The Expert Podcast

So, is the car business changed for good? Obviously, the last two or three years have been a lot of turmoil for the automotive industry. First, there was the pandemic, and then there were lockdowns, followed by an inventory shortage where factories weren't turning out vehicles. Supply chain was part of it, and then dealerships were charging huge markups. Now, used car prices went up, and now that equilibrium is shifting back. There's some inventory at dealerships, but nobody wants to buy them because of inflation—the prices are higher—and because of interest rates, the payments are higher.

Look, the average price of a decent new car right now is about forty-six thousand dollars. At a regular interest rate for most car loans, that's going to be about a thousand-dollar payment. At a six or seven percent interest rate, times 60 months—a five-year loan—a $46,000 car is going to be a thousand bucks a month, and that's pretty stout. So, that's cutting back the demand side of the market now.

Where does that put the car business? Well, dealerships now have inventory, but they don't have buyers. Factories are pressing on the dealership from the other end, saying that we're not going to really have hundreds of cars on the lot anymore. Some factories are saying, "We're not gonna even have dealerships anymore. Buy direct from the factory, not have markups by the dealer, and make it a more Tesla-like experience."

What's that going to do for used cars? Are used cars going to be sold only through dealers? Both Carvana and CarMax are both having problems as large used car retailers. Where do you see the car business in two or three years down the road? Is it going to be factory stores with a small used car department? What about EVs? A lot of these manufacturers are telling their dealers that in three or four years, they have to sell only EVs or mostly EVs. Some states are canceling the eligibility of gasoline vehicles by the end of the decade, by 2030. So, they can't even sell gas vehicles anymore. Dealerships have to do a big transition. That's also going to put a crimp on their parts and service business.

Look, most dealerships have what's called fixed absorption. Fixed absorption means that the fixed operations department—service, parts, body shop—the fixed part of the dealership or the repair part of the dealership covers their fixed expenses, meaning that the rent, their overhead, taxes, insurance, all that's covered by their parts and service department. That's fixed absorption. In the sales department, that's their profit—that's where they make their profit from.

So, if your service can do 100% fixed absorption, you're in good shape. Well, electric vehicles don't need as much service. They don't have internally lubricated engines, they don't have transmissions, and they don't have all the other parts. Yeah, they might need brakes and maybe shocks and tires, but that's not the same as more expanded repairs. Now, a lot of that's covered by warranty, but the factory still pays the dealer for the warranty. So, what happens when everything goes to EVs and you don't have that 100% fixed absorption on the repair side? Maybe you have a 20 or 30 percent absorption. Well, now your sales department has to cover the difference. If you have a lower margin and a lower volume at the same time, that may not be enough to withstand the expense footprint of a large traditional dealership operation. Right, with a five-acre lot, you know, ten thousand square foot showroom, and building and all the upgrades you have to do. It may change the dealership profile to be more of a boutique-style outlet that doesn't have a lot of cars but is more of a delivery outlet for the factory. You don't need ten salespeople, you don't need five managers, a finance manager, all the different things that go with it.

Obviously, automotive consumers have an opinion about this. Some like the idea, some don’t. Take away your thought about wishful thinking, how you want dealerships to be, and let us know how you think it’s going to be. Nobody wants to have to deal with a salesperson that doesn't give you a price right away, that plays around with numbers and has the manager in the back. They go back and forth. Nobody likes that. But what about the alternative? What if it's a fixed price, but you can't negotiate? You have to pay full list— is that better?

Carvana was supposed to be, you know, the utopia of car dealerships to buy used cars. Turns out they had problems too. They're having title problems, and some of the vehicles aren't properly maintained. What is the happy medium for consumers, and how does a dealership enterprise create a structure that's profitable, that can sustain ongoing operations without going out of business?