Dealers maintain optimism heading into spring even as inventory shortages persist

While new-vehicle inventory levels are still near historic lows, franchised dealers answering the latest Cox Automotive Dealer Sentiment Index survey indicated that the supply situation is starting to improve and profits remain strong.

On the whole, dealers who participated in Cox's first-quarter survey viewed market conditions as favorable ahead of the key spring sales season. Independent dealers were more optimistic about the market than they were in the fourth-quarter survey late last year, while franchised dealers held the same positive attitude observed then.

Though polling took place in late January and early February, before Russia invaded Ukraine, an action that has roiled the global economy, that positive sentiment about business for the next three months might still be justified, Cox experts said.

"As we enter the spring market, we can see the small green shoots of optimism from the U.S. auto dealers," Cox Automotive Chief Economist Jonathan Smoke said in a statement. "Most dealers have weathered the storm well, and we suspect there is hope the pandemic may finally be waning. Views of the economy weakened modestly, but dealer profits are still strong and demand remains robust. Those are good signs for the industry."

Cox surveyed 1,146 dealers — 591 franchised and 555 independent — from Jan. 24 to Feb. 7, asking retailers' thoughts on the past 90 days and their outlook on the three months ahead and identifying the factors affecting their optimism or pessimism. 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.

Franchised dealers rated new-vehicle inventory a 25. While that negative score was still among the lowest for that question in the survey's five-year history, it was 11 points higher than the fourth quarter's score of 14. The inventory question reached its historic low of 13 in the second and third quarters of last year.

On the flip side, with low supplies creating pricing power for dealerships, franchised dealers scored their profitability in the 80s during the last three quarters of 2021. That score was 81 in the first-quarter survey, the same as in the previous quarter.

Overall, dealers were slightly less positive about the current market, scoring it a 57 compared with 60 in the fourth-quarter survey. Franchised dealers scored the current market at 66, down from 70 in the previous quarter.

For the three months ahead, dealers' overall outlook improved, with the index score rising from 60 in the fourth quarter to 64 in the first. The gain came from independent dealers; franchised dealers' outlook continued at the same strong score of 69.

"From a historical standpoint, it should be an incredibly strong spring," Smoke told Automotive News.

Smoke noted a caveat related to the survey's timing, about a month before Russia invaded Ukraine. The war could affect the automotive supply chain, the cost of goods and consumer sentiment, he said.

"We have to be careful about some of the perspectives ... on the economy," Smoke said.

Still, despite the uncertainty, many positive signs persist, he noted, adding that last week marked the best weekly used-vehicle sales performance to date this year.

And the U.S. is releasing billions of dollars worth of tax refunds into the economy, Smoke noted.

"A portion of that money will always be spent on vehicles," he said.

But dealers are seeing a delay in when that tax refund benefit hits the used-vehicle market compared with past years, Smoke said.

"We've seen a slow start," he said. Fewer than half of the nation's refunds have been issued, according to Smoke.

Dealers did indicate in the survey growing concern about rising expenses, particularly around staffing. Several said they'd had to raise pay to hire and retain employees.

"We are being competitive in regards to comp and increasing comp so as to attract talent," a Lexus dealer in the South told Cox.