Honda dealers: Profitability 'as good as it gets'

Honda dealers could report their most profitable year yet despite challenges stemming from the COVID-19 pandemic and a chip shortage that has shrunk new-vehicle inventories.

"If you're not making money now, then it's probably time to sell your store because this is about as good as it gets from a profitability standpoint," said Bill Feinstein, chairman emeritus of the Honda National Dealer Advisory Board.

Even as the industry works through another year of inventory woes, Honda retailers continue to be profitable, said Feinstein, who is also president of Planet Honda in Tilton, N.H., and general manager of Planet Honda in Union, N.J.

"I think when the year is all wrapped up and all the numbers report, I'm going to bet that almost every franchise reports the best profitability for their dealer body, certainly in recent memory," he said.

Feinstein, 51, spoke with Staff Reporter Audrey LaForest about the outlook for Honda dealers. Here are edited excerpts.

Q: What do dealers know about when Honda's production and inventory levels will come back in line with demand?

A: Honda has been very transparent about inventory constraints and production constraints. Obviously, this is a fluid situation, and it changes almost week to week, if not day by day. Honda has communicated pretty clearly their plan, and they're just adapting to the day-to-day realities of what they can and can't produce. Frankly, they've been a little more transparent than some other OEMs, trying to keep us up to date in real time, communicating with [the dealer board] often.

As dealers, we understand if the manufacturer doesn't make cars, they don't make money, so this is as much of a situation for them as it is for us.

What do dealers expect in terms of inventory and days' supply this year, given the chip shortage?

Honda, along with all the OEMs, has made a determination that they don't want to go back to bloated 60-day-plus inventories, and Honda seems relatively committed to trying to maintain that optimum 30-day inventory. Certainly, that was one of the hallmarks of the Honda franchise for many, many years. They always seemed to have a really good handle on the balance between supply and demand, and I think once things normalize, they're going to continue to monitor that.

I think that we are going to continue to have these supply chain disruptions and chip shortages throughout most of '22. I don't think anyone with a crystal ball can predict the absolute end date, but it's looking like there won't be substantial relief until probably fourth quarter because — even if everyone gets their production fully back online — it's still going to take a while to build back inventories.

How are Honda dealers handling new-vehicle pricing?

That's a dealer-by-dealer decision, so I can't make a generalization there. Overall, we've not seen major impacts on the customer satisfaction indices, which indicates to me that Honda dealers, as a group, are generally doing a very good job of communicating with their customers and taking care of their customers.

What is Honda telling dealers about pricing and markups?

I won't say they've been outspoken on it. I think Honda expects their dealers to act responsibly and take care of our mutual customers. While Honda, like most OEMs, tries not to get involved in the pricing, I'm sure there are isolated cases here and there. But for the most part, dealers are doing the best they can in a limited situation. There's no doubt prices are up but, unfortunately, prices are up for everything right now.

How sustainable are current vehicle margins and profitability levels as inventory levels improve?

That's the million-dollar question. The better the OEMs match production to demand, the more likely dealers are to maintain margin and manufacturers are also to maintain margin and not rely on incentives. It's really going to require discipline from the factory and discipline from the dealers.

This is one of those "to be determined" moments. I would hope that dealers take a long-term view, that they are going to need their new-car departments to be profitable, especially as we face the future of electrification and potentially less-profitable service businesses. People need to figure out how to be profitable in the new-car department, and so this may be that watershed moment where people start changing their thought process a little bit.

How have Honda's sales incentives changed during this time of decreased production?

The vehicles don't need nearly the level of incentive support in such a tight inventory situation, so I think Honda has done what they can. They've provided APR support. They've provided lease support. They've acted appropriately where they need to provide the proper incentives. But overall, their incentive spend is down — as I would expect it to be — but they've not taken the position, "absolutely no incentives." I think they're taking a "look and see" by market and by model line and seeing where a product might need support. It's also looking at where the product is in its life cycle and then the competitive landscape.

How do you anticipate those sales incentives evolving as production and inventory numbers likely improve?

The OEMs are going to do what they need to do to ensure that the vehicles sell. They generally only have two levers: advertising and incentive support. So my guess is over time as inventories normalize, you'll see increases on both of those fronts. I'm not so sure that you may see that as much with Honda, given just in the next 18 months the amount of new product Honda has coming to market. Generally, the newer products require less support.

What is Honda doing to promote sales of used vehicles, including with its certified pre-owned program?

They just announced their "True Used" program, which allows Honda dealers to certify Honda vehicles up to 10 years old. It basically adds another five years on to the potential certification of the vehicle. It really addresses a big part of the market that franchised dealers have been missing. It's definitely a shot across the bow of the Carvanas and the Vrooms of the world because that's really where they play, despite them showing commercials of people driving pre-owned BMWs and Porsches and whatnot. The truth is the bulk of their sales are in that 5- to 10-year-old vehicle market. Being able to offer those consumers a Certified Honda is going to be a major competitive advantage for Honda dealers.

Has Honda launched or proposed an online platform for the sale of used vehicles?

To date, Honda does have their own Honda Certified website. I don't expect them to launch a CarBravo or something like that. I'm, frankly, somewhat skeptical on that venture because I'm not sure it's anything other than an aggregate website of General Motors dealers. There are some opportunities there, but I'm hard-pressed to believe that as a whole Honda dealers would be any better served by having another platform.

How are the skills needed for sales employees at Honda dealerships changing?

You have to communicate with your customer how they want to communicate in whatever methodology they want and very often it involves multiple things. It may involve a showroom visit, followed up by a video chat or a text message. Salespeople have to be a little more nimble, a little more flexible. As a whole, dealers have done a really good job of adapting to the situation, understanding customer needs and adapting their processes to it.

Certainly, salespeople need to be much more attuned to the product, and you need to be able to explain the tech on these vehicles. For example, we have delivery coordinators whose sole job isn't to sell a car. Their sole job is to explain the technology in the car to the consumer and be delivery specialists as opposed to sales specialists.

Is Honda helping dealers navigate these changes?

Honda has a lot of online training for sales consultants and releases that fairly often. They also launched about a year and a half ago their Honda digital customer experience program and created a marketplace for digital tools and communication tools from digital retailing to websites to digital marketing and bringing in consultants to go over best practices.

One of the things that I appreciate about Honda is they're very good at encouraging you to do new things, but they don't mandate a whole lot. They make the business case for why you should do something as a dealer as opposed to forcing it down your throat. I think that's something that Honda dealers truly appreciate, and why Honda consistently ranks among the highest-rated franchises by dealers. They understand that markets are different and dealers are different, so they find ways to give you choices.

Has there been any change in facility image programs by Honda?

Honda has started announcing that they are going to be looking at changing their facility requirements, trying to be a little more adaptive and flexible with their programs. I think that everyone knows square-footage requirements are going to probably get reduced. Service requirements may get reduced. I think that they're willing to look at alternative solutions, especially in major metro markets, where you do have use limitations and maybe you need to have a separate sales and service facility. I think that they're being a lot more flexible and reasonable. Having just built a brand-new Honda facility, I found Honda, as usual, to be incredibly easy to work with. And frankly, there are very few things where Honda says, "It has to be this way. This is the only way to do it."

What's missing in the Honda vehicle lineup?

A lot of what's missing has been corrected. The changes to the Ridgeline have been extremely well received. We actually have a pickup truck that looks like a truck. They have a pretty broad vehicle lineup. You start at the HR-V, and you go to a CR-V and a Passport and then a Pilot, so you've got a pretty nice collection of SUVs at this point. Honda dealers would love to have a full-size truck, but I'm not sure that's going to happen. But, that being said, the products are positioned really well in the market. There's a very clear progression to be able to retain the customer and as their lifestyle changes and the life cycle changes to be able to move the customer along the lineup.

How are Honda's fixed operations performing?

Generally, RO count still is lagging a little behind pre-COVID levels, though not nearly as much as it was. Service business is fairly robust at this point. Customers seem to be spending a bit more in service. Some of that is probably a result of delayed maintenance and people having not visited the dealer for a long time. Most Honda stores' fixed operations are doing very well right now and are at, or exceeding, capacity.

What areas remain a concern?

The big question for everyone is going to be what happens to fixed operations a year or two down the road as we have a drop in volume. It generally leads to a drop in service volume, so I think we need to all be thinking about how do we do a better job of retaining our customers and driving customer loyalty in the service lane, especially as volume drops? Honda has some plans on that front, and I believe that they'll be making some announcements in the near future that I think will continue to bolster dealers' fixed operations.

What are Honda's plans to promote leasing this year?

They continue to be committed to leasing. Given their strong residuals, it's certainly a competitive advantage for them, and I've seen no retreat on their commitment to leasing. If you look where Honda is strongest, it tends to be on the coast in the heavy lease markets, and I really don't see Honda backing off of that. I think what Honda has done though, to their credit, is beyond leasing they've looked at the markets that are more APR-oriented and have made sure that they have competitive APR offers for those markets.