Over the past 24 months, the automotive industry has been through a series of unprecedented situations. From massive chip scarcity, colossal consumer demand, and severe vehicle shortages, it was both a profitable and equally challenging time for car makers and dealerships.
Because of the aforementioned issues, many dealers faced a serious shortage of inventory with everything coming onto the lot already being sold. With so many shoppers wanting vehicles and so few vehicles to go around, prices for new and used vehicles skyrocketed. Lots of shoppers were buying new cars at sticker prices or even a few thousand dollars over. Not only that, but many customers were getting more in trade value than they originally spent on their car.
That selling model couldn't last forever...
Now, the fact that the semi-conductor chip supply and new car inventory still not back to pre-pandemic levels, paired with economic inflation, consumers’ abilities to buy new cars has decreased. With fewer people shopping and the decline in new car sales, new cars may end up stacking up on the lot, giving dealers a false sense of inventory relief.
What’s happening now? According to the U.S. Bureau of Labor Statistics, the Consumer Price Index from January 2022 to January 2023 reported that used car prices decreased 11.6%.
While an adjustment was needed to re-stabilize used car prices, this could have massive implications for car dealerships.
For example, if a car dealer bought a used car for $10K, a 11.6% decrease in price would mean that car is now worth $8,840, or $1,160 less than what it was purchased for. For a $55K vehicle, that’s a $6,380 decrease, with that car being worth $48,620 now. For a dealer with 40 used cars all valued at $25K each, that’s a $116,000 loss. That affects car dealers’ abilities to buy more cars, pay staff, keep the lights on, etc. This type of loss might be more easily swallowed by large dealership groups, but could be more problematic for mom-and-pop dealers who might not have as large of financial reserves.
What can dealers do about this? Some dealers are choosing to take a write-down on all of their used car inventory in anticipation of the used car value decrease, though that strategy might not work for all dealers.
What all dealers can do is re-invest in their people. With the past 24 months being the easiest it’s ever been to sell cars, dealers became complacent, and training was neglected. With shoppers just walking in and purchasing at the sticker price or above, car salespeople often didn’t have to do standard meet and greets, walkarounds, negotiations, etc. Now, making sure your staff are trained or re-trained on taking calls, helping people find the right car, and all the other essential know-how will help boost your customer satisfaction levels, and ultimately profitability. Shoring up your team’s customer service skills will be even more critical in a time when some shoppers bought their vehicle at a peak price, and it is now upside down or worth less than the amount they owe. Handling those and all customers with care will help ensure they become your customer for life.
Source: https://www.bls.gov/news.release/cpi.nr0.htm
