Pandemic delivers record profits to new-car dealers in Australia – report
Chronic shortages of motor vehicles throughout the pandemic have delivered record profits to new-car dealers in Australia, as customers pay full retail and endure long waiting times.
The return of discounts on new cars could be years away – industry analysts have forecast – after a new report revealed stock shortages and high prices during the coronavirus pandemic delivered the biggest financial windfall on record to dealers across Australia.
Research firm Deloitte – which has forensically monitored the Australian automotive industry for 25 years – has revealed new-car dealers made more money last year than ever before in recorded history.
Dealer profits have more than tripled over the past two years amid ongoing stock shortages, higher transaction prices, and the sudden death of discounts and drive-away deals.
Over the past two years, customers have been forced to pay full retail and endure long waiting times to secure a new motor vehicle.
Figures supplied by Deloitte show in the 2019 lead-up to the pandemic, new-car dealers on average made a profit of $600,000 a year – but last year the average profit per dealer was $3 million.
Deloitte said its latest profit data came from monthly surveys of 1650 dealers nationally – more than half the network of 3000 showrooms in Australia.
With no end in sight to restrictions on the supply of new motor vehicles, industry analysts have forecast high profits – and an absence of discounts on new cars – could continue for several years.
“Dealers have made a dollar … we’ve made a lot of money,” Lee Peters, one of Deloitte’s longstanding automotive industry experts, told the Australian Automotive Dealers Association (AADA) conference in Brisbane last week.
“Low levels of (vehicle) supply have meant … discounting has been eliminated,” said Mr Peters.
“Make hay while the sun shines,” Mr Peters told the car dealer conference. “These unique conditions, the most unique conditions that we’ve seen in at least 25 years, they’re probably going to be here for the next two years. Make as much money as you can right now. Make sure (not to) miss a trick.”
Mr Peters said new-car dealers should use the current levels of prosperity and high profit margins to secure their businesses for the future.
The Deloitte automotive specialist advised dealers not to look back at this period of high profits a decade from now and think: “‘Wow, that was a nice little injection.’ What we need to be looking at is to say, ‘That was a nice reset,’ rather than just an injection (of higher profits).
“As a business model (the car industry needs to focus on) cost-out and customer-first,” said Mr Peters, who urged dealers to “use this two-year period to … future-proof our business.
“We’ve all got cash, we’re all making profit, our balance sheets are fatter than they have been in the last five years,” said Mr Peters. “Make sure (to) do something with that, so that we’re set up.”
Mr Lee said a lack of competition across the new-car market – due to chronic and ongoing stock shortages over the past year or so – contributed to the recent period of record dealer profits.
“There’s less competition,” said Mr Peters. “In fact, most customers are no longer shopping around, so there’s no need for them to visit multiple dealerships because nobody’s got stock.
“Instead what we see (customers) doing is … visiting their local dealership, placing an order, and trying to get in the queue as fast as possible. That’s a nice, healthy way to sell in this environment.”
Fellow automotive expert at Deloitte, Dale McCauley, told the conference: “When the pandemic hit, no-one could have predicted this outcome. (The pandemic) produced … the most interesting set of data we’ve seen in the last 45 years.
“For the first time that I can recall in many years, demand (for new motor vehicles) has exceeded supply, with $60 billion of overseas travel and dinners out with friends … being redirected into retail, cars, domestic travel, and home renovations.”
The Deloitte experts said semiconductor shortages, production slowdowns, and shipping bottlenecks – and the Federal Government’s ‘Job Keeper’ financial assistance package – helped drive up the profit-per-car-sold figures.
The data showed the average profit on each new car sold last year was close to $5000, about half of which came from the gross margin in the vehicle itself, while the other half came from ‘Job Keeper’.
Over the past year or so, car dealers have not needed to discount to win a sale – and car companies have saved money because they haven’t needed to offer generous bonuses or offer other financial incentives to move metal.
The head of the Australian Automotive Dealers Association (AADA), James Voortman, told the conference: “While (stock shortages) brought an end to the discounting wars we saw pre-pandemic – and it’s greatly assisted dealer profitability – it has created a very difficult operating environment for many of our members who have to deal with customers waiting for vehicles.”
The Deloitte experts said last year’s financial boost for new-car dealers arrived after a sustained period of low profits – and noted, immediately prior to the pandemic, more than a third of dealers were in fact running at a loss.
“We reached a point in 2019 where the average dealer was making just 0.6 per cent (profit), and more than a third of all dealers were running at a loss,” said Mr McCauley.
“So out of the 3000 (dealerships) in this country … more than 1000 dealers lost money in 2019,” he said.
After a decade of average dealer profits running at a rate of 1.5 to 2.5 per cent of turnover, the average profit made by new-car dealers last year climbed to 4 per cent – and benchmark dealers (the top 30 per cent) made a profit that equated to 6.4 per cent of their turnover.
New-car dealers in NSW were the most profitable nationally – with benchmark showrooms delivering a peak average of 7.0 per cent profit from their total turnover – ahead of West Australia (6.1 per cent), Queensland (5.8 per cent), Victoria and Tasmania (5.7 per cent), and South Australia (5.6 per cent).
“For the first time, we’ve got 90 per cent of dealers in this country earning money and only a small percentage are losing money month-to-month,” said Mr McCauley, adding it was important to note how dealers struggled for the previous 25 years “to be able to understand exactly how remarkable the last couple of years have been.”
Mr Peters said the average dealer profit of 4 per cent to 5 per cent over the past two years “is the kick (car dealerships) needed.”
“As an industry, we need to do something with that kick … if we get to 2023, 2024, 2025 and we haven’t learned the lessons of this last 10-year journey, we will have missed the trick.”
Mr McCauley said new-car stock was “at critically all-time low levels … and you can clearly see the impact that’s having on (profits).”
“What we are seeing is that, as new stock arrives, most of that’s already sold or pre-sold to a customer, so it’s moving very quickly through showrooms.”
Deloitte forecast the automotive industry will become a “two-speed economy” over the next year or so, based on which brands can get cars and which can’t.
“We do see two speeds occurring, those that will have stock and those that won’t have stock,” said Mr McCauley.
“Those with stock will gain momentum and market share (and) some customers then may pivot to other brands, or go have a look elsewhere for a car that is available and in stock.
“So make sure you are hanging onto your customers, communicating with them, and … holding their hand through this journey to delivery.”
Despite the challenges facing the car industry, Deloitte forecasts a new-car market in excess of 1 million sales per year for the foreseeable future.
“Our latest forecasts are, for the next three to five years, this market will be somewhere between 1 million and 1.1 million, and this will be quite consistent,” said Mr McCauley.
“With 70-odd brands in this market competing for just over a million sales annually, it means that when supply does return, competition ramps back up again.”
In comparison, the US has about 40 automotive brands competing for approximately 18 million new-car sales annually.
“When will our supply chains normalise?” said Mr Voortman. “Who knows? This is the million dollar question, but unfortunately it is beyond our control.”
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