The threat of a recession is looming, but dealers can prepare by considering alternative revenue opportunities.
It seems like a bi-annual event: the press and financial analysts are predicting that a recession is on its way.
Recently, we had another deluge of predictions 10 years and five months after the lowest point of the previous recession, which is a historically long growth cycle. As business owners, dealers should always be on the watch for negative macroeconomic trends so future cash flow planning can be put in place, and to review whether there is potential to diversify the business and thus spread risk.
Let’s take a quick look at the macroeconomic fundamentals:
- Low interest rates and inflation — both in check;
- Low unemployment and steadily growing GDP — all good.
These indicators suggest that there really isn’t much to be concerned about. However, there are three variables that I am watching closely, two of which could pitch Canada into a recession quickly:
New car sales are falling — Canada’s sales are off year-to-date (YTD). However, is this due to worsening macroeconomic conditions, or some sort of demand saturation point which has been met? Given the relative health of the rest of the major macroeconomic indicators, and that sales levels are almost 40 per cent higher than a decade ago, a saturation point would seem likely.
Canada sells more goods and services to the U.S. than its next nine biggest trading partners combined
U.S. trade policy — say what you like about the leadership down south, but the fact that two of the biggest economies in the world, the U.S. and China, are setting up for a trade war is very worrying for Canada. Canada sells more goods and services to the U.S. than its next nine biggest trading partners combined! What this does is leave Canada very exposed if a trade war that triggers recession occurs.
Fear — especially due to a potential trade war, fear levels of a recession are high, despite solid fundamentals. Many economists believe that “a collective belief often creates an outcome,” and in this case the fear of a recession could cause a recession.
So why I am I talking about this? Why is this coming from an automotive futurist? There’s a simple point: recessions trigger consumer behaviour change, and that’s extremely important for the auto retail industry.
Generally, in recession times, both businesses and consumers cut back on capital spending, and often the first to go is any intention to purchase a new car. This is why automotive sales levels are generally seen as a real-time economic indicator — part of a health check, if you will.
If you think you might not have a job next month, you’re certainly not buying a new car. This was very evident in the previous recession when Canadian sales dropped to just 1.45 million. And who can forget the resulting bankruptcies of General Motors and Chrysler?
What’s changed in the transportation and automotive environment since the last recession has been the introduction and growth of new forms of mobility. Ride-hailing, car-sharing, micro-mobility, Mobility as a Service (MaaS) have all begun to change the patterns of how we travel. Millennials and Generation Z consumers have especially have adopted these new mobility ideas with gusto, many regularly using multiple ways to get around, even in the same day.
These two factors have created the potential for something interesting to happen in the next recession: as recession looms and potential buyers hold off making a vehicle purchase, they now have more transportation alternatives to help them avoid making an expensive commitment.
Once customers realize they can either get away without owning a vehicle, or they can use their old car less, then there will be far less incentive to purchase again when the good times return.
Therefore, dealers need to think through and prepare for the next recession as there’s a good chance that not all the lost sales will return. Thinking through what alternatives consumers are using today and extrapolating a use case for a dealer’s local market is extremely important.
Shared, short-term vehicle offerings with limited commitment could particularly suit many people, even in more regional centres. This is especially true for those participating in the gig economy, such as ride-hailing and delivery drivers, who often have low or no credit standing.
Even if the economic fundamentals are generally solid today, I really encourage dealers to find revenue alternatives, such as shared mobility, and how to potentially sell these options to your customers. It’s a way to diversify the business by adding a new, low commitment sales channel, which becomes particularly important if a recession hits.
Preparation and thinking ahead of the next recession is essential. In this political climate, you never know what will happen — maybe next time, Trump will try to buy Canada.
