Looking ahead is not easy

We may have to be prepared for some short-term pain before long-term gains

To say that the past few years have been the catalyst to a ”new normal” would be an understatement. So many different world events since 2018, and especially since 2020, merged to create an enormous melting pot of sorts. Our industry went to places it had never been before. From the reaction of largely unrelated and unthought of ingredients, we are somehow supposed to create a new future. 

At the retail level, the retail car business rapidly became a sellers-market. From a dealers’ perspective, vehicle shortages created a perfect storm as vehicles transacted at or above MSRP, generating grosses per unit not seen for half a century, if ever. 

For some dealers, vehicle selling prices combined with lower human resource requirements combined to rekindle new-found love for the business. Profits soared to unprecedented heights. For other dealers it was a sign that it was perhaps time to cash in and move on.   

As inflation soared to levels unseen by many dealers, and as interest rates rapidly escalated, interest itself became a real expense in our P&L once again. Our costs increased exponentially without the opportunity for any further productivity gains. Those had all come at the beginning of the pandemic. 

Consumers began to walk, some backing out of conditional sales agreements and others walking away from the market due the negative impact on household cash flow. 

The combination of high new and used selling costs and much higher monthly carrying costs began to take hold to reduce vehicle demand. Homeowners with variable rate mortgages quickly changed to fixed ones. 

For those that did not react fast enough, they still today sit on the sidelines waiting to see how long the financial pressures will continue and are banking that their vehicles will last through the looming recession. 

Everything was more expensive. At the same time, the concept of working changed for many employees and business owners. 

Working from home has taken Canadian business by storm. Not only was it deemed healthier, but it also served to counterbalance increasing household budgets by allowing our customers and employees to adopt new tactics aimed at changing historical spending patterns. What used to be a monthly expense, soon turned into monthly savings. Commuting costs, childcare, deferred vacations, and other monthly savings added momentum to the work-from-home migration.

All of that was a lot to swallow in a short period of time, and I sense the turmoil is not yet finished. With 2022 now behind us, what can we expect in the year ahead?  

My hope is that as an industry we have learned from these times. My fear is that we will quickly revert to the old ways.    

Do we need huge amounts of inventory rusting on our lots? Do OEMs need to keep production plants at full capacity to churn out units that many consumers do not immediately want? Can we better match supply with demand to take advantage of the new financial equilibrium we have just lived through? 

As far as I can determine, it was not only dealers that saw profits soar. OEMs did as well. 

Automotive retail, and retail in general, live by market share. OEMs and dealers have chased market share for decades. Will this continue, or will we all focus on profitable growth rather than unit growth at all costs? 

As dealers, increasing market share has the short-term impact of a higher F&I profit pool and a long-term impact of increasing high-margin fixed operations. That’s not all bad, provided we do not give it all away on the front end. 

Hopefully we have learned that if we have the product consumers want, be it new or used, we don’t have to give it away to preserve the fixed operations profits. I believe that many of us have learned a better way to keep our customers happy and satisfied while making the kind of profits our business risks and investments deserve. 

That brings me to the move to electric. I believe this initiative is largely driven by government policy rather than consumer demand. Sure, many of us are concerned about climate change and the environment we are leaving for future generations. I firmly believe that alternative vehicles do have a place in our product portfolios. I also understand that OEMs need a minimum of vehicle activity to make sense of production costs. 

But for the foreseeable future, without government financial support, many consumers will stay away from the perceived high cost of acquisition. This creates uncertainty in the minds of some dealers, who are being asked to up their investment in a “Field of Dreams” approach. 

This also creates geographic differences in a dealer’s retail approach and inventory management. Not all markets function the same. Not all markets will have the infrastructure to support vehicle electrification. 

Serious challenges exist in multi-urban residential dwellings, for instance. In some cases, whole buildings need to be retrofitted at enormous cost, with not all owners or tenants willing or able to absorb increased acquisition costs. 

The concept that every home becomes a charging station sounds great, but a seriously high percentage of buildings cannot easily be converted. History may prove that these were just growing pains to get to where we need to get to as a society.  

My sense is that this will take at least a decade to take hold. In the meantime, who blinks first, the consumer, the dealer, the OEM, or the government? Someone is going to be left holding the bag while the rest play catch-up or don’t change at all. 

Looking ahead is not easy. The playbooks will need to be rewritten and cooperation, partnership and common sense will be required. A solid business plan where all parties share in the growth, founded upon reality and solid business principles is needed. 

Not everyone will be successful, and not everyone will progress in the same direction at the same pace. Eventually, far down the road, things might be different. Perhaps a little short-term pain by all will produce long-term gain by all. 

That might be pie in the sky or the true path to the future. One thing for sure, it likely takes more time than originally thought. Like I said, looking ahead is not easy.

About Chuck Seguin

Charles (Chuck) Seguin is a chartered accountant and president of Seguin Advisory Services (www.seguinadvisory.ca). He can be contacted at cs@seguinadvisory.ca.

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