Without question, the last few years have been amazing to see in the dealership business. Watching a global pandemic kick off what would become the most profitable period in the car business has been excellent. Thanks to a worldwide semiconductor shortage (followed by other parts, including seat foam) and cash infusions from the Federal government under the Paycheck Protection Program (“PPP”) versions 1 and 2, most dealerships are financially more substantial than they have ever been. Is that a good thing?
Charles Darwin studied evolutionary biology, and during his studies, he determined that to thrive and adapt, a species must encounter some natural selection. This could be illness, predators, or anything to push the species’ limits and cull the herd’s fewer desirable attributes, leaving only the most desirable features to survive. Without some challenges, adaption and growth are lost.
Take the dodo bird – it became flightless throughout generations as it did not need to fly to evade predators or feed itself. Then when outsiders discovered their island home, the dodo vanished as they were hunted and not afforded the time needed to adapt.
With the fast-paced change in today’s retail market, is your store going to be able to adapt to a shift in the demand curve quickly? Do your people remember how to sell and not just act as order-takers? With high-interest rebates cooling spending and inventory days-on-hand increasing, stores see foot traffic slow down and front-end grosses decrease.
Used vehicle inventories are becoming stagnant and having “water” in the used vehicle inventory is becoming a hot topic again. Manufacturers are starting to incentivize vehicles and sub-vent interest rates – both have been unseen in the last 2-plus years. The stress fractures are visible, and it is time to adapt to what is coming or risk the dodo’s fate.
This is not to say stores will no longer be profitable – a good operator will find a way to adapt to the changing landscape. Stores may be slightly less fortunate as the pendulum swings in the opposite direction for a while. Expenses must be examined and re-examined to determine if certain items are “necessary.” Even personal spending habits should be reviewed for the same reasons.
Conserving cash is paramount when interest rates rise, and banks tighten their lending.
There were plenty of stores on the verge of collapse before the pandemic for any number of reasons but were able to survive (and even thrive) over the last few years thanks to an unprecedented chain of events.
Have these operators learned the necessary lessons to avoid being in that same position again, or will they find themselves similarly situated after a cool-down in consumer spending on vehicles? The dodo adapted to its environment – food was plentiful, and there were no predators to be mindful of, so it became flightless. Then a dramatic shift happened to its environment, and it became extinct.
For more information on this topic, please contact a member of Withum’s Dealership Services Team.