THE GOOD TIMES ARE ROLLING — BUT THEY MIGHT NOT FOREVER
Having just come off three consecutive record years for new car sales in Canada, a period during which new-vehicle sales grew by an impressive amount, it is easy to be optimistic about the recent trajectory of the new-vehicle market in Canada.
And there is much reason to start 2016 with a strong degree of optimism. Top line revenues at new car dealerships surpassed $100-billion for the first time ever in 2015. That this took place in the context of a slow-growth economy — and a shrinking one for the first half of the year — is no less remarkable.
Outside of activity at dealerships, retail sales have been relatively flat in Canada in recent years, but with dealers’ sales taken into account, growth has been strong. In short, dealers are outperforming retail and the economy at large, and have been doing so for a number of years.
So, all is well, right? Yes, but only until it isn’t. Memories are short but one assumes it is the rare car dealer that doesn’t remember the downturn of 2008 and 2009.
We are now getting close to a decade from the onset of the great recession and financial crisis of that time, and recessions normally appear about once every 10 years. Ignoring for a moment the “recession” of 2015 (which wasn’t really a recession), this is not to say that we are soon to be headed into another sharp downturn, but that yesterday’s strong performance does not guarantee tomorrow’s prosperity. Past performance is no predictor of future returns in your RRSP or on your shop floor.
Though sales and revenues do tend to grow over time, no industry is guaranteed record sales every year. In the context of the string of records we’ve posted as a retail industry in the past several years, it could be easy — particularly for the younger members of a dealership’s staff — to assume the good times always will roll.
But in today’s hyper-competitive market, the dealer that enjoys the solid sales months while planning for the inevitable lean ones will gain a distinct advantage over those with business plans that assume demand only ever grows.
Much has been written about the fact that the Canadian economy is stuck in a slow-growth track for the foreseeable future. This has little to do with recent volatility associated with commodity prices, but is more a manifestation of labour force demographics and productivity numbers that refuse to grow strongly.
In today’s hyper-competitive market, the dealer that enjoys the solid sales months while planning for the inevitable lean ones will gain a distinct advantage over those with business plans that assume demand only ever grows.
The Bank of Canada has exhausted most of its conventional monetary levers with rates so near zero, that if anything, higher rates in the U.S. may soon force our hand to follow suit lest the cross-border rate spread — and accompanying currency fluctuations — get too severe.
Furthermore, governments are unsure how to formulate policies that will lead to stronger growth. Fiddling with tax rates that deliver a few hundred dollars per year in tax relief to the average worker won’t do much, but will cost stretched treasuries billions.
The sort of root and branch tax reform — comprehensive culling of hundreds of billions of “tax expenditures” and across-the-board rate reductions this would allow, for example — that would actually realign our economy in a way that would support stronger growth is a political non-starter.
It’s hard to imagine Canadians marching in the streets chanting “What do we want? Comprehensive tax reform! When do we want it? Now!”
Also, we can predict with stunning accuracy what demographics will look like 10, 20 and 50 years down the road and the implications that our collective ageing will impose on the economy. But policies that deal with issues decades in the future are a hard sell to voters, too.
This reality is why it has so far been impossible to act decisively against climate change, at least in countries where voters’ preferences need to be taken into account.
So what does this mean for our industry this year and later? Predictions are hard, especially when they’re about the future. But last year’s results may give us a clue.
In 2013, sales grew at a very strong rate of nearly six per cent over 2012, a growth rate well above overall economic growth. In 2015, sales grew at a much lower rate, though still enough to post another record year. This year and in the future, look for growth in our industry that is closer to the rate of economic growth. As long as that most important of macro indicators is stuck in the middle lane, it will be hard for our numbers to do much more.
