New dealer confidence index edges up

Dealers say the auto market is strong and expect it to remain so in the near term, but their profitability is constrained by market conditions and competition, a Cox Automotive survey designed to gauge dealer sentiment found.

The newly launched Cox Automotive Dealer Sentiment Index, released today, is the equivalent of a consumer confidence index, showing how U.S. dealers feel about the current automotive market and prospects for the next 90 days. It also identifies which factors are most significant in driving dealers' optimism or pessimism, as well as variations by region. Automotive News is the first publication to carry the survey's results.

The index measures dealer perceptions of current retail auto sales and sales expectations for the next three months as "strong," "average" or "weak." The responses are used to calculate what's known as a diffusion index, where any number over 50 indicates that dealers view conditions as strong, rather than weak.

The third-quarter index rose one point from the second quarter to 55 in the latest online survey, which was conducted from July 31 to Aug. 7.​

Cox surveyed 1,033 dealers. Cox calculated overall results, as well as separate ones for new-vehicle franchise dealers and independent dealers. This report focuses on the results from the 564 franchise dealers surveyed.

The first survey was conducted in the second quarter, so year-earlier comparisons won't be available until next year.

While dealer sentiment increased slightly ​ when looking at the current market, the index saw a dip when dealers were asked about their feelings for the next three months. The index score dropped seven points from the second quarter but still came out at 57, indicating most dealers still have a favorable outlook for the market.

Jonathan Smoke, Cox Automotive's chief economist and the chief architect of the survey, said the results were in line with industry trends Cox has seen.

"To see that franchises were positive and continue to be positive about the future is really reflective of a year that, from a volume perspective, is benefiting them," Smoke said. "To see them more positive about used sales makes complete sense. While retail demand is down about 2 percent year over year, I think they're more than making up for that on the used market side."

Franchise dealers' views on the used-car sales environment were positive, with an index of 68, down slightly from 70 the previous quarter. Interestingly, independent dealers were less bullish on their used-car sales.

Franchise dealers' sentiment around new-car sales scored lower than used vehicles, remaining unchanged at 57.

The index score for dealer profits in the past three months ticked upward by two points in the third quarter to 50.

Cox said nonluxury dealers reported a stronger view of vehicle demand, and new inventory in particular, than luxury operations. But Cox said nonluxury dealers feel pressure to cut prices, which stops the higher volume from turning into increased profits.

Following market conditions and competition, the top concerns for the franchise dealers surveyed were expenses, consumer confidence and staff turnover. Think of this as a ranking of the topics that keep dealers awake at night.

In contrast, franchise dealers indicated barely any concern about dealership systems or tools, interest rates or credit availability to their businesses.

While dealers had a positive view of the market overall, they weren't enthused about customer traffic to their stores. The score on that factor, 42, indicates that more dealers viewed customer traffic as weak than strong. But this could be a side effect of consumers doing more research online and visiting fewer dealerships, Smoke said.

There are slight regional differences in dealer perceptions of market strength. Cox says dealers in the South and West, which have higher profit index scores than other regions, show the most optimism for the market in the next three months.

Dealers in the West, South and Midwest felt most positive about the current market, with dealers in the Northeast a notch behind but still in positive territory.

Western dealers rated the used-car sales environment more favorably than other regions with an index score of 72. For new-car sales, Cox said Southern dealers had the strongest rating with an index of 61. Northeast dealers, the survey found, feel the most pressure to lower prices while reporting higher costs to run their stores.

Overall, dealers indicated that pricing pressure increased for them in the third quarter. The index rose two points to 67. For this measurement, a score below 50 is better.

"That number is high and trending higher for franchises," Smoke said.