By Wayne B. Meyer, Founder, MeyWayLLC

What a tumultuous year 2020 was! A grim sense of pessimism gripped the industry, and the outlook was certainly frightening. This was different from the last financial crisis as the entire world was engulfed by the pandemic, politically, socially, and economically! A year later, who would have thought the automotive retail industry would have enjoyed the success it has or that so many dealership M&A transactions would be completed?

The strange irony is, COVID-19 boosted new vehicle and overall dealership profitability to levels not seen in the industry for many years. This was driven by several factors, including:

• Inventory shortages drove new-vehicle gross per unit to abnormally high levels
• Lower new-vehicle floorplan interest costs, driven by lower inventories, facilitated many dealerships turning this cost center into a substantial profit center
• “Shoppers” became buyers, thereby limiting exposure to multiple dealership visits
• Online transaction volume increased
• Expense reductions improved overall selling gross returns
• Operating efficiencies were improved
• Fewer used inventory vehicles were available from traditional sources, resulting in increased used-vehicle gross profit per unit
• Financial stimulus packages provided by the Administration fueled consumer spending

Although fixed operations were adversely impacted, the surge in variable departmental performance, combined with the reduction in certain personnel and fixed operating expenses, assisted dealerships reaching exceptional levels of profitability, even before any consideration given to PPP loan forgiveness!

PPP loan funds aided cash flow, providing much-needed financial support to businesses.

In these buoyant market conditions, any preexisting operating inefficiencies or complacencies are often obscured by the overall positive performance of the operation. As markets weaken or change and business conditions become more challenging and competitive, there is a greater need to reexamine and reevaluate the underlying fundamentals and detail of the performance of the entire operation, to sustain continued success during a changing environment.

Post Pandemic Influences

As the world turns and reopens back to a new normal as vaccinations increase: herd immunity strengthens, COVID’s progress slows, and you have a reopening of the economy, reduction in unemployment, consumer sentiment improved, vehicle manufacturing achieving full production, and significant change in the new and used vehicle market dynamics.

At the beginning of the year, I anticipated that this change would begin to emerge by Q2 of 2021. However recent supply chain interruptions, including microchip and other component shortages, will delay production longer than anticipated and retard the availability of new vehicle inventory units.

Despite these delays, change is inevitable over the coming months. My expectations of the impact of these changes include:

Variable Operations:

• Greater inventory availability of new vehicles
• An increase in the SAAR from 2020 levels based on increased consumer and fleet demand
• Market share will become a more important metric for manufacturers
• Competition amongst dealers will increase, as a consequence of higher inventory levels
• Shoppers will revert to multiple dealership cross-shopping purchase consideration
• Online transaction volume will continue to grow
• The backlog of matured but extended leases will be largely reduced or possibly eliminated
• Additional stimulus funds will support retail demand
• More new-vehicle activity will stimulate the availability of used vehicle inventories
• New vehicle model releases, currently delayed, will accelerate and drive market “excitement”

These factors combined will place downward pressure on new and used vehicle margins.

Fixed Operations:

These departments will experience a slower recovery of revenue growth as a result of:

• Many people will continue working from home, reducing the number of commuter miles driven
• Service intervals will be extended by lower mileage levels
• Key maintenance components like tires and brakes will be replaced less frequently
• Collision repairs will reduce as a result of lower vehicle traffic
• Parts sales will follow the trend of service and collision departments
• Increased EV registrations will reduce maintenance requirements in the longer-term

Increased leisure travel and road trips may serve as a buffer to some of these anticipated influences.

Waiting for a down market to expose any existing flaws and force a reexamination of underlying operations and processes may be too late for effective and timely corrective action. Continuously evaluate all aspects of the dealership operations, and focus on leadership, processes, efficiency, cash flow, inventory, marketing, planning, and execution.

Fix the roof when the sun is shining!