Dealers more optimistic, less hurt by economy

Dealers surveyed by Cox Automotive expressed more optimism about the coming three months after surprisingly strong January sales that followed three quarters of declining expectations.

But while franchised dealers’ sentiment did rebound slightly, according to the first-quarter Cox Automotive Dealer Sentiment Index survey, their outlook for their markets three months in the future is still nowhere near the enthusiasm they carried for most of the last three years as strong demand and inventory constraints fueled a booming business during the coronavirus pandemic.

Still, “they see hope that this year isn’t going to turn out as awful as the mojo seemed to be late last year,” Cox Automotive Chief Economist Jonathan Smoke told Automotive News. “And even if the market is challenged, the rest of the business is likely strong.”

The U.S. consumer continues to prop up the economy despite high interest rates and stubborn inflation, Smoke said. And while auto sales are slow by historical standards, the sales pace has improved early this year.

Despite a rebound from record-low expectations in fourth-quarter polling, franchised dealers' three-month outlook score of 56 represented one of the lowest levels since Cox began its survey in the second quarter of 2017. Scores greater than 50 indicate dealers view conditions as positive or improving. Franchised dealers' three-month outlook score of 48 in the fourth-quarter 2022 survey was the only time that group fell below 50 — signifying pessimism— when looking ahead three months.

Cox surveyed 571 franchised dealers and 451 independent dealers from Jan. 30 to Feb. 13 to calculate the latest quarterly index and weighed responses by dealership type and sales volume to calculate the scores on what is known as a diffusion index. In addition to asking dealers their outlook on the three months ahead, Cox asked about the past 90 days and identified factors affecting dealers' optimism or pessimism.

Dealers generally found January to be a better month than anticipated, Smoke said

Dealer outlooks have tended to improve in the first quarter, according to Cox.

Franchised dealers scored their current market a 54, up from 52 in the fourth quarter but less positive than any period going back to the second quarter of 2020, the first full quarter of the pandemic. Smoke attributed that slight gain to strong profitability, plus better new-vehicle inventory and modest improvement in the used-vehicle market.

Retailers scored new-vehicle supply at 63, up 10 points from the fourth quarter and up nearly 40 points from the first quarter of 2022.
While that score was higher than several pre-pandemic quarters, when dealerships were flush with inventory, Smoke said the survey measures whether inventory grew or declined, not the actual number of vehicles on hand. Dealership stock remained "very constrained," he said.

Dealers indicated the mix of new-vehicle inventory also improved, to a score of 50 — up 9 points from the previous quarter and out of negative territory for the first time in two years. Dealers' perception likely reflected improvement in the supply of more affordable vehicles, according to Smoke, who said an increase in the availability of sedans and lower-priced versions of other nameplates have helped push down transaction prices this year.

The flip side to improved inventory, however, was lower dealership profits. Franchised dealers' past three months of profitability scored at 63, down from 67 in the fourth quarter and 81 in the first quarter of 2022. But dealers still viewed their profits more favorably than they ever did in pre-pandemic surveys when scores hovered around the 50 mark.

"Effectively, it's still a fantastic time to be a franchise dealer," Smoke said.

Dealers described feeling more pressure to lower prices. A question on that scored a 59, up 9 points from the previous quarter. While at its highest level in more than two years, that pricing-pressure score remained below the numbers consistently recorded before the pandemic and through the second quarter of 2020.

"Bad headlines in the news make people uneasy," a Honda dealer in the Midwest told Cox. "Bad stock market last year, higher interest rates, grocery and gas have an effect on people's confidence and available money."

Automakers' new-vehicle incentives haven't kept pace with the rising price pressure and inventory, survey respondents said. Dealers described incentives as low with a score of 23, down from 25 last quarter and the same as the first quarter of 2022.

"Dealers are basically saying they expected more," said Smoke, who added that he, too, had expected incentive spending to increase. He said he thought "frustration" arose among dealers as brands with normalizing vehicle supply failed to respond with more incentives.

Though the economy remained a top concern, franchised dealers polled in January were less likely to view it as a major hindrance than a quarter ago, according to Cox. Half of the franchised dealers polled in January said the economy held back business, down from 57 percent in the fourth quarter.

"Most people are holding off on vehicle purchases due to imminent recession fears," an Infiniti dealer in the Northeast told Cox.

Interest rates remained retailers' top concern, cited by 60 percent of franchised respondents, up from 58 percent the previous quarter. That response likely reflected dealers' own interest expenses, as well as the effect of higher rates on customer demand, Smoke said.

"Interest rates rising [fivefold] is chilling customers by not being able to afford payments that they will have for a number of years," a Subaru dealer in the West told Cox. "Threats of a recession loom."