After a long period of economic stability, uncertainty and volatility are here. Dealers have a lot to think about
The older you get, the more cynical you become. Risk is best absorbed by the young and is supposed to be avoided by us older folks, sort of.
It is true, however, that the runway to erase the sins of the past becomes shorter the older you get.
With inflation running out of control and gaining momentum, everyone on this planet is feeling its effects every day, regardless of where you live and how much money you make.
Weekly groceries are just one example. With demand outstripping supply, especially for those food items where supply disruption exists in one form or another, an environment of uncertainty creates a hit-and-miss shopping scenario.
Forget about menu planning. You can pretty much guarantee that over 20 per cent of the items on your shopping list will be unavailable or priced so high that it hurts too much emotionally to pay the price.
As dealers, however, we are all accustomed to making split decisions every day, so we substitute a pre-cooked chicken for that prime rib roast you and your family were so looking forward to. Rising inflation means that consumers must learn to make choices. You can swallow the higher prices or alter your shopping. The choice is yours.
The problem is that inflation is touching just about anything and everything. Some of the price increases leading to higher inflation might be warranted but many are not. Increasing prices just because others are, is happening all over the economy. Copycat pricing is alive and well in our economy.
The Bank of Canada is increasing interest rates in the hopes of stopping the rise in inflation then lowering it back to their two per cent target. Inflation rises quickly but takes its sweet time lowering itself.
For those that don’t borrow, the rise in rates does nothing to deter them from spending. For this group, the interest rate strategy seems oxymoronic. For those that do borrow, small rate increases have little effect. It’s a question of timing. If you have a 5-year fixed mortgage, you don’t feel the impact until you renew. On the other hand, if you have a floating rate mortgage, you will feel the impact much sooner.
Housing prices have skyrocketed. This affects those of us that are buying or building new housing or seeking new rental accommodation. For everyone else, the higher prices are anecdotal until you re-enter the market, then they become real.
As dealers, we historically borrow a lot of money, and we make a lot of money on the back of those borrowings. The spread between what we pay and what we earn has been quite favourable of late.
We are all feeling the impact of longer intervals between customer service visits. This has been gradually happening for many years, slowly eroding our service businesses.
When combined with the tune being played by vehicle and parts shortages, increasing demand and related selling prices and margins are music to our ears. But despite that favourable selling environment, we too are subjected to ever increasing input costs up and down our P&Ls. All things being equal, it is costing us more for inputs not dissimilar to what our consumer customers are facing in their personal lives.
So, the pandemic created a perfect storm of government subsidies, supply shortages and labour rationalization that in many ways are the key contributors propelling the rise in inflation.
The question becomes, are we in an affordability crisis? For us dealers, as long as supply allows us to maximize revenues, our businesses should have no problem weathering any inflationary storm. But what about the scenario where we return to excess supply and can’t maximize revenues? Inflation becomes real in our businesses when we return to price discounting.
Planning for the remainder of 2022 and likely 2023 will be a tricky exercise. When will the supply of my branded vehicles return to normal? What will the impact of short-term cost of living increases experienced by our vehicle and service customers have on demand for our vehicle and services? Will the current situation mean that people will continue to drive less kilometers due to high gas prices?
Many Canadians need their vehicles to facilitate employment but what impact will the stickiness of pandemic led work-at-home programs have on consumer demand for transportation services? Will consumers en masse quickly shift to electrified vehicles or is this still years away? How does the transition to electrified vehicles affect our businesses in the short term and what additional investments will we need to make?
We are all feeling the impact of longer intervals between customer service visits. This has been gradually happening for many years, slowly eroding our service businesses. Moving forward this erosion could escalate. The only real solution is to increase throughput somehow.
Electrified vehicles should provide more throughput even though we will experience lower hours per repair order. When will we begin to see this impact in our service bays?
Will the current consumer impact of high inflation and increasing interest rates delay the shift to electrification in provinces without government subsidies?
Certainly, in Canada thus far, electrification has largely been a British Columbia and Quebec opportunity. In many ways vehicle electrification is closely tied to government policy. There is plenty of consumer interest but pricing, along with electrification infrastructure has been a major deterrent.
Will the current economic challenges facing consumers be a catalyst to growth in the future of our used vehicle businesses? On the flip side, will lower new vehicle deliveries in the past 24 months create a used vehicle supply shortage?
Over the past number of years, pre pandemic, we were fortunate to have experienced a stable economic environment. That is not the case today and no one knows when stability will return or even what it will look like.
Many external forces will affect our collective futures. Better days might very well be ahead of us, but the planning to get us there has never been more challenging.