Words for the wise as dealers navigate the murky waters ahead.
As I was driving to a meeting this morning and listening to Squawk Box on CNBC, they were discussing the current state of the economy and what could lie ahead.
This show has been a favourite of mine for a very long time. It covers all aspects of the economy and investing, in detail examining all sides of the issues. One of their guests this morning was asked about when things would return to normal? His answer was simple.
He quickly said there is no such thing as normal. He has personally adopted the saying “Stay alive until Twenty Twenty-Five.” Based on experience, he believes that once the economy hits bottom the recovery is usually unsteady until broad momentum is created. He sees that happening in 2025. Until then the waters will be choppy, and the ride will be bumpy.
Right now, the war on inflation is being fought by rising interest rates. In its simplistic reasoning, this is supposed to reduce consumer demand and thus inflation.
The Bank of Canada believes that interest rate increases may curb or at least alter consumer spending, and if that strategy is successful, inflation will start to come under control.
I believe that it will take many months of steady inflationary declines for the Bank of Canada to begin their slow downward movement in interest rates. This might happen over 2024. Until then rates will likely continue to rise.
We are living in very uncertain times. Not all things are bad, and some sectors of the economy are doing OK.
Rebuilding might not take a herculean effort for some, but it will for others.It could seem more like a renovation as opposed to a rebuilding.
Those of us with some experience know it is often cheaper and quicker to rebuild than renovate. Starting with a clean sheet of paper eliminates many unknowns lurking under the surface in renovations.
In any event, for the economy, renovation is the chosen strategy.
Consensus is that things will continue to be slow before they get better. The recovery will be uneven, two steps forward and one step back before stability and thus predictability will be possible.
This discussion parallels our current situation in auto retail. The supply and demand relationships are shifting. Just as we can see supply pressures easing, demand is now under pressure.
Higher interest rates are whipping up vehicle affordability headwinds. This is causing customers to downsize their vehicles just to keep their monthly payment somewhat comparable to what they are accustomed to.
The fact that most customers need a vehicle to facilitate employment means that they still need a vehicle. For those interested in continuing to own or lease their daily ride, they can either keep the current vehicle longer and hope to win the repair bill lottery, they can purchase or lease a used vehicle hoping to win the longevity lottery, or they can downsize their vehicle to better manage their monthly costs with greater certainty.
Others may turn to public transit or ride sharing but in my experience these folks also own or lease a vehicle, so other than possibly a reduction in net operating costs, they do not mess with the new or used vehicle market dynamic in a material way.
At the moment, for most brands dealer inventories are still low. Dealers are selling everything they can get their hands on, and many dealers have robust waiting lists. The coming months however will hopefully be better but still likely far from stable and predictable. Lots of wishful thinking and cautious optimism but still much uncertainty.
The stay alive until twenty-five saying really resonated with me. After all, many factors out of our control need to come together to get us out of this quagmire. Like runners at the starting line, there will be many false starts, reloading, restarts and unfortunately disqualifications.
Adding to the automotive uncertainty is the road to electrification, brand product cadence uncertainty, product realignment, competitive repositioning, and the overall impact of new vehicle manufacturing entrants and their impact on residual market share.
As new entrants earn consumer support, traditional brands are on the losing end. Unless the total market grows significantly, sales volumes of some mainstay brands will continue to erode. Total market share always adds to 100 per cent. All brands competitively chip away their share as they carve their way into that market share.
The more players, the harder it is to maintain market share per cent. Not too long ago the Canadian new vehicle market topped 2 million new units. Today the market has shrunk to around 80 per cent of that peak. That’s a lot of new vehicle sales not realized.
Some believe this has created a pent-up demand and as such, like the Field of Dreams, if you build it, they will come. Others believe the market dynamics have changed. At this point no one knows.
Vehicle brand owners are walking a tightrope. Just like the Flying Wallendas, vehicle brand owners operate largely without a safety net.
With the winds of market change blowing strong, brands are challenged to stay upright on the industry tightrope. They are engaged in a daily battle as they decide and plan their way forward. These decisions directly impact franchise auto dealers.
Uncertainty is the order of the day for dealers as brands attempt to maintain their footing, hanging on with only their toes and balancing with the use of a flexible pole to lower the centre of gravity and manage torque to avoid rotating and falling. Dealers collectively hold the safety net just in case. In the past, dealers have been called to rescue and as such have been an integral part of the brand positioning.
Many believe these times are different. The consumer fascination with online ordering advanced rapidly during the pandemic period. Will this consumer fascination directly translate to online new vehicle sales?
Some brands seem to be banking on this and are retooling their direct-to-consumer initiatives. This affects their go to market strategy. For some, the business relationship with their dealers is not clear, in fact it’s downright foggy.
As the economy bumps and grinds its way to health, consumers rebuild the confidence they once had and vehicle brand owners develop some clarity on their future direction, franchise dealers today are left with more questions than answers.
Keep the ship afloat and act responsibly to preserve what you have grown. Seek opportunities that make sense for your business without risking the mothership.Keep one eye on costs. Keep the other
eye on your brand’s development and align as much as is practical that makes sense in your market.
Staying alive until twenty twenty-five seems to me to be wise words to follow.
