Used- and new-car margins continue under pressure but dealers optimistic

The pressure for car dealerships is “relentless.”

New-car sellers, used-car sellers, franchised dealer or independent, all are seeing their margins pinched in a competitive marketplace.

“Despite a healthy new-vehicle sales environment, dealers continue to feel pressure to lower prices,” according to results of a survey of nearly more than 900 dealers by Cox Automotive.

Cox reported that both new- and used-car dealers are feeling pressure to lower prices, scoring the concern at 67 on a scale of 0-100, or more than average. And, yet, dealers remain basically optimistic about the near-term future, Cox said.

122817 IL Used- and new-car margins continue under pressure but dealers optimistic - Copy

“Although price pressures and costs are working against them, we continue to be encouraged by the fact that dealers are optimistic about market prospects,” said Jonathan Smoke, Cox’s chief economist.

“Both franchise and independent dealers expect a stronger market in the first quarter of 2018,” said Cox in its “Key Takeaways” from the fourth-quarter survey.

And, yes, it could have been much different.

“Prices of used cars were expected to plummet starting in 2017 as millions of vehicle leases expired and people who bought during the financial crisis exchanged their old rides for new ones,” The Wall Street Journal reported recently. “But the predicted price collapse hasn’t happened.”

Indeed, franchise dealers rate the current used-vehicle sales environment as 67 (above average) on the 100-point scale, while independent dealers rate the sales environment 51 of 100 or about average.

Still, there are challenges on used cars, where most dealers earn a higher profit margin.

“Independents [in particular] are having to deal with the scarcity of five- to eight-year-old vehicles by shifting to what’s most available: less than four-year-old vehicles,” said Smoke. “By shifting to newer vehicles, they are paying higher prices yet they are also continuing to serve a value-seeking consumer who is more likely to have credit challenges. That translates into relentless pressure on price.”

Almost a third (31 percent) of independent dealers rank limited inventory as a top-five factor holding back their businesses, while only about 17 percent of franchise dealers feel the same.

Both groups rated market conditions, competition and expenses among their top five factors.

Market conditions (40 percent) and competition (32 percent) were far and away the most important factors for franchise dealers, with four of five dealers (or fewer) citing the other 12 factors.

Independent vehicle dealers scored market conditions (45 percent), credit availability for consumers (39 percent), competition (37 percent), expenses (33 percent) and limited inventory much bigger concerns than eight other factors that worry fewer than one in five dealers participating in the Cox survey.

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