Dealerships have already beat 2020's profit record

Supply and demand in auto retail is so out of whack that franchised dealers have already shattered a profitability record that took all of last year to set.

The average U.S. dealership recorded net pretax profit of $3 million through the first nine months of 2021, more than double the $1.3 million reported through September last year and well above the record $2.1 million for all of 2020, according to National Automobile Dealers Association data.

Dealers are grappling with high demand for cars and trucks and a low supply of them, especially new vehicles, as automakers are challenged with parts shortages, particularly for microchips.

"As long as the auto industry is stuck with low levels of production, the market's not going to right itself," industry analyst Maryann Keller told Automotive News last week. "And what you're getting is dealers are selling cars for full MSRP and sometimes more."

But shouldn't the low level of vehicles available to sell hurt dealerships? Not when you consider the ripple effects of a low-supply, high-demand environment, Keller said.

"Think about what the other things are," she said. "They don't have a lot of inventory, so they don't have a lot of floorplan cost. They don't really have to do the kind of marketing that they did before because people are searching all over the place for specific cars."

NADA's chief economist and others expected average dealership profitability to cool this year. But so far that hasn't happened.

The average dealership's operating profit more than quintupled through the first nine months of the year to $1.8 million. Net pretax profit includes operating profit and automaker incentive money paid out to dealerships for complying with certain performance targets.

The sustainability of the profit surge depends on the supply chain issues facing automakers, particularly the microchip shortage, Keller noted.

"I would have guessed that everything would have cleared up by the second half of this year, but it hasn't," she said.

"I do think that we will gradually have improvement in 2022."

One key indicator of a return to normalcy will be used-vehicle values, which have reached record heights. When those cool off in earnest, it will likely mean the return of a more typical market, Keller said.

While new-vehicle inventory has been relatively scarce this year, the latest figures from NADA nevertheless show higher sales volume for the average dealership in both new and used.

The average number of new vehicles retailed through September was up 16 percent over the first nine months of 2020, a period in which sales tumbled significantly during the early months of the coronavirus pandemic. The average number of used vehicles retailed was up 9.4 percent through September.

Average per-vehicle gross profit jumped 65 percent for new vehicles and 36 percent for used.

Looking ahead, one pressing question for dealers is whether carmakers will return to the days of building mass amounts of vehicles regardless of retail demand.

"The real question is, are the auto companies going to continue to behave badly, like they did before the pandemic?" Keller said. "Is it just going to be a battle for market share, at which point they give away a lot of money, or do they actually manage their production to the demand for each model?"