The longer-term impacts of the pandemic are just starting to manifest. It will be anything but business as usual for automotive retailers.
Control over the COVID-19 pandemic appears to have improved, and many of us that have been working at home are cautiously optimistic that Canada has turned a public health corner.
As of mid-June, the world numbers are still near record highs, but at least in Canada much of the country is feeling pretty good about starting to rebuild our lives. We are hoping it resembles something similar to what we had pre-crisis rather than what we have all experienced in the last 90 days.
The industry is looking for bright spots that show signs that could spark the move to better days ahead. We are all eager to jump on the positive bandwagon even if the foundation for optimism is more wishful thinking than broad-based facts.
We are in the midst of a collision between health care officials and economic recovery. Healthcare officials still have serious concerns. Momentum however, has shifted away from health and safety at all costs to one of compromise; economic realities are beginning to make a resurgence and are pushing back health concerns in favour of much-needed economic activity.
Citizens in North America are not accustomed to such control being exerted over their daily freedoms. Restlessness and financial concerns are fueling a stampede from lockdown. As North American economies reopen, slowly and inconsistently, more confusion will be felt in the weeks and months ahead.
The United States has 50 differing economic solutions, some based on real health and safety success and others based on dominant economic willpower. We also can’t underestimate the impact of politics and resulting fake news on all our mental states.
Restlessness and financial concerns are fueling a stampede from lockdown. As North American economies reopen, slowly and inconsistently, more confusion will be felt in the weeks and months ahead.
Canadians watch with shock and disbelief as we witness civil unrest and political tug-a-war spill over state lines and cross international borders. In many ways, it’s 1967/68 all over again. Lip service is being overtaken by the sheer global impact of short-term violence transitioning into meaningful and compelling peaceful protests. The power of social media is in full force.
What does all this have to do with car dealers? A lot, actually. To have everything return to some semblance of normal requires all the world’s dominos to line up perfectly. The likelihood of that quickly happening is slim to nil. This means that raw material providers, parts and component suppliers, vehicle assemblers, and vehicle delivery processes all must be functioning efficiently in a world of strong financial and consumer confidence.
COVID-19 is affecting each country differently, both physically and economically. Global supply chains however, can only properly function when they act as one. There is little time to recreate a domestic auto industry to overcome the short-term business risks. Sure, short-term workarounds are possible for some aspects. However, this will present us all with significant challenges.
Consumers are showing short-term signs of wanting to get out of their homes and start circulating and generating economic activity. As of today, more than 47 million North Americans are surviving in an artificial bubble of government support and moral suasion. They are being propped up by mortgage and loan payment deferrals, and government and business subsidies.
This will end at some point, leaving the accountants and politicians to count the beans, lawyers and politicians to point fingers of wrongdoing, and economists to plan how economies around the world will rejuvenate. All will not accomplish this at the same pace.
Short-term signs are positive, but…
From my vantage point, the short-term looks brighter than the mid-term. The short-term actually looks fairly good for Canadian car dealers as long as new and used inventory supplies last, consumers remain confident, and cash keeps flowing. Once government subsidies cease and true unemployment rates surface, the picture could be much different.
Gap between sellers and buyers
Not all dealers will be in for the long haul; many might very well look to exit. With the short-term looking positive, combined with dealers’ perpetual optimism, pressure will be exerted by “selling” dealers to go back to pre-COVID-19 results to assess their businesses.
Potential buyers, on the other hand, will take a differing view — one that is based on future uncertainty. The sellers are selling the past, but the buyers are buying the future. This creates a large expectation gap, which must be closed to consummate buy-sell transactions.
There is no doubt in my mind that this gap will be closed in some situations, especially those that are strategic to the buyers. This will result in buy-sell activity in the short-term. But as we know, many of the buy-sells of the past were based more on opportunity than strategy. In these cases, transactions will be hard to close unless one side or the other blinks.
Real estate values are critical to the selling dealer and are uncertain at the moment.
Many dealers believe that bright days will return and are willing to ride out the current storm with the hopes that values will increase, making a sale down the road more attractive. Dealers can be patient if they are profitable.
Acquisition financing will be tougher
Part of the reason for rapid dealer consolidation in the past has been the access to low cost capital. In the interest of promoting business and “partnering” with long-time customers, many lenders loosened their traditional positions in order to offer attractive financing terms.
The low interest rate environment made debt financing very attractive. Loan-to-value ratios increased, making it feel somewhat easy to borrow large sums of money. Cross guarantees and the like gave lenders additional support and comfort for their loans. I believe lenders will return to their roots, and as such borrowing for acquisitions will become more challenging. It’s not impossible, but certainly more challenging.
Used vehicles part of the answer
As our businesses begin to restart and pent-up demand gets behind us, many factors will be at play to redefine our short-term futures. The used vehicle market is one that carried dealers in 2009 and will likely do the same this time around.
Many dealers believe that bright days will return and are willing to ride out the current storm with the hopes that values will increase, making a sale down the road more attractive.
Used vehicle values are anything but predictable and depend on a number of factors. Caution should be exercised. With new vehicle incentives as high as they are or will be, and used vehicle supply leaning towards short-term over-supply, used vehicle pricing could come under pressure.
We all know that the used vehicle business is more about buying your inventory correctly rather than selling it. Each piece is unique and the price changes daily, if not hourly. Again, cautioned should be exercised.
Optimism is a wonderful thing. It can support a dealership to punch beyond its weight in tough times. Consumers however, will ultimately call the shots at the end of the day. Caution is also required to make sure that the winds of optimism don’t turn into an unforeseen destructive tornado. There is a fine balance between optimism and caution that we should all strive to achieve, especially in times of uncertain consumer behaviour.
