of gone backwards because it’s a seller’s market right now.”

Glenn Mercer, a longtime industry analyst at McKinsey & Company before founding his own research firm, is more confident. “We can imagine the two fundamentally different perspectives of modern-day new vehicle retailing in the United States,” said Mr. Mercer. “Either the industry is 125 years old and therefore ripe for death, or the industry is 125 years old and that is because it is very adaptable. I choose the latter.”

https://www.nytimes.com/2022/04/02/business/auto-dealers-sales-profits.html A weekend in Vegas with the nation’s auto dealers

Ian Walker

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