Dealer optimism builds for '20

A looming, unavoidable downturn seemed to hang like a storm cloud as dealers headed to the 2019 NADA Show. A year later, it seems the skies are clearing.

Auto retailers generally seem more optimistic, as potential profits from used-vehicle sales and the service business, plus stronger economic trends, drive a rosier outlook for 2020.

"Going into 2019, there was a prediction that [we] may have a recession," said Lee Payne, owner of Planet Honda and Planet Hyundai stores in Golden, Colo. "The stock market took a big hit at the end of 2018, and I think that was a little bit of a hangover. ... Everybody was kind of waiting for the business to get bad. You don't hear that talk now."

A recession hasn't materialized, and macroeconomics have been generally favorable for auto retail. Dealers seem encouraged, for the most part. An Automotive News survey of 189 dealership executives shows general optimism about the business for 2020 — though dealers did express worry the presidential election could be a drag on results. And long term, they are concerned about the future of the franchised dealership model.

Nearly half of survey respondents said they expect their overall business to be better or much better in 2020. A little more than a third expect things to stay the same. About one of every seven respondents said they think business will be worse.

"Last year, a few traditional recession signals — those boxes had been ticked," NADA Chief Economist Patrick Manzi told Automotive News, pointing in part to the Federal Reserve's interest rate hikes in 2018. An ominous economic indicator known as an inverted yield curve — when interest rates on short-term bonds are higher than the rates paid by long-term bonds — also had spooked some economists, he added.

"Those two key recession signals aren't really present at the start of this year," Manzi said, "and that could be yet another factor as to why dealers are more optimistic this year."

Cuts to the federal funds rate in 2019 have led to lower interest rates that have generally given consumers more favorable vehicle loans — and helped dealers reduce their floorplan costs, Manzi said.

NADA has seen evidence of improvement in the dealership financial data it tracks.

In 2018, the average dealership showed an annual operating loss, the first time NADA had seen that since it began tracking the data in 2009. But operating profit recovered in 2019. Through the first 11 months, the average dealership showed operating profit of more than $100,000, according to NADA's most recent average dealership financial profile.

That trend could continue in 2020.

"Dealers are a tad less reliant this year on the OEM incentives to remain profitable," Manzi said.

One area of clear optimism for auto retailers is used-vehicle sales. Nearly three-quarters of retailers surveyed said they expected used-vehicle sales at their stores to be better or much better in 2020.

"For us individually, I think it has the best profit growth potential," Payne said, adding that parts and service should also boost his stores' bottom line. "The new-car [sale] is the hardest. There's just no margin left in it at all."

Payne's view on new vehicles was echoed by dealers in the survey. Less than half of respondents said they expect new-vehicle sales to improve over last year.

More than a third said they expect new-vehicle sales to be about the same, while about a fifth of respondents said they expect those sales to get worse or much worse.

When asked where they saw the most opportunity for profit growth in 2020, just over half of the respondents pointed to used-vehicle sales. Nearly a third identified service.

One potential disrupter for 2020 is the U.S. presidential election in November.

About three-fifths of respondents said they expect the election to affect their business this year. Of those, nearly two-thirds expect it to have a negative effect, while a third expect a positive impact.

"We usually see a dip in October/November of election years," one survey respondent wrote.

Some respondents suggested that whether the election's effects are positive or negative depends on who wins.

The optimism about 2020 was tempered by longer-term worry about the stability of the franchised dealership model. Nearly two-thirds of respondents said they had concerns about the future of the franchised model and their place in it.

When asked about the factors leading to that concern, respondents overwhelmingly pointed to declining margins on vehicle sales. The next top factor cited was rising new-vehicle prices and corresponding consumer affordability concerns.

After those two, the chief factor weighing on many retailers' minds is the idea that the traditional franchised model could be challenged. About a third of respondents cited direct sales by Tesla and potentially other brands new to the market as a factor, while nearly a third expressed worry about the potential that automakers operating franchised dealer networks today would want to eventually adopt a direct-sales model. Respondents were allowed to select up to three factors from a list of possible answers.

"I am very concerned with the government approvals of Tesla marketing," one respondent wrote, referring to states that have approved Tesla's direct-sales approach. "And frankly I believe within seven years we will see more direct selling."

Buddy Espinosa, general manager of Toyota of Santa Fe in New Mexico, is keeping a wary eye on direct sales.

"It's not even about Tesla to me," Espinosa said. "All the money's already been invested in the brick-and-mortar [store]. So if you just all of a sudden allow people to come in — manufacturers — just to sell and they don't have to build anything, they devalue your franchise."

Several of the big publicly owned dealership groups also are expressing optimism.

"I think that we'll be in for another good year," said Pete DeLongchamps, Group 1 Automotive Inc.'s senior vice president of manufacturer relations, financial services and public affairs.

Group 1, ranked No. 4 on Automotive News' list of the top 150 dealership groups based in the U.S., forecasts 2020 new-vehicle sales in the U.S. to be in the territory of 16.7 million — a decline of about 2 percent from 2019's total of 17.1 million. But DeLongchamps points to a steady flow of certified pre-owned vehicles and robust used-vehicle sales in general as reasons to be bullish.
AutoNation Inc. CEO Cheryl Miller said the retailer, No. 1 on the list, sees "strength" in 2020, with positive economics on the consumer side and a solid inventory position for the dealership group.

Miller also highlighted lightly used vehicles as an area with profit potential this year.

"We definitely think the customer is going to continue to migrate to nearly new" vehicles, Miller said, adding that declines in new-vehicle sales will be offset by strength on the used side.

AutoNation is forecasting the industry's 2020 new-vehicle sales in the high 16-million range.
Lithia Motors Inc., No. 3 on the list, expects 2020 new-vehicle sales in the U.S. to be close to 17 million, and CEO Bryan DeBoer said he has no major concerns for the year.

"Everything looks really stable," DeBoer said. "Signs are good, and I don't see big disconnects."

Melissa Burden contributed to this report.