Clarity would be great, but flux remain the order of the day
Canadian interest rates declined another quarter point this morning, with hints of more declines likely in the coming year. This is good news for Canadians who are on the paying end of residential mortgages and consumer debts like vehicle loans.
As interest rates decline, consumer affordability and buying power, in theory, increases. It is widely anticipated that many consumers will enjoy a positive impact on their monthly cash flow.
It’s no secret that costs have increased significantly from before the start of the pandemic. One cannot help but feel that prices have risen at a much faster rate than required, leaving many to wonder how much and for how long higher prices will remain. Will there be a rebalance?
Now that the dust is settling somewhat, how much of the increases were needed versus how much was taking advantage of opportunities to increase corporate profits? Will there be a catch-up phase or are current costs levels the new normal and it’s only up from here?
Let’s look at an example. When the business environment uncertainty hit hard in mid-2020, businesses practicing cautious pessimism believed it was prudent to predict a significant increase in input costs. Revised budgets were struck. Updated pricing strategies quickly followed. This happened up and down the supply chain, in effect compounding the issue.
After a successful period of supply shortage, in which inventory was pulled by consumers who quickly caught on to ordering their vehicles, our industry is reverting to building excess inventory.
At each step of the way, prices were adjusted. As a result, end-user input costs increase dramatically. Some of these increases have proven to be warranted, and others are questionable.
Wage inflation is alive and well. Wage rates continue to rise which obviously helps with overall affordability. There are, however, concerns surrounding employment levels as unemployment is starting to creep up.
As we begin our planning for 2025, much uncertainty remains. Vehicle supply is shifting from under-supply to oversupply. After a successful period of supply shortage, in which inventory was pulled by consumers who quickly caught on to ordering their vehicles, our industry is reverting to building excess inventory.
As a result, we are back to a push situation with higher inventory levels and corresponding floor plan interest costs. We are back to price discounts, which is placing downward pressure on our gross margins. The combined impact of lower gross margins and higher wage and floor plan costs is having a dramatic impact on our bottom lines.
Consumer sentiment (confidence) is tracked monthly. According to Trading Economics data, in recent years, consumer confidence peaked at 57.1 in November 2018 and tumbled to 35.6 by April 2020. It recovered to 55.7 in July 2021 and has steadily declined since, now standing at 47.2. The forecast for 2025 shows a slight improvement to the 50–52 range. This is pretty good news as it sets up positively for 2025, barring any unforeseen negative global and domestic events.
The next several months will be fraught with political instability as the U.S. presidential elections and now potential Canadian elections add elements of directional uncertainty. With political parties at polar opposites on certain key initiatives, it’s time to hurry up and wait.
The direction of electrified vehicles is causing increasing instability. Many traditional automotive brands are walking back their initial fleet conversion targets.
Brands are awaiting consistent signs of consumer demand for electrified vehicles to match government conversion timeline mandates and, more importantly, their efficient and profitable vehicle production requirements.
The deployment of capital by automotive manufacturers requires a sound runway. So far, there is a material disconnect between climate change initiatives and consumer demand. Pricing is a significant component of consumer demand. Charging infrastructure, fuel availability, and insurance attitude are just as critical.
All these are causing some brands to pivot to hybrid vehicles from pure electric ones. Dealers, in the meantime, are expected to follow the lead of the brands they represent. With some brands pivoting to different approaches, dealers, once again, feel they are caught in the middle with very little control.
As you start thinking about 2025, things could not be in a more significant state of flux. Many brands continue pressing forward with facility upgrade requirements without a clear vision of the future.
Other brands are adjusting dealer margin levels, and others are adjusting vehicle availability. In all cases, dealers must foot the bill at the end of the day. Some brands have indicated that facilities could be smaller. This is good news for those building all new facilities but of little help to those dealers that have built to previous standards where consumer demand has yet to catch up to current facility size.
Dealers, in the meantime, are expected to follow the lead of the brands they represent. With some brands pivoting to different approaches, dealers, once again, feel they are caught in the middle with very little control.
New vehicle dealers depend more on adjacent businesses, namely used vehicles, all-makes and model vehicle servicing, F&I and shifting away from outsourcing and keeping more of the pie in-house.
Also on the radar screen are new entrants into the Canadian new vehicle landscape. Much has been written recently about low-cost Chinese vehicles and related tariffs in Canada and the United States. This product expansion will not be the same in all parts of the country with consumer acceptance of these new products not yet known. This is an area for dealers to follow since it presents both a potential business opportunity and a competitive market risk.
I wish I had a crystal ball and could accurately look into the future. The only certainty I can provide is that there are vehicles on the road in all Canadian markets. These vehicles provide an opportunity to expand business beyond new vehicle sales.
Focusing on all aspects of our business and keeping our eye on new opportunities for adjacent businesses could produce sizable economic returns. Basic blocking and tackling are likely the play for the next while.
Stick to what you know and stay away from what you don’t. Play to your strengths and eliminate your weaknesses. Trust your gut through these times of elevated confusion.
