July 21, 2024


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Car Sales Tanked in 2020, But Dealerships Had Their Most Profitable Year Ever

4 min read
Photo credit: Howard Berman - Getty Images

Photo credit: Howard Berman – Getty Images

From Road & Track

Last year wasn’t good for new car sales. Factory shutdowns, lockdowns, and consumer hesitancy caused car sales to crater in the Spring of 2020; stronger sales in the latter months of the year couldn’t erase the early drop. Overall, sales were down 14.6 percent in 2020, which sounds like bad news for dealers. That’s hardly the case: Automotive News reports that overall dealer profits soared by 48 percent last year, leading to record-setting profits despite sluggish sales.

That begs the question: How did dealers manage to make so much more money selling fewer cars? The first answer appears to be simple: They put the squeeze on us. Shuttered factories drastically reduced supply, but demand stayed strong. That led to a rush on dealers for in-demand models, with a line of customers ready to pay. Dealers could charge what they wanted.

Or, to put it in the sanitized words of industry insiders: “There was just an improvement in the returns from your operations [in 2020] due to the unique market conditions that increased scarcity for both new and used vehicles,” Patrick Manzi, chief economist for the National Automobile Dealers Association, told Automotive News.

As Manzi alludes, the used car market experienced similar pressure. The limited supply of new cars, coupled with economic conditions that squeezed many household budgets, led to huge demand for pre-owned vehicles. Prices, of course, skyrocketed. In January 2021, wholesale used-car prices were up 15.1 percent year-over-year, a remarkable jump that’s nevertheless lower than the high-water mark for the pandemic used-car market.

Overall, in 2020 per-vehicle gross profit rose 13 percent on used cars and 22 percent on new cars. Some of that is dealership mark-up. But a second major factor played a part in the profitable year that COVID created for dealers: A shift toward more expensive vehicles.

That’s because this pandemic didn’t hit everyone equally. “There’s really a dichotomy, economically, out there,” Tyson Jominy, vice president of data and analytics at J.D. Power, told Road & Track. “The ‘laptop class,’ where you can shift to working from home… did extraordinarily well in 2020. It’s really those that work in the service industry and other jobs that can’t be done remotely that really suffered.”

As the nation and world went into shutdown, well-off people changed their discretionary spending habits. “We saw a big shift in demand for durable goods,” Jominy said. “You know, jewelry and—in particular—cars. If you’re not going to swim with great white sharks off the coast of South Africa, you’ve got money for that $80,000 car. So we saw sales at that end really explode.”

Explode is the right word. Sales of vehicles priced between $80,000 and $90,000 grew 91 percent year-over-year in the fourth quarter of 2020, according to J.D. Power data. Meanwhile, sales evaporated at the bottom end of the market. The under-$20,000 segment—which has been contracting bit by bit for years—collapsed, with a 30-percent year-over-year drop in the fourth quarter. The $20,000-to-$30,000 segment shrank 7 percent; the over-$100,000 market grew 63 percent.

Dealers had additional factors working for them. Many received forgivable Paycheck Protection Program loans from the government. Overall staffing fell, and digital retail improved per-person productivity. Low interest rates, automaker credits, and low supply turned the floor plan from a liability into an asset. Every little bit helped: In 2020, dealers ended up making around $140 per car just from credits and interest alone. Compare that to a typical year, where a dealership might lose around $96 per car on fees and expenses related to slow-selling inventory lingering on lots—and have to make that money up elsewhere.

Whether these trends will continue in 2021 is hard to say with certainty. While the pandemic itself has not forced any recent factory closures, continuing shortages of crucial microchips have. It’s an issue serious enough that the White House is getting involved, recognizing the severity of the potential disruptions. Should these issues continue, it’s likely that we’ll see a repeat of the higher per-vehicle transaction prices that defined 2020.

But the drastic spike in sales of expensive vehicles might correct itself sooner. “At the high end of the market, that is such a dramatic change that I can’t see it running at those levels indefinitely,” Jominy told R&T. “You get the one-time gain from a lack of options, but as we know, so many places in this country are ready to open up. And the expectation that we should have the vaccine rolled out to most of the country by summer means there’s a large pent-up demand for entertainment and travel, vacations and movies, anything that we have been depriving ourselves of for over a year.”

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