To start, let us recap the state of the auto industry to date in 2023. The following factors and more have affected dealers and their profitability.
- Vehicle unit sales nationally have improved for virtually all brands compared to the same period in 2022.
- Vehicle inventory is a mixed bag depending on the brand. Some dealers still find it challenging to get units while others are seeing their lots full.
- Used vehicle values have plummeted.
- The effects of the UAW strike against the Big Three US auto makers will be felt in the succeeding months.
- Rising interest rates have caused a number of consumers to be priced out of the market or search for cheaper alternatives.
- Even though it has eased somewhat from the levels in 2022, inflation remains higher than target levels.
Source
The following results are based on the compilation of information from our dealer client financial statements for the nine months ending September 30, 2023, as compared to their financial information for the same period ended September 30, 2022.
Profits Declining
- For the most part, the record profits generated during the past two years is not occurring in 2023.
- Over 86% of our dealer clients saw their profits decline year over year.
- The profit decrease was striking. On average, profits dropped 22.5%.
- It did not matter if the dealership sold domestic or foreign brands as both categories saw profits shrink by the same percentage.
- While profits have declined when compared to the prior 2 years, most dealers are still more profitable than they were pre pandemic.
Overall Dealership Sales
- Buoyed by stronger dollar volume across all departments, nearly 70% of our dealer clients saw their top line grow.
- Our analysis indicates that overall dealership sales increased by over 5.8% and was fueled by stabilizing prices in both the new and used vehicle markets.
Expenses
- Variable – In contrast to last year, over 50% saw a decline in variable expenses And those declines are mainly attributable to a drop in sales commission payouts. Certain manufacturers include items such as floorplan interest and advertising in this category and is the reason for those that saw variable expenses increase.
- Personnel – Labor costs continue to rise. Nearly 63% of our dealer clients reported an increase in personnel expense though the average increase hovers around 2.8%. The causes remain unchanged – a tight labor market, employee retention, and benefit costs.
- Semi-Fixed – A majority of dealers (approximately 68%) reported an increase in this category. The combination of rising interest rates coupled with increased amounts of inventory in stock has caused interest expense to climb. Advertising expense also continues to rise. All the while, inflation continues to drive expenses higher. On average the category saw costs rise by 10%.
- Fixed – Overall expenses in this category were a mixed bag with it being a 50/50 split between those that reported increases and those that showed decreases. In total, the overall percentage increase was minor.
Conclusion
As expected, the historically strong profits that dealers were able to generate in the past couple of years has begun to wane. Margins on new and used are coming back down to earth as vehicle inventory becomes more available and used vehicle values decline. Vehicle margins are shrinking and operating costs continue to rise. Dealers need to strategize now on ways to maintain profitability and continue growth.
If you have any questions regarding this article, please contact Charlie Paolino at CPaolino@DowneyCoCPA.com or at 800-849-6022.
