As Car Sales Plunge, Auto Dealers are Not Amused

by Wolf Richter, Wolf Street:

Automakers’ efforts are “chaotic for retailers and confusing for consumers.”

AutoNation, the largest automotive retailer in the US with about 280 franchise locations – and thus a sampling for auto dealers in general – reported second quarter earnings this morning, upon which its shares (AN) fell 7%, and are down over 40% from two years ago. It took Ford shares three years to fall 40%.

AutoNation’s new vehicle revenues in the second quarter fell 4.6% year-over-year to $2.93 billion; used vehicle revenues fell 4.6% to $1.2 billion. It booked revenue gains in its high-margin areas – Parts & Service, Finance & Insurance, and Other – but that wasn’t enough to make up for the slide in new and used vehicle sales. So total revenues fell 3% to $5.28 billion.

Selling, general, and administrative expenses rose 4.5%. Net income plunged 22% to $87.7 million, which once again missed consensus earnings expectations, continuing a series of missed earnings expectations that commenced last year.

This isn’t just about a sales decline. Profit margins also declined. The profit margin on new vehicle sales fell to 4.7% in Q2 from 5.3% a year ago – not totally unexpected, given the problems in new vehicle sales across the country.

But the profit margin on used retail sales plunged. Dealers sell some used vehicles to other dealers or via auctions to get rid of these units. At AutoNation, these wholesales fell 49% to $70 million. Excluding these wholesales, used retail volume was about flat year-over-year at $1.13 billion. But gross profit on these units plunged 14.6% to $74 million.

CEO Mike Jackson blamed the debacle on the “implementation challenges with our centralized One Price strategy during the quarter.”

Confusingly, this “One Price” no-haggle strategy was rolled out with great fanfare in October last year.

“The consumer is craving a fair, transparent price,” Jackson proclaimed at the time. “They really have had enough of the negotiated process and the lack of transparency around pricing.” And he promised, “We will have a bigger piece of share of the pre-owned market.”

At the time, AutoNation figured out what so many dealers and automakers have figured out over the decades: car buyers say they prefer no-haggle prices.

And now AutoNation is figuring out what so many dealers and automakers have figured out over the decades: car buyers take this no-haggle price and shop it around and buy at the lowest do-haggle-price.

This strategy has backfired on franchised dealers who compete with a bunch of dealers with the same franchise in town, and all have the same new vehicles at exactly the same cost. Customers who prefer no-haggle prices will take that no-haggle price and shop it at do-haggle dealers, and these dealers will undercut that price and get the deal.

It might work for a Lexus dealer when there isn’t another one for 100 miles. But in many cities, you only have to drive 15 or 30 minutes to get from one Ford dealer to the next Ford dealer and save some money.

With used vehicles, the no-haggle strategy has a slightly better chance of succeeding because they’re all in different condition with different mileage, etc., and the price is harder to shop. CarMax has been doing this successfully for a long time. But it’s not easy. And AutoNation is finding out just how hard this is.

Read More @ WolfStreet.com