Challenges abound for dealers

There are mixed signs in the market, and some dark clouds dealers need to keep their eyes on. 

Looking back over the years, the job of a dealer used to be quite simple: unlock the doors, and the customers either walked into your showroom or drove into the service department.  

That was followed by a period of hyper-competition, during which new brands and dealer locations shot up right across Canada. Image programs were all the rage, and dealers invested millions in facilities and technology infrastructure.  

Although there have been shifts between brands, the dealer count has remained relatively constant in around 3,500 outlets for the last twenty-plus years. Dealers continue to invest heavily to this day.   

The business relationship between brands and dealerships has changed dramatically. Brands are much more involved in their authorized dealers’ businesses. 

As vehicle competition continues to increase, brands today are seeking to make a direct connection with retail customers and, as such, are more involved in determining the state of play within their dealer networks.  

The consumer arena is broad and diverse with brands wanting as much of the consumer business as possible. Competitive brand positioning is all important. As we all know, total market share sought by OEMs always adds up to more than 100 per cent and brands are after their fair share of the pie.

After an absence of over two-plus years, subvented financing and price discounts are resurfacing in the market. 

The value of dealers varies from brand to brand. Some brands are supportive and view dealers as an integral part of their go-to-market strategy, and others not so much. What is said publicly about the role of dealers often differs from some brands’ internal attitudes.   

In Canada very few critical decisions are made here. Canadian vehicle distributors are beholden to their parent companies. Sure, Canadian distributors might be able to massage the parent company’s instructions somewhat, but overall, major decisions in brand direction are not made in Canada. This often creates tension in the franchisor/franchisee relationship. In many cases, plans structured outside Canada often do not fit seamlessly into local Canadian markets.     

2024 / 2025 are stacking up to be challenging years for automotive.  Perhaps even longer. With vehicle supply returning to new normal levels for most brands, some old bad habits are returning to the marketplace.  

After an absence of over two-plus years, subvented financing and price discounts are resurfacing in the market. This is not happening for all brands. 

Consumers of all brands, however, are confused again about mark-ups and pricing in general. Consumers interpret these discounts to mean that prices are artificially high. 

This practice puts pricing pressure on all brands and potentially hurts customer satisfaction and trust. Also, as inventories climb, downward pricing pressures follow.  At the same time, higher interest rates have increased the cost of holding inventory. Simple math says that dealership profits will be impacted.

The economy is not bouncing back as everyone would have hoped. Consumers are still feeling the pinch of higher prices as they wait for wage increases to catch them up. Mortgage renewals are costing some homeowners dearly with sizable increases in their monthly payments.  

Vehicle acquisition costs are causing many consumers to delay replacing their vehicles. Sure, those drivers who need a vehicle for work or family reasons and lease renewals are still in the market, but many others are sidestepping and delaying their vehicle purchase decision.

I did some interesting high-level research about population and new vehicle sales. Looking at a twenty-year horizon, new vehicle registrations have not kept pace with population growth.  

In 2004, Canada’s population was 31.94 million people. In 2024, Canada’s population will have increased to 40.01 million people, an increase of 25.26 per cent over 20 years. Looking at new light vehicle sales, in 2004 sales amounted to 1.534 million new light vehicles. For 2023 the corresponding number of light vehicles sold in Canada was 1.664 million, for an increase of 8.47 per cent over 20 years. 

Are we able to say the difference is pent-up demand? If new light vehicle sales matched the percent increase, 2024 new vehicle sales would amount to approximately 2.0 million units.  

The recent SAAR as established by DesRosiers Automotive Consultants as of July 2024 was 1.77 million units. Canadian new vehicle sales peaked in 2017 at 2.04 million. Certainly, the last few years have been a kick in the pants from a volume standpoint. From my vantage point, it looks like a rosier future ahead as pent-up demand hopefully diminishes throughout 2025.

This summer all eyes have been on the U.S. Federal Reserve. There is much speculation as to the timing and quantum of potential interest rate cuts in the U.S.   

In Canada, the Central Bank has already started to reduce interest rates.  At the moment, there is concern on the labour front both in the number of workers and wage rates and their impact on inflation. That being said, the average forecast Bank of Canada overnight rate, currently at 4.40 per cent is projected to drop to 3.00 per cent by the end of 2025. This is good news.

Consumers are not lining up to purchase electric vehicles at the rates needed by brands to be profitable. As a result, some brands have delayed their conversion plans until consumer demand increases. 

The shift to vehicle electrification is throwing a monkey wrench into prospects. Governments are pushing forward with their plans, but there is a mixed message from consumers and some brands in the automotive industry. 

Consumers are not lining up to purchase electric vehicles at the rates needed by brands to be profitable. As a result, some brands have delayed their conversion plans until consumer demand increases. There is also a very real possibility that Chinese vehicles could enter Canada, dividing the market share pie even further.    

Despite the lingering uncertainties, brands are still moving forward with their demand that dealers invest further in their stores, which is causing some dealers to question why.  

Some months ago, I wrote an article called Stay Alive Until 2025. As we close out 2024 and approach 2025, there are some bright spots to foster optimism. 

There are, however, still some dark clouds high above to be watchful of as well. Challenges still abound meaning that dealers should still be vigilant as they plan for 2025.

 

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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