Affordability worries put dealers in a gloomy mood

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DETROIT — Price pressure, rising interest rates and a shrinking supply of affordable vehicles have U.S. dealers worrying more about business as they look toward 2019.

Dealers’ expectations for the next 90 days, a period that they typically view through rose-colored glasses, have turned negative, according to the Cox Automotive Dealer Sentiment Index survey for the fourth quarter. It’s the first time retailers’ outlook has been negative since Cox Automotive began reporting survey results in the third quarter of 2017.

“We’ve reached a point in which dealers are clearly communicating to us that it’s going to be very hard for their business to continue to be profitable and growing,” Cox Automotive Chief Economist Jonathan Smoke told Automotive News last week here. “You look at the underlying metrics that we track and the data, and it relates to inventory, it relates to credit access for consumers, it relates to interest rates both for consumers and for themselves.”

The survey, which gauges dealers’ perceptions of the past 90 days and expectations for the next three months, identifies key factors affecting retailers’ optimism or pessimism.

The top three factors dealers cited as holding business back — worsening market conditions, rising interest rates and competition from other dealers — carried over from the third quarter. And franchised dealers were more optimistic than independent retailers. Still, the degree of pessimism expressed surprised Smoke, and the gloomy outlook went beyond seasonal factors. Smoke said he didn’t expect optimism to fall substantially until next year.

“We know we’re in trouble when the optimism goes out of the positive category.”
Jonathan Smoke, chief economist, Cox Automotive

“We know we’re in trouble when the optimism goes out of the positive category,” Smoke said. “We are back to an environment where dealers are describing the current market as weak rather than strong.”

The survey results have been on a roller-coaster ride in 2018, he said. That has ranged from euphoria in the first quarter about the potential lift from tax-law changes to fear in the third quarter about tariff threats. Franchised dealers were concerned about tariffs, and that continued in the fourth quarter.

The latest survey, conducted Oct. 24 to Nov. 6, had 1,124 dealer respondents — 610 franchised and 514 independent. Responses are weighted by dealership type and sales volume to represent the national dealer population. They are then used to calculate what’s known as a diffusion index, in which a number greater than 50 indicates that dealers view conditions as strong.

Cox calculated overall results, as well as separate results for franchised and independent dealers. This report focuses on the franchised dealers’ responses, unless noted.

For all dealers, current market conditions scored a 44, down from 51 last quarter and 46 a year ago. Franchised dealers were more optimistic with a score of 51, down from 59 last quarter and 54 a year ago. Franchised dealers’ view of the next 90 days scored a 54, down from 61 last quarter and 57 a year ago.

Inventory woes

Holding back business
Franchised new-vehicle dealers are concerned about these topics, with the number of dealers citing interest rates leaping the most from a year ago.

 
Dealers concerned Q4 2017
Dealers concerned Q4 2018

Market conditions
43%
40%

Interest rates
38%
5%

Competition
36%
32%

Staff Turnover
24%
21%

Credit availability for consumers
23%
15%

Limited inventory
23%
17%

Note: Multiple responses were allowed.

Source: Cox Automotive Dealer Sentiment Index

Among franchised dealers, concerns about interest rates most notably have skyrocketed, with those citing it as a problem jumping to 38 percent from 22 percent last quarter and just 5 percent a year ago.

Maintaining affordable inventory for cash-conscious buyers was especially challenging for dealers this year. Not enough affordably priced cars and ever-increasing prices on trucks are a growing concern. One dealer responding to the survey complained about wanting a pickup that is “not stupid money” to sell, Smoke said.

Limited inventory ranked No. 5 among the top factors holding business back with 23 percent of franchised dealers citing it as a concern. It was tied at that position with credit availability for consumers.

Finding quality vehicles at lower prices was “almost impossible,” said one dealer.

“It’s frustrating not being able to order vehicles to match customer demand,” said another respondent.

Disillusioned dealers reported coming up dry at auction when it came to pickups and SUVs less than $20,000 or smaller vehicles less than $8,000.

“We need more quality vehicles under the [$6,000] range at the auction,” one dealer said. “It is like everyone is looking for the same things and then those vehicles are run up. Then we overpay for vehicles and lose when dealing with the lenders.”

Franchised dealers continue to have a warm view of the used-vehicle sales market, which scored an average 68. Optimism about new-vehicle sales dipped slightly, scoring 57 this quarter compared with 60 last quarter and 61 a year ago.

“New-vehicle sales have essentially maintained and stayed in the strong category,” Smoke said. But if the quarterly drops in that category continue, franchised dealers will move toward negative territory.

Tariff threat

Though overshadowed by other concerns, threats of tariffs on imported vehicles and parts still weighed on franchised dealers in the fourth quarter.

More than half of dealers — 57 percent — said tariffs would hurt profits if implemented; 34 percent said they believe tariffs would have no impact. Just 9 percent said tariffs would improve business.

Despite continued strength in new- and used-vehicle sales, dealer sentiment about customer traffic — a metric dealers consistently cite as weak — scored a 41, down from 46 last quarter and 45 a year ago.

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