The Expert Podcast

This about sums it up right here: the question is, what's the car business going to be like for the next year in 2023? Obviously, if you go back to 2018 and 2019, the car business was very robust. New car dealerships had two, three, or 400 cars sitting on their lot. You could get great deals, big discounts by negotiation, and you could pretty much get whatever car you wanted—every possible color combination, equipment, and model was available.

Now, fast forward to after the pandemic hit, and you had lockdowns. There were supply chain issues. Manufacturers stopped building as many cars. 2020 and 2021 made for empty lots—car dealerships had no cars on their lot. Used cars went up in value, and 2022 almost got worse. People thought that maybe supply chains would open up a little bit in the past 12 months, but they really didn’t. We're just starting to see some inventory now, but nowhere near what it was in 2019.

So, what does that mean for the future? Well, manufacturers are pretty much able to start building cars again, not to the level that they would in 2018 or 2019, but they can get most of the supply chain parts and the equipment they need. But the question is, do they want to? And here's a reason why: demand is starting to back off, mostly because the prices have gone up. The average new car right now is about forty-six thousand dollars for a decent new car. The interest rates now are six, seven percent. If you apply a seven percent interest to a forty-five thousand dollar car, you're going to end up with a payment of a thousand dollars a month for a car payment for five years.

So, that's going to do what's called demand destruction. The problem with the car business in 2019–2021 was supply-side problems where they couldn’t supply enough vehicles. Now, it’s demand-side problems—where they can build vehicles, but who the heck’s going to want them if you have to pay a thousand bucks a month, right? So, the demand is starting to be a problem.

In addition, some of the manufacturers are now looking at: well, how much do we want to invest in the development of new models, equipment, and upgrades if we have to switch over to electric vehicles in the next four to five years? The lead time for vehicle development, new models, new platforms, is about five or six years from the time you start doing it until the time it's tooled, ready to go, and on the lot. Well, some states are already telling manufacturers they won't be allowed to sell gasoline vehicles by the end of the decade—2030. Well, five or six years from 2023, you’re right up against that deadline. So, they may not want to put a lot of money in tooling and R&D into gasoline vehicles. But on the other hand, the demand for electric vehicles is not really that big yet. Right? So, the automakers are kind of caught between a rock and a hard place. Do you develop more gasoline vehicles, push electric vehicles, try to split the difference and do a little bit of each, or sit back and wait? Because who knows what the demand is going to be? There may not be people knocking down your door to spend a thousand dollars a month for a new vehicle. And if they are, is that going to be the same kind of volume as you need to keep your dealership going?

Another canary in a coal mine is the fact that big used car dealers like Carvana, CarMax, Vroom, and some of these larger used car dealers are running into some serious problems with volume and profitability. While a new car dealer has other profit centers—you have new cars, obviously, where Carvana doesn’t sell new cars, they only sell used—you also have a service department where you can repair vehicles and get some service income and parts income, where used car dealers don’t. But is that going to be enough to maintain the dealership expense structure, especially when you have a six, eight, or ten-acre lot? Even if you're not filling it up with cars, you still have the expense of carrying that real estate, the taxes, and the insurance.

So, the other potential future for car dealerships is that dealership footprints become smaller. Meaning that their lot size is smaller. They don’t carry 500 cars, they might carry 50 cars—representative models. Yeah, they have some inventory. They keep a few cars in the showroom, but they don’t have 10 of each model for customers to choose from. Maybe more people will order vehicles. In fact, if anything comes out of the Carvana revolution—if you call it that—they had a small footprint. They went up, they had that car vending machine, which was a gimmick, but they also didn’t have a big lot filled with cars. That may be something that new car dealerships, traditional dealerships, start to look at.

And also, more fixed pricing. Now, people have different opinions about fixed pricing. One is, you don’t have to negotiate, you don’t have to haggle, you don’t have to play games. But on the other hand, if it’s a fixed price, you also can’t get a deal either. If you are a savvy negotiator or you know what to do to get a good deal, if it’s a fixed price, you’ve got to pay full price—full retail, same as everybody else. You can’t get a deal. So, some people don’t like that fixed price because they don’t feel like they can get any kind of concessions from the dealer.

How do you feel about that? Would you rather negotiate and get a good deal or just give in and pay whatever the dealer says and walk away if you think it’s too much? And where do you think the dealership business is going in 2023 and beyond?