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Blue-sky values peaked in Q1 and Q2 due to higher interest rates, reports Haig Partners.

Skyrocketing Auto Sales Coming Back to Earth

Pent-up demand and inventory shortages will likely sustain profits and buy-sell activity for three years, analysts report.

The booming automotive retail sales market is beginning to dip, though pent-up demand and scarce dealer inventory will sustain it for the foreseeable future.

That’s the analysis of Haig Partners, which just released its third-quarter 2022 Haig Report.

“I think that the pandemic created a once-in-a-lifetime set of circumstances that brought unprecedented wealth to a lot of dealers,” Alan Haig, president of Haig Partners, tells Wards. “But what goes up eventually has to come back down. I think we’re beginning to feel the effects of the government trying to fight inflation with rising interest rates.”

Haig reports that one of the economic shift’s main impacts is record-high buy-sell activity levels among dealerships in the first nine months of 2022. A total of 369 dealerships were acquired, up 5% compared to 2021. Private buyers acquired 337 stores, 24% more than in the same period last year.

Automakers’ focus on electric vehicles, concerns about direct-to-consumer sales and the advancement of digital sales and marketing are among the factors that have caused much of the buy-sell activity. Although some dealers embrace the changes in this era of record-high profits, others believe they signal the deterioration of the franchise model.

“We think it will take years for the factories to make up for all the lost sales (due to chip and parts shortages), and during that time, dealers should continue to enjoy strong profits. Our belief is shared by many dealership buyers, as proven by the high demand for dealerships today,” says Haig. “Times are still very good for sellers.”

Blue-sky values peaked in the first and second quarters due to higher interest rates. Those rates curtail consumer demand and may decrease dealer profits. They also reduce the amount of cash flow from acquisitions. Still, blue-sky values remain more than twice as high as before the pandemic.

Other report highlights include:

  • Ford and Lincoln EV programs may be eroding franchise value. Dealer sentiments about the Ford and Lincoln EV program are mixed. Haig reports some shoppers considering buying dealerships are avoiding Ford and Lincoln franchises due to the focus on EVs. It is not yet known how General Motors’ just-announced EV program will impact dealerships.
  • Auto prices are growing faster than wages. J.D. Power reports the average monthly finance payment for vehicles increased 22% from January 2020 to October 2022. Cox Automotive estimates the average buyer today must work for 42.2 weeks to afford a new vehicle compared to 34 weeks before the pandemic –  24% higher.
  • Pent-up consumer demand is still growing, so the outlook for future profits looks bright. J.D. Power estimates there will be pent-up demand to purchase more than 5 million vehicles by the end of 2022. Haig Partners estimates pent-up demand is closer to 8 million units. Based on how slowly the OEMs recover production capacity, Haig estimates demand for new vehicles will exceed supply for at least the next three years.
  • GDP increases after two straight declining quarters. After two straight quarters of declining GDP, it rose at an annual rate of 2.6% in Q3. However, economists do not believe the U.S. is safe from a recession, reports Haig. Most of the growth was due to a narrowing trade deficit thanks to a stronger dollar that won’t be repeated in future quarters.



TAGS: Retail
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