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Originally Posted by I-Hate-Hulse
Awesome insight from someone in the know - thanks for sharing (and welcome back!)
What about the new car market though? Not sure if the 'floorplan' you speak of would affect new cars the same way as the used market. Can you foresee a return to sub-MSRP pricing? (heck I'm happy if it's *just* MSRP now with no BS $7,000 mandatory dealer package). I'm hearing chip shortages may ease by 2023. But I'm also hearing of various excuses or conscious decisions by the manufacturers that might constrain production levels.
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Floor planning is different for new cars, but you still want to sell them as fast as possible, as you do pay monthly interest to carry inventory. There is a million variables though as all brands are different, all banks are different and and most dealers keep that close to their chest. But I believe you can carry them for a year, so they rarely age out.
As for the rest....this is a tough question to answer, but I have a few theories.
First I have to put on my Company hat and say that MSRP is an acronym for Manufacturers
Suggested Retail Price. Not NMRP Manufacturers
Mandatory Retail Price. When demand outstripped supply for the first time pretty much ever on new cars, most dealers were handcuffed and had to add market adjustments to their prices to balance their books.
Just to frame it, most people do not realize how slim car margins actually are. On something like a Toyota Corolla or a Honda Civic, VW Golf.... cars like that have an average margin of around $600. That's it. At one point in time Hyundai Dealers lost money on every single Accent they sold, because after you paid your shop to PDI and detail the car, the $290 Margin from Hyundai was gone and then some. Dealers do get a Holdback from the manufacturer, and it's typically 2-3% The more expensive SUV's and Trucks at the top end tend to have a margin of 7-9%, those are the cars that pay the bills. And I don't think it's unrealistic or greedy to make $5000 on a $50,000 product of any kind. Most people would agree it is reasonable. Of course you make money on your back end products like warranties, Insurance, 3M, accessories etc. That's no secret.
Also a lot of people don't realize, car dealerships are no different than any other franchise model. We have a license from the brand to sell their product under their rules. Also they dictate how many cars each dealer gets based on performance metrics and you plan your year based on how many cars you expect. And you will never get more than your yearly allocation outside of buying allocation from another dealer. And no dealer was giving up anything as everyone had a backlog of customers.
This was the problem, when you have a business model
mandated by the manufacturer that says you need to sell say 80 new cars a month to break even, and you planned and forecasted by that model and then the manufacturers can only supply you with 25 cars, something had to be done so the Dealers could turn a profit and pay their people. A lot of dealers yes... they got way too carried away, I've seen $20 and $30K adjustments on certain vehicles. Not naming any names, but that was out there.
However, there is a second component to this. Deals with Trade-ins. People were complaining about the extra couple grand the average dealer was asking over MSRP, but
nobody was complaining about the extra 10-15k they were were getting for their truck they traded in. Or extra 5k for their Corolla. The Delta/difference in cost on most deals, was actually a lot smaller, than it was pre-Covid. So yeah, you were paying a couple thousand over list, but you were also getting 5-10k more for your trade. So Trade-in transactions were typically win-win.
Where do I see it going? I think water will find level somewhere in the middle. I think the days of $10-15k rebates on trucks/SUVs are gone forever. I also believe that auto manufacturers are going to go away from trying to be the 'biggest manufacturer in the world' to becoming 'the most profitable manufacturer in the world'. Biggest doesn't always equate to most profitable. Ask 80's/90's GM how that worked out for them.
I also see a more bespoke/build to order model coming in. Gone will be the days where there is 300 F150's on one dealers lot they have to give away, and the manufacturers has to incentivize the dealer to sell. The last 2 years gave businesses of all kinds opportunities to lean out their operations, trim a lot of useless fat, and as much as a lot of people don't like to hear it, weed out dead weight employees. I kinda chuckle at 'The Great Resignation' as I am sure, a huge portion of those resignations were "Resign and get a package, or your position will be eliminated." Covid forced business to analyze their models for any areas where efficiency could be improved, and I have no doubts the Auto sector used it to dramatically lean out as well. If you can make the same money, and increase your share price on 40,000 vehicles instead of 60,000, why wouldn't you?
I think you'll see cars selling a lot closer to MSRP. Dealers carrying a lot less inventory, and used cars will balance out eventually. The biggest thing that hurts used car values are factory rebates. Whenever I appraise a truck, the first thing I do is check the manufacturers site for rebates. So if I am appraising a 2020 RAM and a new 2022 equivalent has a $8000 rebate and 0% financing, well you've gotta factor that in right off the top. If the crazy rebates go away, then the values come up.
At the end of the day, for most people, it's all about the difference in cost. And no matter how many wrinkles you throw in there if Jim and Nancy can come into the dealership with their 5 year old SUV and walk out of here with a new shiny SUV for a $20k difference, like most people, they don't care how you get there, they are just focused on that difference in cost. And I don't see that changing over the long haul.
Water will find level as it always does.