Dealers worried but used profits offer hope

Economic anxiety is weighing on franchised U.S. car dealers, but a robust used-vehicle market fueled traffic and profitability this summer, shoring up those dealers' outlook on the market.

Setting aside price pressures and softening new-vehicle sales, 2019 has been remarkably stable for U.S. auto dealers, Cox Automotive notes in its latest Dealer Sentiment Index report. Vehicle shoppers have borne up under the burden of higher costs from rising vehicle prices, a pullback in automaker incentives and higher-than-usual interest rates. High lease penetration has fueled a desirable mix of off-lease used vehicles with strong residual values for dealers to work with.

"It's an environment that continues to be healthy for franchises who are focusing on used-vehicle operations," Jonathan Smoke, Cox's chief economist, told Automotive News. "It's a good-news-bad-news story. The market's not going to give you growth, but the market is going to have plenty of quality inventory for you to make the most out of this situation."

The stability of dealer sentiment from respondents to the Cox Automotive survey so far in 2019 stands in contrast to last year when dealers rode a roller-coaster of extreme highs and lows, Smoke said. In 2018, euphoria spurred by tax law changes gave way to fears about the effect that proposed tariffs would have on the sale of imported vehicles and parts.

And while current marketplace conditions are less than ideal, dealers who successfully navigate today's challenges are likely to see continued growth, Smoke indicated.

"We can't lose sight of the fact that there's been a lot of good. It's been a pretty stable two quarters," Smoke said.

The survey, which gauges perceptions of franchised and independent dealers of the past 90 days and expectations for the next three months, identifies key factors affecting retailers' optimism or pessimism. Franchised dealers responding to the third-quarter survey indicated the current market is strong, though down slightly from last year at the same time.

The latest survey, conducted Aug. 6-18, garnered responses from 1,115 dealers — 595 franchised and 520 independent. Responses are weighted by dealership type and sales volume to represent the national dealer population. The survey tracks how dealers view their market on a scale from weak to strong. A score higher than 50 indicates optimism, while a score below 50 indicates a negative outlook.

For franchised dealers, current market conditions scored a 56 in the third quarter, up from 54 in the second quarter but down from 59 a year earlier. Overall, dealers scored the current market at 48, dragged down by independent dealers' score of 46. Used-vehicle sales likely drove the score, Smoke noted, as franchised dealers felt most positive about their used-vehicle sales and inventory levels in the third quarter. The used-vehicle sales environment scored a euphoric 73 with franchised dealers, the highest mark across the survey. The enthusiasm about the used-vehicle market comes as industry volume of off-lease vehicles peaks. That has been a major driver of the used-vehicle market for several years now. While off-lease volume will start to contract, Smoke said, he doesn't anticipate a drastic drop-off.

Dealer sentiment about new-vehicle conditions sat at 55. Though new-vehicle sales softened in the first two quarters, Smoke said, they remain generally strong.

Sentiment about consumer traffic stayed in negative territory for franchised dealers, but at 47 it was the highest on record for Cox's 2-year-old survey. Both franchised and independent dealers look at the current U.S. economy with optimism, giving it a score of 55.

Franchised dealers are optimistic about vehicle sales in the fourth quarter, with a score of 57. That number was down from 62 in both the first- and second-quarter surveys.

Cox found regional factors influenced that outlook.

More than half of the franchised dealers citing the economy as the main factor for weak conditions ahead were in the Northeast, Smoke said.

"Winter months are tougher in my area...," a Northeast Jeep dealer wrote in a survey response. "Demand falls off."

Dealers also cited affordability challenges as a reason for concerns about the fourth quarter.

"Wages are not keeping up with the price of vehicles, and consumers are patching their vehicles to keep them running," a Chevrolet dealer in the South wrote.