“Car dealers have nothing to sell” is a refrain we’ve been hearing over and over lately, but dealership profits have been soaring, hitting record highs even higher than the peaks of late 2020. Somehow, dealers are making over double the profit through September of 2021 than over the same period in 2020, which presents an interesting situation for analysts, dealers, and manufacturers alike.
With record scarcity of cars, dealers could charge consumers more for the same product than they ever could. Instead of cash on the hood, dealers are adding markups to everything with four wheels, tires, and a steering wheel. Incentives are low and cars are only getting more expensive, with recent average new car prices slicing past $40,000.
Let’s take a look at how the normally brutal auto sales industry has managed to come out just fine despite a lack of cars and a kneecapping start to the pandemic-era car industry.
Welcome to Headlight. This is a daily news feature that lights up one current event in the car world and breaks it down by three simple subheadings: What Happened, Why It Matters, and What To Look For Next. Look for it in the morning (Eastern time) every weekday.
What Happened
According to the National Automobile Dealers Association, average dealership pretax profits hit a healthy $3 million through September 2021, more than double the $1.3 million average reported for the same period last year. As Automotive News reported, it even beat the average $2.1 million pretax profit of all of 2020, which was a new record in itself.
The good news continues once taxes are collected. In fact, the news is astonishing. Operating profit, that is profit after taxes and expenses, soared from a paltry $322,000 average to nearly $1.8 million. For the mathematicians out there, that is a 456-percent increase in operating profit over the same period in 2020. Suffice to say that is an astronomical number.
Profit per vehicle has also risen dramatically, with used cars making 35.9-percent more profit and new cars swelling to 64.9-percent more profit than the first nine months of 2020. An interesting stat among this proverbial sea of cash for dealer franchises is the used-to-new car sales ratio dropped slightly from 96.3-percent to 90.8-percent.
Why It Matters
We at Car Autance have commented much on the state of the new and used car market. It is one of our mandates to talk about it and seeing how it’s evolved since the beginning of the pandemic has been fascinating. Cripplied supply chains aside, it seems that the price of cars has swelled beyond reason as consumer demand stays insatiable relative to the production capacity of the big automakers.
For a lot of folks, this trend means that they simply cannot afford a new car. Especially when greedy dealerships add thousands of dollars of markup to normal cars and tens of thousands to desirable enthusiast cars. I would love to see the stats on dealer markups and how much they contributed to this stratospheric rise in dealer profits, but that data is hard to come by.
Car dealerships saw an opportunity to increase prices thanks to the classic supply-and-demand backbone that makes up the capitalist dynamic. There are certainly fewer cars on dealership lots than ever and even if demand is only at pre-pandemic levels, fewer cars mean there is more demand for the cars that are on lots. Thanks to this scarcity, dealers could get away with charging more, much to the chagrin of many buyers.
The point being, dealers are not losing in the war against markups. It seems that people are paying them and dealers are pocketing a lot more money because of it. Whether these good times will keep rolling is yet to be seen. There is still the chip shortage and reduced production capacity that will be solved in the coming months. Once inventory is back on lots, it might just derail this freight train.
What To Look For Next
The year-end reports for dealer profits will give us a total picture of how much has changed since 2020. It doesn’t take a math expert to know that dealers are on track for a record year of profits, even with fewer cars to sell. But like all record highs, there must be a cool-off period after the peak.
This peculiar situation with inventory and production won’t last forever. The chip shortage has been rumored to have been solved for months now, but there is seemingly no end in sight. When the day comes that dealer lots are stuffed to the brim with shiny new cars, things might return to normal and car dealers will get a bucket of ice to the face. Inventory means fewer markups. Fewer markups mean less profit.
Consumers are shrugging prices off but surely this isn’t sustainable, right? Only 2022 can tell us.
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