The explosion of per-vehicle gross profit shows why buying a car or truck now is nuts. But lots of people did though they didn’t need to: inflationary mindset.
By Wolf Richter for WOLF STREET.
I’ve covered the mindboggling price increases in the new and used vehicle markets, retail and wholesale, from various aspects since last year, including the collapse in new and used vehicle inventories across the US due to a mix of issues. Today, we’ll check into this on a per-vehicle basis, in dollars and percentages, in terms of what consumers are paying on average, and just how massive the profits are that consumers are allowing dealers to make. These are truly stunning times. And it’s another sign that something in the market has broken.
AutoNation, the largest chain of franchised auto dealerships in the US with over 300 stores, reported second quarter earnings this morning. The per-vehicle revenues and gross profits were just stunning, a reflection of the breath-taking price increases in used and new vehicles retail, documented now even by the new and used vehicle Consumer Price Index inflation data that for two decades has understated or brushed off entirely those price increases.
Revenue per vehicle retailed jumped as a result of higher prices per vehicle and a shift to more expensive models, as we’ll see in a moment. Throughout, I’m going to compare AutoNation’s Q2 2021 to its Q2 2019 because in Q2 2020, the numbers were heavily distorted by the lockdowns:
|Revenue per vehicle retailed:||Q2 2021||Q2 2019||2yr Change|
Gross profit per vehicle retailed: Gross profit in the sale of a vehicle is the difference between the cost of the vehicle on the dealer’s books, and the final selling price; this does not include expenses such as commissions and interest expenses (floorplan).
These are stunning, mind-boggling, and in normal times incomprehensible increases:
|Gross profit per vehicle retailed:||Q2 2021||Q2 2019||2yr Change|
|Finance and insurance (F&I)||$2,339||$1,921||+22%|
In new vehicles, the 133% explosion of per-vehicle gross profits reflects in part higher prices, as customers were willing to pay no matter what to get a new truck or SUV; and in part a shift to higher-end models in the mix, as we’ll see in a moment.
If you add F&I profits, the average customer allowed the dealer to make nearly $7,000 in gross profits. These are just stunning numbers and reflect a market that has broken. Customers are just paying no matter what. Pricing has become a loose cannon.
In used vehicles, the 54% surge in per-vehicle gross profit comes despite the historic surge in used vehicle wholesale prices, which averaged over 40% in Q2 compared to Q2 2019, according to the Manheim Used Vehicle Value Index.
So dealers are paying a lot more for their used vehicles, both in terms of trade-ins and in terms of units purchased at auction; and they’re able to pass on those higher costs, plus some, to customers eagerly jostling for position to vastly overpay.
For dealerships, this is a revolution. Before, American consumers were known to be astute and do research and walk away when the price was too high. All manner of tricks were being played to get consumers to pay more; and now, forget it. Consumers are eager to pay more.
Cars and trucks are for most people discretionary purchases. Most people can just drive for a year or two what they already have, or they can exercise the option to buy their leased vehicle at the end of the lease at the price set at the beginning of the lease (the “residual value”). They don’t need to buy or lease another vehicle.
And the people with money are splurging. These are the beneficiaries of the Fed-created asset bubbles, and they’re spending some of their gains. This is how the Fed’s favorite strategy, the Wealth Effect, is supposed to work.
AutoNation reported that “segment income” (operating income less floorplan interest expense) rose across the board, but modestly with domestic brands, and exploded with imports and at the high end.
|Segment income||Q2 2021
These enormous profits on a per-vehicle basis document the explosion in prices that dealers were able to get their customers to agree to pay; and they blew away the input cost increases that dealers faced.
And the fact that customers threw decades of training into the wind and just laid down and paid whatever when they didn’t even have to buy a vehicle, and could have just waited a year or two until this craziness blows over, shows just how broken the vehicle market is, and how broken ultimately the customers are. With this kind of attitude that price doesn’t matter, inflation has become ingrained in the mindset.
If enough customers had refused to pay those prices, and just kept driving what they already had, sales would have dropped, and inventories would have built up until dealers start cutting prices and making deals. But that didn’t happen. Customers eagerly played along with the worst outbreak of inflation in four decades.
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