Independent dealer sentiment lags behind franchise optimism

While the automotive market is still tracking behind all prior-year sales metrics, franchise dealer sentiment is optimistic about the coming summer, according to a Cox Automotive report released today. Independent dealers, on the other hand, said their top priority is just keeping their showroom doors open. 

Prior to the COVID-19 economic crisis, dealership sentiment had been on the decline, with franchise dealers concerned with growth factors like competition and other macroeconomic market conditions, according to the last two quarterly Cox Automotive index reports.

While 20% of franchise dealers are now primarily focused on improving their sales figures in the wake of the pandemic, more than half of independent dealers are mainly concerned with staying in business, according to Cox’s dealer sentiment index. Among the independents, only 8% said their priority is improving sales, and 6% said they are working to retain customers. 

Independent dealers particularly have felt the squeeze of the industry’s recent recession. Last week, Wells Fargo announced it is backtracking funding for a majority of its independent dealer networks indefinitely, leaving dealers to seek alternative lenders for subprime customers.

“Franchises often have strong lender relationships that remain committed to the consumers they serve,” said Jonathan Smoke, chief economist at Cox Automotive. “Independents may be seeing more challenges on that front as their traditional customer is more likely to be subprime.”

Still, other factors could be spurring franchisees’ optimism as well, Smoke said. 

“We also believe that the average franchise dealer was able to respond to the crisis more proactively — like applying for Paycheck Protection Program loans that helped them shore up their financial position,” he said, noting that franchise businesses have typically more diversified offering sources of revenue, including parts and service, which tend to perform well, even in economic downturns when sales slump.

Consumer sentiment has been a key indicator of the industry’s future performance since the pandemic outbreak. It still shows consumers’ uncertainty in conducting big-ticket purchases moving forward, so dealers are feeling pressure to lower their prices, according to the price pressure index in Cox Automotive’s report. 

In addition to stay-at-home orders and record unemployment, this pressure could be a result of consumers’ assumptions that they can get a bargain, Smoke added. 

“There are no bargains now,” Smoke said. “It is possible that wholesale prices will come under pressure again, but the opposite is happening now — pressure is being alleviated by recovering demand and thin retail inventories.”

New-vehicle inventories came in around 2.6 million units in May, according to Manheim. Still, the new-vehicle market performed better than the used-vehicle market last month, largely due to lackluster vehicle sales and the exclusive access to inventory that franchise dealers have with their OEM partners. 

“As the new-vehicle market has been recovering strongly, franchises have the advantage of trades on those new vehicles as a source of inventory,” Smoke said.

Originally published on Auto Finance News