Canadian dealers vital to Canadian economy

The Canadian auto retail industry continues to thrive in a uniquely challenging marketplace

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THE PERIOD BEGINNING in late 2008 and ending today can be split up into three distinct economic periods: the immediate crash and recession; its subsequent lukewarm recovery, and; the most recent phase, renewed uncertainty associated with the recent precipitous drop in oil prices.

Though volatility has characterized all three of these periods, one theme unites them all: that of auto dealers representing an ever-greater share of the total (half-trillion dollar) retail sector in Canada.

Though this has had as much to do with struggles in the non-auto retail world in recent years as it has with the strength of the automotive side, it is a piece of good news for the industry. It speaks to the growing importance of auto retailing in our overall economic landscape.

A few years ago, car dealer revenues represented about 16 per cent of total retail sector revenues, or about one in six dollars that Canadians spent. By 2014, that ratio had risen to just over 19 per cent, or almost one in five Canadian retail dollars.

While a jump of three percentage points may not seem like much, it does represent almost a 20 per cent increase in the relative importance of automotive retailing in just a few years’ time. That it has happened during a period of time that posed unique and massive challenges to the auto sector writ large is even more impressive.

The equivalent U.S. ratio is still stuck around 16 per cent. Car dealer revenues in the U.S. were about $730 billion in 2013, out of a retail sector whose revenues topped $4.5 trillion. While sales and revenues south of the border are continuing their long march back to pre-recession levels, those in Canada are already back at a record-setting pace. This year will be the Canadian retail auto sector’s first $100 billion year, as sales came in just under that level in 2014.

While comparisons to our large southern neighbour are helpful (and a national sport in Canada), they don’t tell the whole story. The Canadian and American retail markets are fundamentally different from one another.

Just ask Target, whose recent foray into Canadian retail ended with a swift multi-billion dollar write-down and retreat. Strategies and business plans written for the U.S. market are not likely to translate well in Canada.

Our market poses unique challenges: weather, low population density, tax and regulatory regimes, language issues, and the mix of products we buy. The list can go on.

I recently attended the CADA Summit and the fascinating keynote speech delivered by AutoNation CEO Mike Jackson.

Though Jackson has overseen the establishment of a large auto retailing empire in his current role, it is confined entirely to the United States. Those that enter Canada, he warned, do so at great risk. Where local knowledge is key, new entrants from parts unknown can face sometimes insurmountable challenges in attempting to gain toeholds in markets from Victoria to St. John’s.

How have car dealers managed to thrive and increase retail market share in what remains a highly challenging Canadian economy and retail landscape?

As a dealer body, we are national in scope, the most geographically diverse sector of the auto industry by far. But individually, car dealers operate in their local markets, their homegrown niches that sometimes have taken decades to cultivate.

There is not one Canadian economy but dozens or hundreds of regional ones, even down to the level of the individual neighbourhood. Car dealers know them intimately, and this provides a powerful competitive advantage over any market entrants that don’t have that level of connection to their respective communities.

It is this community attachment that has allowed automobile dealers to thrive in recent years as other retail brands and sectors have struggled in what is a uniquely challenging Canadian marketplace. Our dealer body may be national in scope, but its success is achieved locally.

About Michael Hatch

Michael Hatch is chief economist for the Canadian Automobile Dealers Association (CADA). He can be reached at mhatch@cada.ca.

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