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May 08, 2017

New Vehicle Sales Begin Retreat From Record Highs

Featuring Wilfredo Fernandez

Recent Wall Street Journal Headlines: 

“Banks Pull Back on Car Loans as Used Auto Prices Plummet” -- Wall Street journal
“Auto Makers Report Steep Sales Decline in April” -- Wall Street Journal


Recent troubling headlines coupled with the increase, and anticipated continuing increase, in interest rates (over the past year the Prime Rate has increased 50 basis points and the 30 day LIBOR rate, used as the basis for many floor plan rates increased almost 60 basis points) will challenge dealers, especially those dealers in the Northeast, whose sales rely on a high lease penetration concentration, to maintain sales volume.

It is not, however, all doom and gloom.  While new car sales in April 2017 are down 4.7% over the same period in 2016, the seasonally-adjusted annual sales rate is still at about 17 million – down from 17.55 million units sold in 2016, but still at near record highs.  So, what should a car dealer focus on? The following are a few important areas to consider:
  1. Frozen assets.  A concept used in the auto industry for decades. Does the dealership have frozen assets, which can be accessed to free up liquidity?  Focus on new, used, and inventory parts levels and aging.  Contract in Transit, Warranty Receivable and Accounts Receivable turnover.

  2. Managing interest cost.  With the continued rise in interest rates dealers need to consider new and used inventory levels to minimize carrying cost.  Dealers are in the beginning of the Spring/Summer selling season, with manufacturers ready to provide increased incentives to “move metal,” – the challenge is to have the right mix of new vehicles to maximize new vehicle inventory sales penetration and minimize the end of ‘Model Year Blues’ in the Fall, when new vehicle inventory is made up of 2017 units that never sold.  Used vehicles can make or break the profitability of dealerships.  With the manufacturing incentives decreasing new vehicle selling pricing and the flood of off lease vehicles coming into the market place, dealers must pay special attention to aging inventory levels, and mix of used vehicles.  Additionally, trade values and auction purchases can minimize future used vehicle write downs, and increased carrying cost of unsold inventory.

  3. Fixed Operations.  Service and Parts managers of the respective department need to set weekly goals on RO counts, and Sales per RO.  Also, the Parts wholesale operations need to be reviewed – are wholesale parts gross properly supporting the increased inventory carrying cost, related wholesale accounts receivables, and support services (i.e. delivery staff and vehicles)?

  4. Accounting department.  Is the accounting department able to provide timely and reliable financial information on the dealerships’ profit centers and overhead cost?

These are just a few items to focus on, as new vehicle sales begin the retreat from record highs. Ask your professional advisor to discuss these and other important considerations.