Car dealers are optimistic, but supply crises, war spur concern, survey finds

Dealers, following a year of soaring profits but scant new-vehicle inventory, expect more of the same in 2022.

But a pair of relatively new worries are hindering outlooks for some dealers: the impact of Russia's invasion of Ukraine and rising gasoline prices in the U.S. Those joined the concerns around the lingering microchip shortage and its disruption to vehicle production and supply levels for dealers answering Automotive News' 2022 Dealer Outlook Survey.

"If it was December, early January, I would have thought maybe by the end of this year we would have been in a better spot with regards to the chips and production," said Peggy Proko, who owns Honda and Nissan dealerships in Nashua, N.H. "Not great, and certainly not pre-pandemic levels, but certainly on the road to recovery. But with the war thrown in with Ukraine, I see that actually as a negative effect."

Still, the 196 dealers and dealership managers who answered the survey in late February and early March have a generally positive outlook for the year. About three-quarters of respondents said they expect their dealerships' overall performance in 2022 will be on a par with or better than last year, widely considered the most profitable year for U.S. dealerships in history. Just as many said they expect profits and vehicle sales volume to match or outperform 2021.

The average U.S. dealership earned $4.1 million in pretax profit in 2021, according to an estimate by Erin Kerrigan, managing director of Kerrigan Advisors, a dealer advisory firm in Irvine, Calif. She based her estimate on profit data through October reported by the National Automobile Dealers Association. NADA is no longer sharing dealership financial data publicly on its website.

That estimated 2021 profit number is nearly double the $2.1 million in net pretax profit recorded by NADA for the average dealership for all of 2020, the previous annual record.

The expectation by some survey takers that 2022 results will be as good or better as 2021, however, hinges on the supply situation not worsening.

Bill van den Hurk, owner of Aloha Auto Group, which has seven Kia stores across Hawaii, said he was encouraged by last year's performance and remains so for 2022.

"As long as we can get the vehicles," he said. "Product is our only limitation right now. Kia is in demand."

Dealers see the war in Ukraine as a risk factor to that positive outlook.

Both Russia and Ukraine are home to key gases and raw materials needed for the production of semiconductors around the world. And the ripple effects of the war could exacerbate the microchip crisis as raw materials become harder to come by.

Auto parts and raw materials sourced from Russia and Ukraine include aluminum, microelectronics etching gas, neon, nickel, palladium, pig iron and wire harnesses.

"I felt that by January the pandemic had settled down with the omicron" variant," New Hampshire dealer Proko said. "Things are loosening up in towns and cities. People were still needing and wanting cars, and I thought production would pick up a little bit, not huge. But the delays are there. I think they're only going to be intensified, or made worse, by this war."

Stewart Kreun, dealer principal of DeBoer Chevrolet in Edgerton, Minn., is wary of how soaring gasoline prices might affect market demand.

"Our outlook had been, up until the last couple of weeks, very good ... as far as just overall economic outlook," Kreun told Automotive News. "Everything that's going on in Ukraine may impact that, depending on what happens in the agricultural market with fuel prices."

Kreun, who described his market as primarily agricultural and fairly rural, is closely watching rising U.S. gasoline prices.

On Friday, March 11, the national average for a gallon of regular gasoline was $4.33, according to AAA, an increase from $3.62 on March 1.

"If we start seeing four and a half, $5 fuel, that'll definitely cool the market like it did 2008, 2009," Kreun said. "But outside of that, I would say that our outlook is very positive — if I can get product. But it's all based on product."

Dealers have wrestled with supply disruptions for nearly two years now — first because of production shutdowns caused by the coronavirus pandemic and then because of the microchip shortages.

In the Automotive News survey, nearly 90 percent of respondents said new-vehicle inventory levels for the brands they represent were not back in line with demand. And more than two-thirds are bracing for a long wait until that happens, with 55 percent predicting it for some time in 2023 and 13 percent for some time in 2024.

Eric Stamps, owner of Colonial Volkswagen-Subaru in Feasterville-Trevose, Pa., northeast of Philadelphia, said demand outstripping supply has shifted pricing power to dealers.

"It's a seller's market versus a buyer's market," Stamps said. "That has, in my opinion, made things easier for everybody involved. If you want to buy a new Subaru from me, no problem. I have visibility for a month out. 'Here's a black Forester. Here's a white Crosstrek. Do you want it or not?' And they say yes or no. There's no more negotiations. There's no more, 'I'm going to talk to the next guy.' "

Jim Evans, owner of three-store Evans Dealer Group in Dayton, Ohio, has just a handful of new vehicles at some locations.

"We started the month of March with two available BMWs to sell when we normally hold 40, 45," Evans said. "We started the month of March with Volkswagen with six to sell. ... Infiniti was three available for sale. What we're seeing happening here is we are selling much deeper into the pipeline."

With that pricing power, many dealers are marking up prices to well above sticker and selling to buyers willing to accept dealer-installed equipment that can reach into the thousands of dollars.

According to an Edmunds report from February, buyers paid above sticker price on a record 82 percent of all new vehicles in January, compared with 3 percent in January 2021. The average transaction price was $728 above sticker in January, compared with $2,152 below sticker price a year earlier.

In the Automotive News survey, more than a third of respondents acknowledged marking up new-vehicle prices to more than sticker, a practice that automakers are increasingly pushing back against.

But it's not a one-size-fits-all approach. The most common increase, by nearly half of those marking up, was for 6 to 10 percent above sticker. Just more than a quarter described their markups as 5 percent or less, while 15 percent put them at the 11 to 15 percent range.

Evans, though seeing much bigger markups at competitive dealerships, said his stores only mark up in limited circumstances and at modest levels.

"We're seeing levels of $8,000 to $10,000 for cars" elsewhere, Evans said. "We are [at] a much, much lower level, if we do it at all. It's more in the $1,500 to $2,000 range for the import cars. And really, to be quite honest, it's for people who are calling us from far away."

He's not charging above-sticker prices to local customers who've bought from his group multiple times.

And "when it comes to Stellantis vehicles, we actually — other than something like a Wagoneer — are selling those cars at employee pricing," Evans said.