The hidden benefit of the supply shortage

October 25, 2021

Gross profits are up and floor plan interest is low; some areas of your financial statement have never looked better.

There is a level of uncertainty in the automotive industry today.

The vehicle supply chain is broken and will take months to repair. Retailers are dealing with a hungry customer base, while sitting on virtually empty car lots. Manufacturers are demanding higher sales volumes and providing little remedy to inventory shortages. Owners expect results. Your dealership profitability must grow, and excuses fall on deaf ears.

It’s really tough these days. Just when things were starting to normalize, the auto industry threw us another curve ball.

Despite all the negativity in the air, this unprecedented supply shortage is offering dealers a ray of positive light. There are areas of your financial statement that have never looked so good.

It’s true, dealers are financially healthier today. More fiscally responsible and better managed. Today’s “challenges” are helping dealers be better organizations. Here are a few examples:

Gross profits are through the roof

In microeconomics, the law of supply and demand describes the relationship between the quantity of a commodity available for sale and the prices they can be sold for. When supply chains are operating normally, prices will naturally settle at an equilibrium point and the economy will run efficiently.

The current inventory shortage we are facing is breaking this fundamental formula of modern economics. With little inventory available, dealers can effectively sell cars for whatever price they want.

There are areas of your financial statement that have never looked so good.

For this first time ever, dealers seem to be in the driver’s seat of this transaction. There is little negotiation. Dealers are “walking customers.” Sales staff are fighting over inventory allocations. Cars are effectively sold before they even get off the truck.

This is resulting in the highest gross profit per unit month the industry has ever seen. According to NADA, in June 2021, the average new car generated $3,336 in gross profit (8.3%) vs $2,098 in 2020 (5.5%). As a whole, the new vehicle department, including F&I, added 32% margin vs. 23.5% in the same month last year.

Used car averages were just as strong, generating 14% gross profit in June 2021 vs. 11.4% in 2020. Each used car is averaging gross profit of $3,429 per unit and netting $1,083. Used-to-new ratios are through the roof too, approaching 90% throughout the summer.

I fully expect this trend to continue. I think it’s great! Variable operations are finally starting to look lucrative again. Maybe we should focus on building bigger showrooms?

Floor plan interest is practically nothing

The real losers of the inventory shortages are the big banks. For the first time in my career, floor plan interest costs are negligible on dealer statements. And with most OEMs offering floor plan credits to their network, dealers are basically making money in this area. It’s unprecedented!

The average dealer is holding less than 50% of the inventory they need to meet market demands. To be clear, historically, a typical dealership holds a two month supply of vehicle inventory at any given time. Today, they are lucky to meet the four-week mark. There are dealers in rural markets with less than 10 new units sitting in their lot.

Imagine that, a car dealership with nothing but tumbleweeds rolling across their property. This scary visualization is the reality of the industry in the summer of 2021.

Interest rates continue to be at an all-time low. In August 2021, the Canadian prime lending rate sat at 2.45%. In June 2000, this same rate was 7.5% per annum. Lending institutions are basically giving money for free.

This, coupled with dealers’ lack of inventory, is resulting in major cost savings in variable expenses. It’s a beautiful thing: in these hard times, dealers have accidentally figured out a way to win this chess game.

This industry continues to surprise me. Sometimes it has a cruel sense of humour, giving you the thing you want most at the worst possible time. You just have to laugh at the irony. However, remember that success in automotive retail comes from resilience, fluidity, and of course entrepreneurialism.

Stay focused. Stay positive. Find momentum. This too shall pass. Before you know it, your lots will be overflowing with inventory, you’ll be discounting cars to win business, and your borrowing costs will inevitably increase again.

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