Despite sky high prices and surging customer demand, automakers are not the ones coming out on top
According to Edmunds, the average new car transaction in June was just shy of the record $41,000 set in May, and up 10% from June 2019. The average used car price soared even more, rising 28% in that two-year period to reach a record $26,500.
The real winners in this current price environment? Car dealers.
Dealers are independently owned businesses that buy new cars from automakers at fixed prices. And those wholesale prices have generally not increased of late, leading to unprecedented profit margins on new car sales.
Typically, selling new cars is the least profitable sector of a car dealer’s business. Used car sales are more profitable, while service and repairs account for the most lucrative part of the business.
“All will deliver record earnings,” Faghri said. “I think prices have probably peaked. But these market conditions will probably continue until 2023.”
A timely U-turn
A survey of more than 1,000 dealerships conducted by Cox Automotive put dealer confidence in the second quarter of 2020 at an all-time low index of 20. A number over 50 indicates more dealers view conditions as strong or positive rather than weak or negative.
What a difference a year makes. The most recent survey conducted in late April and early May found a record high confidence reading of 70.
And Faghri sees even better times ahead for dealers because the traditional flow of service revenue still hasn’t returned to normal. He expects that to be the next area to see a big increase in demand.
“A lot of people weren’t driving much during the pandemic, and didn’t have work done,” he said. “I’m generally a big believer there’s a lot of pent-up service demand and deferred maintenance that will need to be taken care of.”
Dealers are having to pay more for used cars, especially those bought at auction. The supply has been squeezed by rental car companies — which typically put a lot of cars into the market — putting the brakes on sales of their vehicles.
In 2020 as travel ground to a near halt, the major rental car companies sold off roughly a third of their fleets to raise the cash they needed to survive. Now, because of the chip shortage, they are having trouble replenishing those fleets. With a rebound in demand and rental prices more than double what they were before the pandemic, the rental companies are holding onto the cars they have, feeding the record used car prices.
Some dealers are now advertising to buy cars rather than sell them in a bid to build inventory. There are also robocalls going out from companies offering to buy used cars.
