Dealer optimism rides into Q1

With dealership profitability riding high, franchised dealers came into 2021 still strongly optimistic about the market at hand. But the effects of the coronavirus pandemic and inventory shortages are high on their list of concerns about factors that could put a crimp in results, according to the latest Cox Automotive Dealer Sentiment Index survey.

The first-quarter survey marked the third-straight quarter of strong optimism by franchised dealers after their outlook plunged in the second quarter of last year, during the peak of the industry's coronavirus crisis. Cox Automotive Chief Economist Jonathan Smoke said 2020 marked the "most dramatic year in history" for the index, which was launched in 2017. The roller coaster for dealer sentiment coincided with the most profitable year on record for U.S. dealerships, according to the National Automobile Dealers Association, which tracks the data.

"We've now had two quarters in a row of fairly normal seasonal patterns, even though nothing is normal still in the economy," Smoke told Automotive News.

The index measures dealer optimism on a quarterly basis. The latest survey was conducted Jan. 26 through Feb. 7, following President Joe Biden's inauguration and improving pandemic trends but before the worst of the winter storms blew through the country. Cox surveyed 1,058 dealers — 599 franchised and 459 independent. Responses are weighted by dealership type and sales volume and used to calculate what's known as a diffusion index, in which a number greater than 50 indicates that dealers view conditions as positive.

Franchised dealers' view of the current market scored a 61 — the same as last quarter. Looking ahead, they see blue skies and a strong used-vehicle business. Their expectations of the vehicle market for the next 90 days scored 68, up from 58 the previous quarter and the third-highest mark in index history.

"The outlook could only be topped if we go back in time to the beginning of 2018, when tax reform had just been implemented and was tremendously boosting expectations for the year and, notably, the spring," Smoke said.

Respondents indicated reasons to be thankful in the survey comments.

One franchised dealer wrote: "Pent up demand. Much better availability of [new-vehicle] inventory.

Likelihood of more COVID related stimulus. Calming of economic and political situations impacting volatility in markets."

Impacts from the coronavirus returned to the top of a list of factors franchised dealers cited as holding business back. That bumped the political climate from the top spot — the fourth-quarter survey had been fielded in the days immediately following the presidential election in November.

Inventory constraints continued as the No. 2 concern. Specifically, franchised dealers scored new-vehicle inventory levels in negative territory, at 44, worse than 48 in the fourth quarter but better than the abysmal score of 29 in last year's third quarter.

The dip reflects "the perfect storm of issues" that new-vehicle production has faced this winter, Smoke said, including a microchip shortage and coronavirus-related manufacturing delays.

The political climate dropped to the third spot in the first-quarter ranking.

"If gas prices start to rise due to Biden, I would expect more customers to be looking for the most fuel-efficient vehicles and that may pull people away from our brand and onto hybrid or electric cars," one franchised dealer wrote.

Another franchised dealer said: "I think with the political party in charge, taxes, and fuel prices going up, things are going to get worse."

Expenses ranked No. 10 among the factors, but several franchised dealers cited rising costs as a concern for profitability in the first quarter.

One dealer referenced the challenges of recruiting technicians and bemoaned hiring and referral bonuses.

Another franchised respondent wrote: "Costs of vehicles are going up. Costs of healthcare is going up. We just seem to be spending quite a bit more money in all sorts of areas."