The Party Crashers Have Arrived, but the Auto Retail Celebration Isn’t Over Yet.

Despite immense challenges during the pandemic and microchip shortage years, dealers will acknowledge it was the best time to be in the new car business, akin to an unforgettable college rager. They enjoyed an unprecedented financial boom, with return on sales soaring from 2% to over 6% at most publicly traded auto groups. To put that into perspective, a dealer who earned $1 million in net profit in 2019 watched their earnings surge to over $3 million in 2022. The most astonishing part? Dealers made three times more profit while selling roughly one-third fewer vehicles.

While the party may have mellowed in 2024, the DJ is still spinning good tunes. New-vehicle sales pace hit 15.9 million units in May, marking this year’s peak, and Cox Automotive is forecasting an even hotter pace of 16.0 million for June. Despite downward pressure on front-end grosses, dealers continue to benefit from a 45% uptick in F&I income compared to 2019, earning more money in high-margin “back-end” dollars with every sale. This translates into a sizeable boost to their bottom line, so no one is drinking cheap wine at this party!

The used car business is still dancing, with Carvana and CarMax posting solid results. Carvana reported significantly improved average front-end gross margins in their latest earnings report, from $808 in 2022 to $3,030 in Q1 2024, a key factor behind its stock price increasing more than six-fold compared to last year! CarMax continues to have strong retail margins at $2,347 and set records in both wholesale gross and extended protection plan sales in Q1. The spring bounce in used-vehicle sales was generally muted, but used retail sales are currently running higher year over year by about 9%. Inventory remains relatively tight in used vehicles, but so far, it’s sufficient to keep sales healthy.

However, as with any party, there are signs it may not last forever.

The Party Crashers Have Arrived: Rapidly growing inventories, affordability challenges, high interest rates, and significantly fewer off-lease vehicle returns are dampening the mood of an otherwise lively festivity.

1. Rising Inventories and Holding Costs: New-vehicle inventories are up nearly 1 million units or 50% compared to last year. In 2021, the ratio of new inventory to used was 55%; today, that ratio is 125%. Some brands, particularly Mazda, Nissan, Audi, Stellantis, and Ford/Lincoln, have days’ supply levels well above the industry average. Dealers are feeling the impact of rising floor plan costs on their financial statements. At today’s interest rates, franchise dealers collectively spend an estimated $540 million in additional holding expenses per month compared to 2019, when 1 million more new vehicles were in inventory!! Talk about a buzzkill.
2. Affordability Challenges: New- and used-vehicle interest rates have only amplified consumers’ affordability challenges with a high-priced inventory. With new loan rates up 83% and used rates higher by 89% versus two years ago, the average monthly payment for a new vehicle is now $752, while the average used-vehicle payment is $571. Many reports suggest that only 50% of Americans can responsibly afford a $400 monthly car payment. This equates to about a $20,000 vehicle. The trouble is that you can hardly find a sub $20K-vehicle in the current new-vehicle market and it’s not easy in used. The net result of this situation is that households making over $250,000 represented 4% of total retail sales in 2019, but today, they represent over 16% – a 4x increase. One other byproduct of this scenario is that wealthy households are less likely to borrow money: The percentage of cash buyers has nearly doubled from 10% to 19% in the last three years.
3. Less Off-Lease Turn-Ins:  The combination of less retail volume and fewer leases during the pandemic has created a used-car acquisition challenge for dealers. Leasing shortens consumer trade cycles and enables used-car departments to pick up attractive inventory for their CPO programs. In the three years from 2019-2021, the industry had a steady flow of about 4 million off-lease vehicles per year returned to dealers. This year, off-lease volume will drop to 3 million and tumble further in 2025 to 2.3 million, before recovering a bit in 2026. This dynamic will pressure used-car departments to diversify their used-vehicle acquisition strategy. (Attention dealers: Check out vAuto’s latest innovation, ProfitTime GPS Global Search, which helps to solve this exact challenge.)

During my college years at the University of Wisconsin-Madison, there was a saying: “The party’s not over until the cops show up.” It’s fair to say the cops aren’t standing on the doorstep yet. However, dealers tell me the days of pre-selling 90% of their incoming inventory at full sticker are long gone, and they are increasing their focus on the controllables: inventory management, advertising efficiency, and headcount levels. Still, they acknowledge their business remains healthy and are optimistic about the second half of this year.

At the end of many college parties I attended, the last song played was often Closing Time by Semisonic, who sang: Closing time, every new beginning comes from some other beginning’s end. Although it’s not closing time yet for the automotive retail party, for those of us who follow the market closely, it sure feels like we’re beginning a new chapter.

Brian Finkelmeyer

Senior Director of Enterprise Insights and Advisory

Brian Finkelmeyer is Senior Director of Enterprise Insights and Advisory at Cox Automotive. Brian leads a team dedicated to providing car companies with actionable business intelligence to drive their performance. Brian has spent his entire career in the auto industry, working at Nissan for nearly 20 years in various sales leadership positions. Upon joining Cox Automotive, Brian was responsible for the vAuto New Car Inventory solution – Conquest. Brian lives in Nashville, TN.