Record recovery in dealer sentiment for Q3

Despite the ongoing effects of the coronavirus pandemic on the economy, franchised dealers were far rosier about the U.S. sales market in the third quarter than they were in the spring — a "record-breaking" turnaround on Cox Automotive's quarterly Dealer Sentiment Index survey.

Dealers reported record-low optimism on Cox's second-quarter poll, taken in late April and early May as the pandemic shuttered factories and showrooms. But vehicle purchases had rebounded when dealers were surveyed for the latest index, from July 27 to Aug. 11, and scarce inventory was resulting in higher transaction prices and contributing to strong dealership profits, said Jonathan Smoke, Cox Automotive's chief economist.

Looking ahead, new-car dealers generally expect the market in the fourth quarter to be positive, though less so than the current quarter, partly because they're also grappling with supply shortages that could put a wrinkle in the sales recovery.

"Inventory has become problem No. 1, and it's likely for the near term the biggest challenge that dealers really are facing," Smoke said.

In the survey, limited inventory surpassed the pandemic's impact as the top factor holding back business — the first time franchised dealers have ranked inventory at the top of the list, Smoke said. Dealers reported feeling the squeeze in both new and used vehicles, and Smoke said that raises questions about whether the sales recovery can be sustained.

Some dealers were optimistic but wary.

"I believe we are making progress in understanding the COVID [effect], and people are currently still buying," said a Mercedes-Benz dealer in the West. "Hopefully the demand will continue to be strong and the inventory levels will balance out, giving us more product to sell."

The impact of the pandemic, the economy, market conditions and the political climate rounded out the top five factors holding back business among franchised-dealer respondents. Several noted concerns about a potential resurgence of COVID-19 cases in the coming months.

The Cox survey asks how retailers perceived the previous 90 days, as well as their outlook for the next three months, and identifies key factors affecting their optimism or pessimism. Metrics such as the sales environment and customer traffic rebounded in the third-quarter survey after sinking to record lows in the second quarter.

Cox surveyed 1,112 dealers — 596 franchised dealers and 516 independent dealers — for the third quarter. Cox weighs responses by dealership type and sales volume to calculate a diffusion index. An index number greater than 50 indicates dealers view conditions as positive.

Overall, dealers' sentiment about the vehicle market in the third-quarter survey made up lost ground — scoring 56, up from 20 in the second quarter and 48 in the year-earlier quarter. Franchised dealers had the most positive view of the market, scoring 68, up from 30 in the second quarter. Franchised-dealer outlook for the next 90 days was softer, at 60, than the current market view but still in positive territory.

Among franchised dealers, sentiment toward traffic scored a record 55, up from 20 in the second quarter. It was the first time the score topped 50 in the history of the index, Smoke said.

They also were bullish on the new- and used-vehicle sales environments in the third quarter — scoring 61 and 77, respectively, up from 39 and 43 the previous quarter. Views on inventory fell even lower since the second quarter, with dealers' take on supply tumbling to 29 for new vehicles and 28 for used vehicles.

Dealers "have been aggressively trying to solve that problem by sourcing inventory," Smoke said.

"But that's led to higher prices, which has, in essence, put a shelf life on their incredible margin and profit run."