Demand shows COVID resistance

It's insensitive to categorize anything that has killed more than 230,000 fellow citizens and sliced the nation's second-quarter gross domestic product by a third as a "stumble," but that's exactly what COVID-19 looks like to analysts covering the U.S. auto industry.

After falling off a cliff in the spring because of the pandemic, retail demand for new automobiles in October reached a seasonally adjusted, annualized selling rate of 14.8 million in October, according to an estimate by Morgan Stanley Research. That is the retail SAAR's highest level since September 2018, when it reached 15.5 million vehicles — and almost double the 7.5 million depths plumbed in the dark days of April.

But this isn't April or 2018.

Because of what the pandemic did to siphon dealer inventories and tamp down expenses, coupled with a product mix heavier on lucrative light trucks and continued strong pre-owned demand, dealer profitability is better than it's ever been.

"I think that it is fine to call it record profitability levels," said Patrick Manzi, chief economist for the National Automobile Dealers Association. The group's latest Dealership Financial Profile, for the month of August, showed net profit share of total dealership sales at 2.9 percent, and Manzi said the situation improved even further in September and October.

Of automakers reporting, Subaru and Toyota said they set sales records for October, with Subaru rising 11 percent and Toyota Motor North America up 8.8 percent. Mazda saw its sales jump 16 percent, Volvo increased 21 percent, and Hyundai-Kia climbed 5.1 percent. Ford, which last week announced a return to monthly sales reporting, saw its sales decline in October by 6.1 percent. American Honda was down 3.4 percent.

During an Oct. 22 update with reporters, Bob Carter, head of sales at Toyota Motor North America, said he was bullish on the way 2020 will finish, especially compared with this spring.

"You know, the circumstances that were out of everyone's control really put us in this position," Carter said. "But let's control what we can control. I personally have turned off the TV and put down the newspaper, and we're just going to get after it and sell like hell and close out with a really strong fourth quarter."

Other automakers did not report monthly sales in October, and industrywide fleet volume continued to be depressed, down 27 percent last month compared with a year earlier, though it was up 6.6 percent from September, according to data compiled by Cox Automotive. Morgan Stanley estimated that total industry sales were down 2.5 percent year over year, with European brands collectively down 6.6 percent, Asian automakers off 4.6 percent, and domestic automakers up 0.5 percent.

Overall, October's SAAR was 16.4 million vehicles, according to Motor Intelligence.

With new-vehicle sales still down from last year, dealership profitability — and automaker profitability — is being driven largely by the ugly discipline imposed on the industry this year by the pandemic, said Brian Finkelmeyer, senior director of new-car sales solutions at Cox Automotive.

"COVID is showing us that price is no longer the winning play," Finkelmeyer explained. "The winning play is having the right quantity and quality mix of inventory. It's just a fact: Dealers with bigger inventories capture more online shopping attention. Also, the dealers best at inventory management are earning 'em by turning 'em."

Finkelmeyer said dealerships have learned to be more efficient with less personnel and are spending less on advertising and holding costs.

In addition, incentive costs are way down — $3,678 per vehicle in October vs. $4,953 in April — because of strong demand.

"This is why the business is so good for dealers right now," Finkelmeyer said. "COVID has been a crash course in efficiency and inventory management."