Over the past three years, the automotive industry has faced quite a bit of turmoil. From the pandemic and lockdowns to supply chain shortages and aggressive price markups, car dealerships have been put through the wringer. Now, used car prices have gone up and there’s more inventory at dealerships, but no one wants to buy because of inflation. The prices are higher and because of interest rates, the monthly payments are higher.
The average price of a decent new car right now is around $46,000. At a typical interest rate of around 6-7% over a 60-month term (5 years), the monthly cost for a new car is around $1,000 per month.
Now, where does that put the car dealership industry? Well, dealerships now have inventory but they don’t have any buyers. Manufacturers are pressing on dealerships from the other end, saying they’re not going to produce hundreds of cars for dealer lots anymore, and some aren’t going to be selling to dealerships at all. Some manufacturers want to sell straight to the consumer, like Tesla. No markups by the dealership, just straight from the manufacturer to the consumer.
What’s that going to do for used cars? Will used cars only be sold through dealerships? Where do you see the used car business in two or three years? Will there be factory stores with a small used car department?
What about electric vehicles? Many of these manufacturers are telling dealerships that in 3-4 years, they can only sell EVs or mostly EVs. Many states are even canceling the eligibility of gasoline vehicles by the end of the decade. So dealerships won’t even be able to sell gas vehicles anymore; they won’t be allowed to go on the road. It’s clear that dealerships have to make a big transition if they want to stay afloat, and that’s going to put a big crimp on their parts and service business.
Most dealerships have a fixed absorption, meaning the fixed operations (service and parts) covers the fixed expenses; meaning overhead, rent, taxes, and insurance, all of this is paid for by their service and parts department. The sales department is where the profit comes from. So if your service and parts department can do 100% fixed absorption, you’re in good shape.
Well, electric vehicles don’t need as much service compared to gasoline vehicles. They don’t have internally lubricated engines or transmissions that need to be serviced regularly. They might need new brakes or tires, but that’s not the same as more expanded repairs. A lot of this is covered by a warranty, but the manufacturer still pays the dealer for the warranty. So what happens when everything goes to EVs and the fixed absorption only comes out to 20-30%? Well, now the sales department has to cover the difference; and if you have a lower margin and a lower volume, that may not be enough to withstand the expense footprint of a large traditional dealership.
What do you think about phasing out car dealerships and buying directly from the manufacturer? Take away the wishful thinking of how you want a car dealership to be, and let us know how you think it’s actually going to be. No one wants to deal with a runaround salesperson who goes back and forth with the elusive “manager in the back”, would this alternative be a better option? What if negotiating was taken out of the picture and cars had fixed prices? What is the happy medium for consumers and how does a dealership enterprise create a structure that’s profitable and sustainable without going out of business?
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