The big dealership groups are bracing for the bittersweet impact of the Japanese earthquake on their business: higher profit margins but fewer cars.
With vehicle supplies short and retail demand growing, they expect prices and profits to rise. But they will need to hustle to get enough vehicles, both new and used.
In conference calls last week, executives at virtually every publicly held dealership group said they have been told by Japanese automakers to expect product shortages that will start in June and last most of the year.
Both new- and used-vehicle margins at most of the groups were down or flat in the first quarter compared with the year-earlier quarter.
Earl Hesterberg, president of Group 1 Automotive Inc., said new-vehicle margins suffered as a result of automakers and dealers fighting to keep market share. He said the product shortage should reverse that trend.
"This scrapping for share by the Japanese manufacturers and the associated oversupply -- particularly on volume models such as Camry, Corolla, Accord, Civic -- is clearly going to dissipate in the next couple of months," Hesterberg said. "So we should certainly get back to healthier new-vehicle margins as we move though the summer."
AutoNation Inc. CEO Mike Jackson predicted a pullback of new-vehicle incentives by manufacturers and "slight increases in new vehicle margins of just a couple hundred dollars" at retail. He also noted "it will still be competitive marketplace and consumers still have a lot of choices."
Added AutoNation COO Mike Maroone: "There is margin opportunity in small cars through greater content. If you look at Ford, they have pricing and content opportunities. There is a tremendous demand for small cars, and there is limited availability."
Jeff Dyke, Sonic Automotive Inc.'s executive vice president, said his company expects prices of new and used Toyota-brand vehicles to rise in the next couple of months as supplies dwindle. He said that Lexus vehicles already were retailing for about $1,000 more per unit on the West Coast than they were earlier in the year.
The company is also seeing wholesale prices jump $1,000 to $2,000 on used Honda and Lexus vehicles, Dyke said.
The likelihood of tighter new-vehicle supplies is pushing the public groups to look to used-vehicle sales to meet customer demand. Prices at auction of used vehicles -- particularly late-model, fuel-efficient ones -- already are high, a fact reflected in higher prices to consumers.
Greg Young, Sonic's vice president of finance, said the company's used-vehicle margin of $1,500 has remained steady for nearly two years.
"Yes, the prices are high at the auction, but we are also selling the cars and making gross both from an F&I perspective and a front-end perspective, plus what you get in reconditioning," Young said. "We can live in this market easily."
Asbury Automotive Group Inc. COO Michael Kearney said Asbury is restricting sales of most late-model used vehicles at auction and broadening its used car inventory, particularly those earmarked for certification.
He said margins on used vehicles bought at auctions can be maintained in the near term but added that a lot depends on a how fast lenders adapt to rapid price changes. He said the company may have to require bigger down payments.
Lithia Motors Inc. President Bryan DeBoer said that with late-model used vehicles in short supply, the company has increased sales of vehicles with 80,000 miles and up. During the first quarter, unit sales of those vehicles nearly doubled, to 2,200 units, from 1,200 units in the first quarter of 2010.
"Fifty percent of our cars are trade-ins," he said. "We're pushing market share and volumes where we can to make sure we are able to attract those trade-ins. We have developed aggressive purchasing plans."
Diana T. Kurylko contributed to this report