Tuesday, 19 June 2018

Auto dealers worry over rising interest rate, limited inventory

Dealers increasingly worry that rising interest rates and limited inventory could hurt vehicle sales and store profitability.

That’s a key conclusion from the latest Cox Automotive Dealer Sentiment Index, a quarterly survey of auto dealers.

Though the retailers remained upbeat about the retail market, optimism in the second quarter slid from the previous quarter.

“The challenges are growing in number,” Jonathan Smoke, Cox Automotive’s chief economist, told Automotive News. “And they almost become self-fulfilling prophecies of weaker sales in the future.”

Smoke: Sales could be affected.

The survey measures dealers’ perceptions of the past 90 days and expectations for the next three months. It identifies key factors affecting retailers’ optimism or pessimism.

The latest survey, conducted April 30 to May 14, had 1,053 franchised and independent dealer respondents. Responses were weighted by dealership type and sales volume to represent the national dealer population. The responses are used to calculate what’s known as a diffusion index, in which a number greater than 50 indicates that dealers view conditions as strong.

Cox calculated overall results, as well as separate results for franchised and independent dealers. This report focuses on the franchised dealers’ responses, unless noted.



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Among those retailers, optimism about the coming three months scored a 69, robust but down from 73 last quarter. Their views about the market at the time of the survey scored 56, up from 55 last quarter.

But Smoke doesn’t expect dealer smiles will last through the year.

Interest, inventory

Holding business back

Franchised new-vehicle dealers are most worried about these topics — and in most categories, their concern is mounting vs. a year ago.
  Dealers concerned Q2 2018 Dealers concerned Q2 2017
Market conditions 47% 39%
Competition 36% 39%
Credit availability for consumers 24% 19%
Automaker mandates/restrictions 24% 22%
Limited inventory 23% 17%
Expenses 23% 21%
Source: Cox Automotive Dealer Sentiment Index

Concern over interest rates is rising, from 4 percent of dealers a year ago to 21 percent in the new survey. The concern was No. 8 among franchised dealers and No. 6 overall. A year ago, it was No. 12 overall and No. 13 among franchised dealers, not even a factor, Smoke said.

The leap in dealer concern is not surprising, he said, as loan rates have increased dramatically in the past six months. The average best available interest rate for auto loans in May rose to 4.26 percent, an increase of 104 basis points over year-earlier rates, according to Bankrate.com.

“I wouldn’t be surprised if next quarter — if interest rates keep moving — we actually see that issue of interest rates being a negative factor moving into the top five,” Smoke said.

Market conditions continue to be the top-cited factor holding business back. But limited vehicle inventory is another growing concern. It was No. 2 overall, tied with credit availability for consumers, a jump from No. 5 during the first quarter and No. 3 a year ago. Franchised dealers ranked it No. 5, with 23 percent citing concern. That was up from No. 8 with 17 percent expressing concern a year ago.

The mounting marketplace challenges on the horizon could hurt vehicle sales in the coming months, Smoke said.

Higher interest rates lead to higher payments, which eventually make vehicles unaffordable for some consumers, he said. Difficulty obtaining credit shifts customers out of the new-vehicle market and into the used, all while dealers are reporting a squeeze on new and used inventory.

“It’s hard to conclude that we’re going to see strong growth in sales in future months as those things all come to roost eventually,” Smoke said.

Tax rates

Tax change letdown

Franchised new-vehicle dealers’ expectations of benefits from federal tax changes tanked this quarter. Fewer expect a positive impact in the next 3 months.
  Dealers responding Q2 2018 Dealers responding Q1 2018
Positive impact 34% 68%
No impact 59% 31%
Negative Impact 7% 1%
Source: Cox Automotive Dealer Sentiment Index

Dealer confidence fell significantly in the benefits from tax changes, with scores indicating the new tax plan had no impact on the retailers.

Last quarter, Smoke said dealers were “borderline euphoric” about the tax changes, indicating that probable increases in disposable income could translate to increases in gross profits.

But dealers sharply adjusted expectations in the second quarter, with only 34 percent of franchised dealers reporting a positive impact from tax change, compared with 68 percent who anticipated growth in the previous quarter. Meanwhile, 59 percent of dealers saw no impact.

The next index report is to be released in September.

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