You’d think that record-low car production output since World War II would be bad for business, but many dealers are benefiting from the bottlenecked supply chain.
Rick Ricart, president of Ricart Automotive Group in Columbus, OH, told Morning Brew that a recent sale that would have taken four hours to make before the chip shortage was closed in 52 minutes. Customers no longer wait for a model with an additional feature to come along, because no one knows for sure when that will be.
“I like this world,” said Brian Miller, president of Manhattan Motorcars and owner of luxury car dealerships in New York. Sales are down 20 percent, he said, and depending on the model, customers are waiting anywhere from six-to-18 months for their new car due to the semiconductor shortage. Still, 95% of everything coming in sells almost immediately, so Miller is pleased.
The dire lack of semiconductors has idled factories around the globe. As a result, lower output means $210 billion in lost revenues for the industry this year. And yet, Haig Partners reports dealership profits jumped 197% in Q1 2021 compared to Q1 2020.
Auto retailers benefit from lower operating costs with less inventory, and the supply-and-demand imbalance means buyers pay more for new and used vehicles, sometimes thousands of dollars above the manufacturer’s suggested retail price (MSRP).
Sales volume has dropped 26%, leaving franchise owners scrambling to find inventory to fill their empty lots. Tim Fuller, co-owner of Hunter Dodge Chrysler Jeep Ram Fiat in Lancaster, CA, said his 7-acre lot usually holds 1,200 vehicles but currently showcases only 200.
Without its usual stock of new, high-end sports cars to sell, salespeople at Manhattan Motors have shifted tactics to making calls to old customers, asking if they want to get out of a lease or sell their third or fourth car. The same is happening in Ohio. “People are selling cars back to us for more money than they bought them for a year ago,” said Ricart.
Other owners have also had to get creative. According to Fuller in Lancaster, one manufacturer announced that they’re monitoring DMV registrations to ensure cars delivered are already sold, because some dealerships seem to be faking sales to acquire more inventory.
Unable to get his usual batch of higher trim level Ford F-150s that require almost 2,000 semiconductors each, Ricart has turned to upfitters—aftermarket companies like Roush Performance—that buy vehicles from separate manufacturer bailment pools to beef them up with big tires and lift kits. Ricart will take as many of those as he can get his hands on.
“The surprising part is the average selling price on those trucks is close to $100,000, and the consumer demand has still been sky-high,” he said.
But the money left on the table from lost opportunities is a frustration dealerships feel across all marquees. Luckily, the shortage is also balanced by the solid used-car market and increased service revenue now that customers are holding on to vehicles longer rather than replace them.
“Our used car volume is up 30% this year, which was absolutely necessary because our new volume has been down in the second half of the year,” Ricart said.
This shift has been good for the industry’s bottom line. All dealers interviewed for this story declined to share revenue figures, but AutoNation, the largest automotive retailer in the US, reported a record $7 billion in revenues during the second quarter of 2021 with gross profits of $4,157 per new vehicle sold—almost $2,000 more than the year before and 130% compared to the second quarter of 2019.
Sonic Auto Group, one of the nation’s largest auto retailers, also reached record-high quarterly revenues of $3.4 billion for Q2, up 58.7% from the year before. However, smaller, single-point operators may be negatively impacted more than large auto groups.
“We still have people working here that need to make a living and feed their families,” said Fuller, whose only location sells vehicles produced by Stellantis. “[They’re] not going to make as much without selling a larger volume.”
With a diversity of brands to help them stay afloat, Ricart says he has managed to maintain his crew of 550 employees and, despite fewer sales, brisk business means salespeople earn more money.
Limited supply has not only driven up sales prices, it’s significantly reduced the need to advertise. There are no fights between dealers to make a sale, and the nationwide inventory shortage has pretty much eliminated negotiating, according to Ricart and Miller.
IHS Markit Principal Automotive Analyst Stephanie Brinley expects the situation to stabilize in the first half of 2022. Still, rising backorders and increased consumer demand for electronics mean it will take a long time for supply to balance with demand. Another reminder that the pandemic isn’t over yet.
But from Miller’s perspective, there was excess in the market before the pandemic, and he’s not eager for manufacturers to return to “normal” production levels. “We’ve got a fair price, and customers are happy,” he said. “And there’s not a glut of cars. To me, that’s the way it should be.”