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Once again an annual global trek brought dealers and their key managers to New Orleans, Louisiana for the largest gathering of dealers and industry players. Thousands of industry folks from around the world have been active networking, learning and socializing in the Big Easy. The Canadian auto dealer team was there to take it all in.
For us seasoned veterans of NADA, much of the good stuff happens before the convention floor opens.
I arrived on Tuesday with the convention floor not opening until Friday morning. Arriving early allowed me to network with key industry contacts in a more relaxed environment.
This week I had the opportunity to spend time with Atlantic Canada heavy truck dealers, large U.S. dealers, both public and private, high profile dealer buy/sell professionals, Chinese automobile manufacturers, Canadian dealer group CEOs and executive teams, BMO Executives as well as industry conferences organized by AutoTeam America, Capital Automotive and JD Power. NADA is an incredibly busy time.
Although there was a lot to celebrate this year, with the CADA’s 75 Anniversary hit celebration at the House of Blues, and NADA’s 100th Anniversary celebrations at Mardi Gras World, I would describe the mood among dealers this year as only: “wishfully optimistic.”
Coming off record years in both Canada and the U.S., there are some high level dark clouds on the horizon. Although most are putting on a happy face, certain trends and realities are staring to keep dealers awake at night.
Most industry forecasters are calling for a 2017 new vehicle sales market that will be down slightly. However, they all qualify their predictions with a big uncertainty, Trumponomics. Possible import tariffs, the potential for higher vehicle prices, flat weekly paycheques for most Americans and rising costs are all big question marks.
Also everyone is expecting interest rates to rise and the cost of funds to increase, making vehicle financing more expensive for the consumer.
In the U.S. there are very high levels of off-lease vehicles expected to flood the used vehicle market this year. This is expected to be the catalyst for declining used vehicle transaction prices. With good quality used vehicles in ample supply, new car incentives are expected to grow from already very high levels to even higher to protect new vehicle sales levels. There will be leakage from new to used vehicles, estimated to have been over 300,000 units in the U.S. in 2017 and this number is expected to move higher.
The customers’ sweet spot for payments in the American market is $500 per month regardless of luxury or volume vehicles. Heavy discounting is taking place on light truck, SUVs and luxury nameplates to match pricing with market demand. It is generally believed that this cannot be sustained, again pointing to reduced new vehicle sales ahead.
Credit delinquencies are also on the rise. This is expected given that many lenders have increased their penetration in sub-prime loans.
New vehicle leasing is running at approximately 33% of all new vehicle registrations. This is despite the fact the most popular loan term is 72 months. Leasing is expected to fall a few percentage points in 2017 due to declining residual values.
Some analysts call the near luxury and luxury segments “a mess.” Real residual values have fallen to 39% of MSRP after 36 months. This should have the impact on increasing leasing costs unless OEM residual value subvention is increased. Neither move is seen a positive for the industry.
Many U.S. consumers seem to be taking 72-month loans but viewing them as leases. Many want to exit early only to find they have significant negative equity. Passenger cars perform the worst, then near luxury, then luxury. Light trucks continue to hold up the market by retaining their value.
The Canadian environment is somewhat more stable, however as history has shown, as the U.S. goes, Canada seems to follow at some point.
Many Canadian dealers have been very successful in selling used vehicles in the U.S. This has largely been led by fairly stable used vehicle prices and the discount rate of the Canadian and U.S. dollar. This dynamic will likely change as a result of increased domestic supply of used vehicles in the U.S. causing a reduction in used vehicle transaction prices. Canadian dealers could see their margins begin to erode on the used vehicles they wholesale south of the border.
There is much talk about the future of auto retailing. Many dealers do not have a warm fuzzy feeling about the direction the brands will take in the future as they respond to evolving consumer product acquisition trends.
One example is Geely Holding Group, the Chinese owned parent company of Volvo. Geely is launching a new brand called LYNK&CO. I had the opportunity to meet with LYNK&CO’s top global executive in an interview. The skinny on their initiative is that they believe that consumers are looking for a different way to access mobility.
As such they are going to alter the traditional vehicle distribution model by contracting with the consumer directly. They do, however, embrace the concept of a dealer network but only from a service and parts standpoint.
Although their launch in Canada is a few years away, they will be launching in Europe later this year from a central office in Berlin and in the U.S. in late 2018 from a central office in San Francisco, California.
They plan product display showrooms in various major cities, providing for test drives etc. but the new vehicle subscription based service will be done entirely online. At this point LYNK&CO will own all the inventory and also the vehicles under subscription. In this way they control both the new and secondary subscription vehicles. Authorized dealers will provide services to LYNK&CO owned vehicles for a fee.
The vehicles themselves will be built upon Volvo platforms and consist of ICE, Hybrid and fully electric models over time. The vehicles come equipped by all the advanced technologies of the day. They will also enable and facilitate car sharing.
In addition, consumer friendly features, such as smartphone access to vehicle trunk space allows for some very interesting time saving features through general retail partnerships where the empty vehicle becomes the delivery point.
Many dealers view this a threat and not an opportunity and have deep concerns. Others believe it’s an interesting opportunity to not be saddled with new vehicle inventory and expensive facility investment requirements.
They point out that services and parts are the highest margin portion of the auto dealerships and the base from which customer relationships are developed and maintained. Although its very early stages and few concrete details are available, some dealers see this as a possible opportunity to increase the efficiency and utilization of their workshop facilities.
As with changing wind directions on our lakes, for a period of time there seems to be no strong indication of the final direction. That seems to be where we are at the moment.
As for the convention floor, my observation is that the two busiest exhibitor booths are X-Time and V-Auto.
There are, however, a complete range of product and service providers, many based on customer containment and inventory management.
Checking out the more than 600 exhibitors can be somewhat overwhelming. Just today my iPhone indicates that I have taken over 18,000 strides. The floor span is massive and many of the exhibitor booths are extravagant.
It is ironic that with all the talk about the future face of retailing, the trade show business seems to be marching right along as it has for decades. Touch, feel, try, dialogue and shake hands and walk away with a small gift is still the norm of the day.
