Author: Maxime Theoret
To all the dealers who believed that the pandemic had succeeded in transforming the workings of the automotive industry’s business model into a “just-in-time delivery” format, beware! All the signs are there: 2024 will mark the return of the operational framework which manufacturers have favoured for decades.
The signs are clear
The year 2023 just ended, but there are already several signs pointing to this return. Starting with the first-quarter results for light-vehicle sales. According to our data here at DSMA, these sales were up by almost 8% (7.6%) compared to the same date in 2022. Although not quite back to pre-pandemic levels, these results show that the automotive industry is gradually getting back on track.
The fact that GM’s Q3 2023 performance was one of its best in four years is a further indication. The American manufacturer’s production has picked up again, enabling it to generously replenish the yards of its dealerships across North America.
Increasing inventory days
Speaking of refueling, the number of inventory days is on the rise. Overall inventory levels remain relatively stable. Days’ supply stood at 60 at the start of October, which was 14 days higher than the same time a year ago. Supply has been inching toward a 60-day average level, which is considered normal and ideal across the industry.
It is important to understand that manufacturers are first and foremost public companies that answer to their shareholders, and who share a common objective of growth. And what does growth mean? Increased production – and with it, more vehicles in dealerships.
Lower profitability in sight
Presumably, this return to normality with a wider choice of vehicles will please consumers. But it is not necessarily desirable to dealers, who, thanks to the economic climate, are already facing quite a few headwinds. Many of them will have to cope with a loss of profitability- a sad reality we see and hear from our North American customers.
Rising interest rates will hurt dealers…
The Bank of Canada’s historic interest rate hike, which began in March 2022, is largely responsible for this slowdown. In interest alone, it now costs dealers nearly a dozen dollars a day for each vehicle in their dealership’s parking lot. Do the math. Since the average cost price of a vehicle in this country is now over $65,000, and the average duration of inventory exceeds 50 days, a dealership must now budget just over $600 in interest for each product it holds in its yard. Not to mention, this is only the interest to be paid on other inventory-related costs. The dealership’s other expenses, such as outstanding loans, are also affected by the dizzying rise in interest rates imposed by the Bank of Canada.
…and consumers alike
This rise in interest rates also affects consumers’ purchasing power. Sure, they are entitled to a better inventory, but they too are hurting from the financial impact of this situation. In addition to having to navigate with an interest rate that now exceeds 7%, even 8%, on the vehicle bill, the increase in the average cost of cars is putting a strain on many budgets. Indeed, the average price of a vehicle rose by at least 21% year-on-year in the 2nd quarter. In the sport-utility vehicle category, the jump was even more than 30%.
For example, before the pandemic, $800 a month was enough to lease a luxury German model. Today, that’s barely enough to get behind the wheel of a lower-range vehicle.
Dealership transactions in sight
Consequently, all these factors influencing the automotive industry while affecting company profitability will encourage opportunities for dealership transactions. Succession situations may be more difficult to achieve, as solo dealers may find themselves in a precarious situation. In other words, companies that own more than one brand are more likely to be better equipped to face the obstacles that will arise in the coming months. And provided they’re well managed, many of them will be keen to take advantage of the situation to enhance their portfolios.