We are living through a major industry shift. The signs are all around us.
As I look back over the articles and reports of the past few years, many of the predictions and observations about the future of our industry are unfolding right before our eyes.
We are living through a herculean industry transition that is anything but smooth. Since early 2020, we have faced significant challenges that have reshaped our industry, governments, customers, and employees. Two of the most significant, in my opinion, are vehicle availability and vehicle affordability.
After four years of interest rate anxiety, the Bank of Canada just reduced its bank rate by ¼ point. Just hours after the announcement, there is much hope that this will be the beginning of a significant downward movement in the bank rate over the next year.
This will certainly address vehicle affordability as consumers experience an increase in their monthly cash flow produced by lower expenses and, more importantly, their confidence level. Only time will tell if this is the beginning of the end of high interest rates or merely a temporary blip.
Spending patterns for many retired Canadians, for instance, will change as they become dependent upon fixed incomes. It’s not a good formula when incomes are flat, but expenses continue to climb.
Vehicle affordability has several components. The cost of the vehicle itself and the cost of financing the vehicle are certainly front and centre in consumers’ minds. Affordability is also affected by fuel costs, vehicle repairs, vehicle insurance, and other related driving costs.
Consumer affordability on the other hand, is much broader and to the extent that interest rates have been a catalyst towards higher prices, these may or may not reflect in better pricing in the future. Remember that lowering the rate of inflation does not in itself mean that expenses will come down. It could simply mean that costs will still go up but perhaps not as quickly as recently experienced.
Financial pressures have, of course, increased for all of us, leaving many Canadian residents to believe that they can only move backward and not forward.
Spending patterns for many retired Canadians, for instance, will change as they become dependent upon fixed incomes. It’s not a good formula when incomes are flat, but expenses continue to climb.
These baby boomers, largely accustomed to buying what they want during their working years, will now begin to watch their pensions and investment portfolio values almost daily and begin to think more long-term than seek short-term, feel-good purchases.
These same baby boomers purchased lots of vehicles and were strong customers for dealerships right across the country for the past three or four decades. Two-car families will become one-car couples. Large SUVs and pick-up trucks will eventually give way to smaller ones or even sedans.
Yikes! The pandemic was the catalyst for many baby boomers to accept retirement packages. They walked away from the workforce now only to realize that their fixed incomes were a recipe for sleepless nights. Many want to travel, only to realize that travel costs have doubled and tripled in some cases and tough choices must be made. I could go on and on, but thankfully, I will not. You get the picture.
This could have a dramatic impact on our dealerships. As the large baby boomer cohort begins to slow their spending, our dealership revenues could suffer, assuming Gen X and Y do not make up for the difference.
The second aspect is vehicle availability. Just as OEMs try to develop electrified vehicles alongside vehicles with internal combustion engines, drivers must decide which camp they will support. Governments will likely not significantly alter their environmental and climate change focus.
This is a global problem and not a local one. This global initiative exerts significant pressure on all local governments worldwide to toe the line. It will be hard and unpopular to hide from their global responsibilities.
That said, they must manage their local economies and balance their books, so to speak. This has not proven to be easy in the past and will most certainly be much harder in the long term. Where is the money going to come from?
On the domestic front, employees need access to transportation to facilitate employment. That means more cars, trucks and mass transit. Canadian new vehicle sales topped 2.0 million units in 2017 and 2018. 2024 SAAR, according to DesRosiers Automotive Consultants, is tracking at 1.63 million units.
Since 2018, Canada has added more than 2.5 million in population. Many believe there is significant current pent-up demand for vehicles. The stars should align in the short term in favour of dealership vehicle sales. The only things that must be decided are new vs. used, internal combustion vs. electrified, hybrid, plug-in hybrid, battery electric, owned, leased or shared, financing term, and if electrified, select a reliable charging structure. Simple right?
We are already beginning to see some cracks with inventory. Just a few short years ago, consumers ordered their vehicles. Dealers did not have inventory, and customers waited many months to receive their vehicles. Consumers paid the full list price. Times were good for the dealership business.
EVs are being counted in months’ supply for some brands rather than days’ supply.
However, today, we see some brands with lots of inventory and price discounting returning in spades. Holding new vehicle inventory is back to being very expensive. Revenues are down and costs up, which is not a good formula.
We are back to dealer trades because even with all that inventory, you’re not stocking the vehicles consumers want. EVs are being counted in months’ supply for some brands rather than days’ supply. Early EV adopters seem to have all but dried up. For some brands, true consumer demand seems mismatched with supply.
As I said at the beginning of this article, we are amid a herculean industry transition, and it will be messy and challenging. However, I believe there are bright times ahead once inventory aligns with consumer demand and vehicle pricing and cost of living become more affordable. This will take some time, but for now, small steps could lead to big gains in the future.
