Survey shows dealers are concerned about affordability, new-vehicle profit margins

Dealers move into 2024 with continued concerns about high interest rates and vehicle affordability, though some are confident service, parts and collision operations will provide a profit lift.

Dealership executives who participated in Automotive News' 2024 Dealer Outlook Survey said they remain wary of how interest rates and affordability could further disrupt their businesses. A majority are concerned new-car profit margins will decrease year over year, with some expecting to spend more money to advertise vehicles and service work to consumers who are worried about higher purchase prices and borrowing costs.

Many respondents are not yet ruling out a recession this year, either.

"Even though the demand is there, that doesn't mean the ability [to buy] is there," Ben Keating, president of Keating Auto Group, of Victoria, Texas, told Automotive News. His group has 29 dealerships in Texas and ranks No. 15 on Automotive News' list of the top 150 dealership groups based in the U.S., retailing 31,936 new vehicles in 2022.

Keating said he is cautiously optimistic his group will sell more new and used vehicles in 2024 than it did in 2023, though he expects the company will spend more money to market new vehicles and make less on them overall than it did last year.

The 208 dealers and dealership managers who participated in Automotive News' January survey have varied perspectives. A little more than one-third said they expect their dealership's overall performance to worsen in 2024. About 39 percent expect performance will be better or much better than it was in 2023. Twenty-five percent said they anticipate a performance similar to 2023.

Outlooks on overall dealership profit also are mixed: Thirty-seven percent said they believe overall profit will worsen, while 32 percent said they expect it to stay about the same. Thirty-one percent said they expect profit to be better or much better in 2024.

Most respondents — 55 percent — said their dealership was profitable in 2023, though profits were down from 2022. One-third said their store was more profitable in 2023 than it was in 2022, and 12 percent said it was not profitable in 2023.

And of those still worried about a potential recession in 2024, 67 percent of respondents said they are either "moderately concerned" or "extremely concerned" about a significant economic downturn hurting their business.

Survey respondents said dealership results in 2024 will depend on whether high interest rates and average vehicle prices keep consumers purchasing new cars out of need and not out of desire. While new-vehicle inventory has generally improved, those surveyed are concerned new-vehicle profit margins also will compress because of overstocking in some segments.

In last year's survey, respondents said higher interest rates were their top worry. That is the case again this year — half of respondents selected interest rates as a factor they're most concerned about in 2024. Vehicle affordability and lower new-vehicle profit margins are the second and third most concerning factors, with 42 percent selecting affordability and 33 percent choosing profit margins. Dealership executives could choose up to three top concerns.

Some consumers no longer have the ability to purchase because they "cannot afford to pay a 10 or 12 percent interest rate or they cannot afford to spend $80,000 on a new SUV," Keating said. Other buyers can afford to purchase whatever they like but are holding out in protest of higher monthly payments, he said.

Nearly two-thirds of dealers and managers, 64 percent, believe higher interest rates will increase dealership floorplanning expenses in 2024, while 63 percent said interest rates will reduce consumer demand for new vehicles compared with 2023.

Dealers are hoping for a modicum of relief from the Federal Reserve, which has signaled it will cut rates this year. If the Fed cuts rates three times in 2024 for a total of three quarters of a percentage point in reductions, that won't bring down consumers' monthly payments by much, but it could be good for business, Keating said.

"It's going to massively influence [consumers'] willingness to bite the bullet and go ahead and buy that new car they've wanted," Keating said.

Nearly two-thirds of those surveyed said they expect the Fed will make two or three rate cuts in 2024. About 14 percent expect there will be none this year, 7.3 percent said one, 5.1 percent anticipate four or more and 10 percent are unsure.

Though new-vehicle inventory is improving, several dealers anticipate some shrinkage in profit margins, results show.

Sixty-seven percent of respondents said new-vehicle profit margins will drop from 2023 levels, while 16 percent expect they will remain flat. In addition, 45 percent said new-vehicle sales departments are facing the most challenges across all dealership operations.

New-vehicle volumes should be up, and profitability should be down, based on inventory availability and competition, said Kent Kirkwood, COO of CAR Group, of Newport Beach, Calif. The group has 15 dealerships in California, Florida and Texas. It ranks No. 30 on Automotive News' list of the top 150 dealership groups, retailing 22,600 new vehicles in 2022.

Kirkwood said the mix of vehicle models is smoothing out, and there is a trade-off to monitor: When inventory from an automaker such as Honda is short, profitability from sales of that brand's vehicles tends to be a bit higher.

"We aren't seeing the same degradation in margins across all brands evenly," Kirkwood told Automotive News. For instance, Hyundai margins in CAR Group's California market saw a bit more compression as Toyota inventory came back very late in 2023, he said.

Dealership executives' answers to a question on whether inventory levels for brands they represent are back in line with demand also are split: Forty-five percent of respondents said yes while 45 percent said no. And 10 percent aren't sure.

"Days' supply on [Chrysler-Jeep-Dodge-Ram], Ford, and others is too high," one respondent wrote. Another wrote, "Overall it looks ok, but break it down into product lines we are short of some and long on others. No consistency, and very little visibility of production pipeline."

Dealers and managers said they are banking on profit growth to come from vehicle repair and maintenance in 2024.

Thirty-nine percent said service, parts and collision departments present the most opportunity for profit growth this year. Twenty-seven percent see the most profit opportunity in used-vehicle sales, while 22 percent believe it will come from new-vehicle sales.

In a cycle where interest rates and floorplanning expenses are up, effectively selling used vehicles becomes much more challenging, said Richard Lupo, fixed operations director at Apple Tree Honda, of Fletcher, N.C., a town south of Asheville.

"Anytime that happens, people are going to repair their cars in lieu of purchasing," Lupo told Automotive News. "That's a boon source for fixed [operations] — where one area of the dealership dips, another one stands to gain."