Floorplan revenue expected to dive after years as a profit source

Higher interest rates and car prices, combined with a likely influx of new-vehicle inventory as the industry's supply shortages start to ease, mean floorplanning revenue for dealerships will drop — or even flip to a cost — bringing about the end of its status as an unlikely profit center.

Floorplan as a profit source is a pattern seen when the Federal Reserve has aggressively raised its benchmark lending rate, increasing borrowing costs. Though floorplan interest — the loans taken out to finance vehicle inventory — historically has been a cost to dealerships, that changed for much of the 2010s as interest rates tumbled but automakers continued subsidizing dealers' floorplan loans. The pattern returned when rates dropped sharply early in the coronavirus pandemic.

But it's now poised to end, and dealers are getting ready for the change.

Rita Case, CEO of Rick Case Automotive Group, in Sunrise, Fla., told Automotive News that she's taking her group back to the basics.

"We are moving to a 'back to normal' cost structure," Case said. "The past years of extremely low interest rates, low inventory levels and higher gross margins is coming to an end."

She expects inventory levels this year to be higher than in the previous 18 months though not as high as they were in 2019. She aims to ensure her store managers do things such as enforcing traditional inventory control procedures.

Dealers also should put renewed scrutiny on their sales process and vehicle ordering to make sure the cars they're getting "make sense," said Greg Dougherty, partner at accounting firm Crowe in Tampa, Fla. Dealers didn't have to do as much to manage inventory in recent years, he said, so people have gotten out of practice.

"Dealers have had an extraordinarily great run for the last couple of years, so they are sitting on an extensive amount of cash," Dougherty said. "Many dealers, even in the last 12 months with the Fed raising interest rates, have been able to manage that through used-vehicle lines. They've been able to go just buy their used vehicles and not have their floorplan line be utilized. Certainly on the new vehicles, where they have maybe some ability to have an offset account with their financial institution, they earn a certain amount of interest in full or close to the same rate that they are being charged for floorplan."

Automakers continue floorplan financial assistance payments in low-rate environments to incentivize dealerships to keep ordering vehicles to stock their lots. The payments, sometimes referred to as credits, go to a dealership at the time it purchases a vehicle at wholesale, helping to offset interest and costs that stores incur to have a vehicle in inventory before it's retailed. In recent years, floorplan credits have outpaced the costs, especially as vehicles have quickly sold during the supply shortages.

A major difference in today's market compared with earlier stretches of floorplan profit is that recent interest rate hikes have come at a much faster and steeper pace, and the amount of inventory and length of time those vehicles stay on dealership lots is much lower.

Floorplanning as a revenue item goes back at least to 2009, the National Automobile Dealers Association previously disclosed. NADA reported that the average dealership made $2,355 in floorplanning in 2010. That number then climbed through 2015 when it peaked at $109,497 and stayed positive the next couple of years. In 2018, as rates rose, it flipped to an average per-store cost of $55,164, the association reported the next year. It remained a cost in 2019, this time $82,979. Then in 2020, as rates were slashed during the coronavirus pandemic, floorplanning flipped back to a profit item, this time an average of $108,395. That was the last full year NADA reported that data — it stopped sharing its average dealership financial profile after October 2021.

But though that visibility has gone away, the six major publicly traded dealership groups provide a glimpse of recent shifts.

Floorplan assistance "has exceeded floorplan interest costs for the six public dealers in 10 consecutive quarters and will likely remain a positive for the group into late 2023, but the earnings benefit has been declining," Benchmark Co. analyst Michael Ward said. "As interest rates move higher and inventory levels improve to a more normalized level, despite being well below inventory levels of the past, floorplan interest costs will continue to increase."

Ward told Automotive News that net floorplan interest for AutoNation, Lithia Motors, Group 1 Automotive, Sonic Automotive, Penske Automotive Group and Asbury Automotive totaled $90 million in 2019 but turned positive in 2021 to $323 million for the group as the automaker credits offset expense. Ward estimated the group took in a collective $300 million in floorplan in 2022 but expects the profit to be halved to about $150 million in 2023.

"Going forward, increasing interest rates and higher inventory levels will likely push the benefit lower," Ward said.

For most automakers, floorplan credits traditionally have equaled 1.5 percent of a new vehicle's invoice price, Brian Finkelmeyer, senior director of new-vehicle solutions for Cox Automotive told Automotive News. The assistance was designed to help dealers cover the interest expense of keeping the vehicle in stock for about 90 days, he said.

But with historically low inventories in 2020, 2021 and 2022, and with cars arriving at dealerships already promised to customers, they weren't sitting on lots for anywhere near 90 days, making floorplanning a profit stream, Finkelmeyer said.

Rising inventory will affect that profit stream, but that will vary by make, Finkelmeyer noted.

"Brands like Toyota, brands like Honda, the ones that are still running that very low days' supply, Kia might even be in there a little bit as well, those dealers are still going to have a profit driver from that floorplan credit because their inventory is turning so quickly," Finkelmeyer said. "As long as they turn the car faster than 90 days, it's a profit."

Matthew DeSantis, an analyst for dealer advisory firm Haig Partners in Fort Lauderdale, Fla., told Automotive News that quick inventory turn is increasing in importance for dealers. Ford Motor Co. changed the amount of floorplan credits dealers receive by switching to a model that covers costs for up to 75 days based on actual days in inventory, he said, noting that this will affect the floorplan assistance dealers receive from Ford depending on how long the vehicle is on the lot.

“Historically, dealers received a floorplan credit no matter how long a vehicle sat on the lot,” DeSantis said. “It remains to be seen if other automakers will change their model.”

Larry Morgan, chairman of Morgan Auto Group, in Tampa, Fla., told Automotive News he doubts automakers will help offset rising interest rates any further than current levels, but his group, the eighth-largest dealership group in the country, plans to be proactive.

"We have certainly budgeted for not only the current interest rates, but we budgeted 2023 for a couple hundred basis points increase throughout the year," Morgan said. "We expect [interest] rates to go higher. Our inventories have been at all-time lows. They are slowly improving. It's kind of by brand, but they are getting larger, so the combined impact of more cars, more inventory and higher rates is certainly adding to our operating overhead."

To prepare for lower floorplan profit, Morgan said he's trying something new to speed his group's inventory turn this year.

"We told our stores if they can't sell the inventory they have in stock in a reasonable amount of time, we're going to transfer it to other stores with the like brand," he said.

"Not only to cut down on floorplan, but to sell more vehicles and be more sales efficient in those stores."

Charles Arnold, national sales executive for commercial dealer services at Chase Auto, one of the largest floorplan loan providers in the U.S., told Automotive News that even though interest rates started climbing in March 2022, the impact on floorplan wasn't seen until inventory levels started creeping up late last year.

The No. 1 action dealers can take in the face of lower floorplan profits is to make sure they are appropriately managing excess cash, Arnold said. Another top focus should be managing inventory.

"You've got to be very diligent with the factory," he said. Managing inventory closely matters "because as inventory continues to increase and sales don't materialize, it's going to be a significant cost."

Case is focusing on speeding payments and reducing contract-in-transit time, so floorplan loans can be paid off as quickly as possible.

"These last few years were fun, but we all knew it wouldn't last," Case said.