Ouch!

Let's preface this article by saying it isn't about beating anyone up. It's about offering realistic insights into the struggles we're currently facing. If we don't tackle the issues we face head-on, we're asking for a rude awakening in the coming months. For those living under a rock, according to a recent NY Times article, auto sales in 2023 will be at a low that we haven't seen since 2011. Sure, with the increased gross profit, that'd be okay. But is that the perspective of looking through rose-colored glasses? 

It's no secret that interest rates have steadily increased. And while half of a point here and there is minimal – it is considerably higher than it was at this time last year. So, while dealers previously could easily justify selling over MSRP in the past due to supply shortages – can they do the same when inventory levels start to saturate, and interest rates continue to climb to an all-time high? The reality is that the dealers will have to start selling again. And if we don't have a game plan, whether that'd be managing inventory or handling a sales process, then we're in trouble.

One of the biggest things dealers will have to be cautious of in the next year or so is what the OEMs will do regarding pricing and inventory. If dealers can maintain lower, nimble inventory levels, then it might work out. But even if dealers maintain lower inventory levels, it doesn't mean they will sell their vehicles. If the rates continue to climb, the customer may be more reserved when purchasing a car. Let us also remember that those customers who bought pre-owned vehicles in the last three years did so at an all-time high. And they will most likely be in trouble when it comes time to purchase another car. Think about it: those who bought in the peak of 2021 will already have their vehicle for a mere two years! If when those customers come back to possibly trade in their cars, are we really going to be able to get them into a new car?

If the customer is flipped, having paid at or above MSRP, or paid 135% of the used car value, the banks will most certainly limit their book-out values. So, are we ready and prepared to deal with the aftermath of selling at record-high profits? Is this going to come back to bite us? I mean, sure, we could do cash for clunkers as we did in 2008. But it's just that the beaters aren't necessarily going to be worth the money the customer needs to purchase a new vehicle. Not to mention, the banks – with increased APRs – aren't necessarily going to offer approvals with substantial negative equity without considerable cash down. And are the OEMs going to be prepared or willing to start offering increased incentives to purchase vehicles? If you've seen the latest trends in OEM incentives, they're actually down year over year, and it's not likely that they're going to go up.

So, what does all of this mean? Well, it means that we have to be strategic in the coming months. We don't have much room for error. Those with digital retailing on their websites – such as offering pre-approvals and monthly payments, ought to ensure their online processes are clear and to the point. How many customers have potentially exited due to the "potential" financing not being within their range? This will only worsen as trade-in values ease, and the lenders are only willing to book out so much of the value.

Bottom line: look, this isn't about being a pessimistic doomsayer; it’s about making sure dealers have a plan to tackle the issues we're going to face. If there is anything we have learned in the last decade is that dealers are resilient and often tackle challenges head-on. Tackling those challenges head-on means that we must have effective processes on the dealer level. Ensuring that we're correctly handling every opportunity we get. Long gone are the hay days of the pandemic when the customers came to us without any objections. There will be objections we have to face, and if we don't face those objections head-on, we will have a hard time.

The good news out of all of this is that there are resources available to ensure that you're on the right track. Every phone call counts more now than ever. Take a minute to submit for a free stealth test. We will mystery shop your dealership, offering insights on what your team can do to improve their customer service. And no, this isn't a one-time phone call review. It's a long-term strategy for improving and refining their technique. A technique that will prove itself valuable in the days ahead.

Are you ready to tackle the challenges ahead in 2023?