After record profits amid pandemic, dealer outlook soars for '21

Ten months ago dealers braced themselves for a huge financial hit as the coronavirus pandemic started to wash across the U.S.

It never materialized. Dealerships surely suffered short-term losses in the spring months as showrooms in many areas were shuttered and consumers sequestered at home under government orders. But federal relief in the form of forgivable payroll loans combined with a rebound in vehicle shopping and an increase in profit margins by midyear led to a striking turnaround of dealership fortunes.

The result: the most profitable year in history for many dealerships across the country.

"Everything you worked for your whole life to become an owner was at risk. And then, all of a sudden, business took off — in spite of the handcuffs we were wearing," said David Ferraez, a dealer who has three stores in New Jersey. "We started selling our cars and making more gross per vehicle than we had averaged in 20 years prior."

Indeed, dealership data collected by the National Automobile Dealers Association shows that 2020 set a new bar for profits. Through the first 11 months of 2020 — December data is not yet available — the average U.S. dealership had net pretax profit of $1,786,149, up 33 percent from the comparable period in 2019. That 11-month 2020 figure is already higher than the previous full-year record of $1,503,432 reported by NADA for 2015.

Automotive News' 2021 Dealer Outlook Survey of 183 dealership executives in January further illustrates 2020's profit boon.

Nearly two-thirds of respondents said their dealerships made more money in 2020 than in 2019 — even with the disruptions of the pandemic. And with vehicle margins still high, they entered 2021 with optimism. Just more than half of respondents said they expect this year to be even more profitable than 2020.

Dealers still expressed concerns — top issues cited included limited inventory and regulatory uncertainty — but those didn't dim their bright outlook. The results largely mirrored findings from the same survey conducted in early 2020 before the start of the pandemic.

Political activity featured prominently in the 2021 survey, with 71 percent of respondents saying they expected the transition to President Joe Biden's administration to hurt their businesses. Even with 2020's robust profits and the optimism for 2021, about a third of respondents supported more federal payroll loans for dealerships this year.

The 2020 profit surge came about as inventory constraints caused by the pandemic led to higher transaction prices and per-vehicle gross profits even as dealers cut costs in response to the virus crisis.

"It was the perfect environment for incredible profitability," Cox Automotive Chief Economist Jonathan Smoke told Automotive News.

Operating profit for the average dealership for the first 11 months of 2020 was $520,258 — more than quadruple the level for the same period in 2019, according to NADA.

Though vehicle sales were lower, the average dealership's gross profit per new vehicle retailed rose 18 percent to $2,376, according to NADA. Gross profit per used vehicle rose 12 percent to $2,672.

Loans from the federal Paycheck Protection Program likely played a small role in dealership profitability, Smoke said. Franchised dealerships borrowed program money in larger numbers than independent dealerships, according to Cox survey data. But the impact of that money on dealerships' bottom lines likely was marginal, Smoke estimated.

"It was vitally important to provide the motivation and the courage to stay in business. ... I have no doubt it contributed," Smoke said. Yet "I really think the PPP program was a rounding error compared to the improvements in gross margins and in productivity."

Smoke noted that many of the conditions that drove profitability last year persist in 2021, but "some are going to be impossible to replicate."

About 40 percent of survey respondents said cost cutting is behind them, while 42 percent said they expected to trim expenses in 2021.

One dealership executive chalked up his optimism for 2021 to restructured pay plans and the care he'd taken to rehire only his strongest sales employees. Jack Daniels Motors in New Jersey subsequently had its best-ever year in 2020, CFO Ronald Dubin said.

Strict shutdown orders in the state prompted the five-store group to trim sales staff to a skeleton crew. When sales roared back in May, Dubin took the opportunity to overhaul the entire department.

"We brought back the cream of the crop," he said. "We redid every pay plan in the company and realigned it towards profitability."

John Pitre, dealer principal of Motor City West in Bakersfield, Calif., said he adopted shorter business hours that required only one shift per day instead of two.

Supervising half as many employees allowed managers to become more efficient.

"Our people got better. Our processes got better. We eliminated unnecessary steps and unnecessary vendors," Pitre said. "That streamlining has allowed us to be more efficient in not only our pricing but our delivery of services."

Survey respondents said they see the most opportunity for profit growth this year in used-vehicle sales, followed by service and then new-vehicle sales.

Nearly one-third said they plan to hire to expand dealership head count this year.

At Harbin Automotive, a two-store group in Scottsboro, Ala., used-vehicle sales jumped 85 percent last year, said Tom Vosen, the stores' general manager.

When the industry rebounded, demand rapidly eclipsed supply in both used and new.

"Especially in the last half of the year, we were selling off the [delivery] truck," Vosen said.

New-vehicle inventory levels remain a wild card in 2021.

More than a third of respondents expect them to be back in line with demand by the end of June. Another quarter don't expect that to happen at all this year.

Cox Automotive's Smoke estimates supplies won't normalize until next year. That will continue to both help and harm dealerships, he said.

"The bad news is, it's certainly going to be more challenging to have the inventory to support dramatic increases in volumes," Smoke said. "The good news is, it creates much of that very strong pricing power that directly related to the improvement in margins experienced in both the new and used markets."

Randall Hebert, dealer principal of Mountain View Chevrolet in Chattanooga, said he sourced inventory during the early weeks of the pandemic from dealerships closed by government orders. But those stores aren't selling to other dealers any longer.

"The factory still has the same problems that they had before," Hebert said. "They have never been able to ramp production back up."