Coronavirus woes crush dealers' spirits, yet there's hope

To no one's surprise, COVID-19 restrictions on vehicle sales and the resulting economic toll drove dealer sentiment into abysmal territory during the second quarter, according to the latest Cox Automotive Dealer Sentiment Index survey.

But franchised dealers, known for their boundless optimism, are already anticipating a robust recovery during the next 90 days. That positive outlook was somewhat surprising, said Cox Automotive Chief Economist Jonathan Smoke.

The sunny forecast was likely fueled by improved vehicle sales in late April and early May — the survey was taken April 28 through May 10. But dealers may be misguided if they anticipate steady improvement, Smoke told Automotive News. Numerous challenges lie ahead, he said, and Cox researchers were already seeing signs of that in the economic data they track.

"We're not going to see consistent recovery like we have enjoyed for almost two months running in the weekly data," Smoke said. "We're already seeing some evidence that some of the momentum is slowing down."

For instance, Cox researchers are seeing an increase in the number of consumers in recent weeks who say they will delay purchases, he said.

Smoke also noted the coming expiration of payment relief granted to millions of Americans for their automotive and other loans and the end of higher unemployment benefits through the federal coronavirus relief package slated for July. And, as the summer progresses, new-vehicle inventory levels are expected to be strained because of virus-related closings at vehicle assembly plants. Dealers responding to the second-quarter survey already cited inventory levels as a problem.

The Cox survey gauges dealers' perceptions of the past 90 days and expectations for the next three months and identifies key factors affecting their optimism or pessimism. In the second-quarter survey, respondents' outlook about key metrics that determine dealership success, such as the sales environment and customer traffic, fell to the lowest levels recorded in the index's nearly three-year history.

Respondents to the latest survey numbered 1,140 — 610 franchised dealers and 530 independents. Responses are weighted by dealership type and sales volume and then used to calculate what's known as a diffusion index, in which a number greater than 50 indicates that dealers view conditions as positive.

Overall sentiment about current conditions plunged deeper on the negative side in the latest survey, with a score of 20, down from 49 in both the most recent and year-ago quarters. Franchised dealers rated current conditions at 30, down from 54 a year ago and 55 in 2020's first quarter. Franchised dealers' expectations for the next 90 days, however, scored 57, down from 66 in the previous quarter but still in positive territory.

Sentiment about customer traffic dropped to 20, the lowest score ever recorded from franchised respondents on any topic in the survey.

Used-vehicle sales, often a high point for franchised dealers, fell into negative territory for the first time in the survey's history, to a score of 43. That's compared with 72 for both the most recent and year-ago quarters.

COVID-19 effects overwhelmingly earned the top slot among the factors holding business back in the second quarter, with 72 percent of franchised respondents citing it. The U.S. economy rocketed to second slot, cited by 53 percent. In the first quarter, economic concerns ranked sixth among factors holding business back, with 19 percent citing it.

Many franchised dealers shared expectations that pent-up demand would help their recovery."We are hearing from potential customers that they are delaying purchasing until they feel financially secure. Most expect to be back to work within three months or so," said a Subaru dealer in the West.

A GMC dealer in the South said, "Once people are back to work and the U.S. returns to some level of normalcy — people will be more comfortable making a purchase."

Many dealers advocated for additional federal assistance — for instance, reviving the Great Recession-era Cash for Clunkers program.

Smoke said dealers should consider that some of the April-May sales rebound is likely attributable to the pent-up demand they are counting on for summer. Moreover, public health officials' warnings that the virus could surge again as the weather cools is something to watch.

"If we're starting to reach the end of that pent-up demand, maybe the recovery from here is tougher," Smoke said. "I'm definitely more worried about the fall and the winter than I am about the immediate summer."