Franchised dealers are a bit more optimistic about the current market than they were three months ago, the Q3 Cox Automotive Dealer Sentiment Index finds. Independents, meanwhile, are decidedly less confident. One area is responsible for that divergence, Jonathan Smoke, Cox Auto’s chief economist, tells Wards.
“Separate what they are saying about the used-car market,” he says. “Franchised (dealers) are positive and independents negative.”
Of course, independent dealers only sell used cars but used cars are an important source of income and profit for franchised dealers. And the outlook for that part of a franchised dealers’ business is doing well and will continue to do so, says Smoke. Supply is the key.
“Franchised (dealers) have had an advantage because they have greater sources of (used) inventory and in particular during the pandemic, the access to off-lease (inventory) is not only a source but also a source of particular strength in profits for franchisees,” says Smoke.
As the supply of new vehicles became constrained by the chip shortage and other supply chain disruptions, the market price of used vehicles shot up, he explains. Vehicles coming off lease had positive equity. “Historically, that number is negative,” he says.
Even as the used market begins to stabilize, franchised dealers still have a huge advantage; they can buy the off-lease vehicles at the contract rate instead of the market rate, “which is a built-in $4,000 profit,” says Smoke.
“We do an estimate every month of lease equity position, and it is still greater than $4,000,” he says. Furthermore, “We think we are likely to see positive equity (on off-lease vehicles) for at least another two years.”
It’s Still a Good Time to Be a Franchised Dealer
In the most recent CADSI, the overall current market index was 45, below the threshold of 50, indicating that more dealers see the market as weak than as strong.
But franchised dealers’ current market index score was 57, up one point from last quarter (Q2). Independents’ score fell one point to 41.
Franchised dealers are also more positive about the market outlook for the next three months; their score increased one point to 58 while independents’ score declined three points to 41.
The Q3 2023 CADSI is based on 983 U.S. auto dealer respondents, comprising 554 franchised dealers and 429 independents. The survey was conducted from July 24 to Aug. 8, 2023. Dealer responses were weighted by dealership type and sales volume to represent the national dealer population.
Rising interest rates were the top concern for both franchised and independent dealers in the Q3 CADSI. But independents take a bigger hit than franchised dealers when interest rates rise, says Smoke.
Independents tend to be smaller scale, with inventory financing (flooring) tied to the Federal Reserve interest rate policy, he says.
Franchises “tend to have broader access to credit, including manufacturer’s flooring,” says Smoke.
Higher interest rates also have a negative effect on consumer financing costs and both franchised and independent dealers are concerned, as evidenced by the list of “Factors Holding Back Your Business” in the CADSI. But their reasons for concern are different.
For franchised dealers, number five is “Lack of Consumer Incentives from my OEM.” For independents, number five is “Credit Availability for Customers.”
“The difference on number five is pretty telling,” says Smoke. “There is a big difference in their customer base; independents tend to be serving a more credit-challenged customer.”
Overall, franchised dealers deserve to be optimistic, says Smoke. Looking at the full set of data, all areas of a franchised dealer’s business have been performing quite well, he says.
It is still “extremely profitable” to be in the franchised dealership business, says Smoke. New-car and fixed operations margins are also expected to remain strong, he says. “That is the benefit franchised dealers have with multiple businesses tied into one.”