Did you buy a new car last year? If you didn’t, you’re not alone. Car sales tanked last year by nearly 15% year-over-year last year. But, guess what? Dealership profits were UP by almost 50%. Why? A combination of factors that would make any Econ professor salivate.
Briefly, the factors impacting the car market last year were:
- Decrease in supply
- Steady demand
- Uptick in discretionary spending habits
- Less overhead
- Business-boosting measures from the government
Now, looking at these factors in a little more detail, let’s start with the age-old economic driver of supply & demand. Any time there is a drop in sales, there is one of two causes: a lack of supply or a lack of demand. When there’s a lack of demand, the price (and profit margin) goes down. When there’s a lack of supply, the price (and profit margin) goes up. That’s why you never pay full price for a Buick and pay a premium for a Tesla. In 2020, however, due to a variety of COVID-19 complications and influences—including everything from factory shutdowns to limited supply of imported parts—dealerships seemingly had a waiting list for every car they had. Subsequently, dealerships could name their price.
Additionally, there was a change in discretionary spending habits outside of those in the service economy. Workers who could work from home saw their paychecks stay relatively the same, while their channels for discretionary spending dried up. With limited vacation opportunities and significant changes in the restaurant dining scene, people with extra money in their pocket funneled it where they could—jewelry, fancy things for the house, and luxury cars. As it goes, dealerships saw sales at the luxury end of the market explode in 2020, with sales of vehicles priced between $80k and $90k increasing by over 90% and the $100k+ segment growing by 63%.
Then there were the very basic business boosts—less staff and increased agency assistance. With customers staying indoors and businesses locked down for months, commission-based sales floor staff quit or were let go. Additionally, dealerships saw more sales come through digital channels like the Internet, and those transactions require less work and can be handled by fewer salespeople. These factors combined to keep overhead expenses low. Combined with forgivable PPP government loans, manufacturer assistance and incentives, and low interest rates from banks… dealerships got quite a bottom-line boost on the backend.
Whether this will continue long-term, or even through 2021, is yet to be seen. But 2020 was a very good year to own a car dealership.