A year ago this month, the North American automotive industry was upended by COVID-19. As automakers halted production and retailers navigated shutdown orders, no one would have guessed that it would become the most profitable year on record for dealers.
Shocking as it was that dealers' profits from new-vehicle sales operations on average, according to the National Automobile Dealers Association, topped the previous record by 40 percent, franchised dealers large and small know why profitability soared in 2020. The reason is as old as capitalism itself and fundamental to the theory: the law of supply and demand.
Consumer demand for personal vehicles remained strong, despite severe economic headwinds, while supplies were constrained industrywide as automakers halted production until they could keep workers safe in factories. The result: Dealers had broad power over pricing for the first time in a generation or more.
For lean inventory and high profits to last, every automaker would need to be on board, which is highly unlikely in a natural market with many players and large fixed costs: Manufacturers tend to increase output until the profit from making one more isn't worth the cost.
Dealers have the power to make healthy new-vehicle profit levels more than just an astounding one-off side effect. The problem is that doing so requires discipline both in managing inventory and managing expectations.
