The explosion in gross margin per vehicle shows why buying a car or truck now is crazy. But a lot of people did it when they didn’t need to: inflationary mentality.
By Wolf Richter for WOLF STREET.
I have covered staggering price increases in the new and used vehicle markets, both retail and wholesale, in various aspects since last year, including the collapse of new and used vehicle inventories in the United States. United States due to a mixture of issues. Today we’re going to check that out by vehicle, dollars and percentages, in terms of what consumers pay on average, and how huge the profits consumers allow dealers to make. These are truly breathtaking moments. And that’s another sign that something in the market has broken.
AutoNation, the largest franchise auto dealer chain in the United States with over 300 stores, reported second quarter results this morning. The revenues per vehicle and gross profits were simply mind-blowing, a reflection of the jaw-dropping price increases in used and new vehicle retailing, documented now even by the inflation data of the Car Index. consumer prices of new and used vehicles which, for two decades, completely underestimated these price increases.
Revenue per retail vehicle jumped due to higher prices per vehicle and a shift to more expensive models, as we’ll see in a moment. Throughout, I’ll be comparing AutoNation’s Q2 2021 to its Q2 2019, because in Q2 2020 the numbers were heavily skewed by lockdowns:
|Revenue per vehicle sold at retail:||Q2 2021||Q2 2019||2 year change|
|New||$ 44,429||$ 39,276||+ 13%|
|Used||$ 25,882||$ 20,969||+ 23%|
Gross margin per retail vehicle: The gross profit from the sale of a vehicle is the difference between the cost of the vehicle on the dealer’s books and the final sale price; this does not include expenses such as commissions and interest charges (floor plan).
These are startling, mind-boggling and normally incomprehensible increases:
|Gross margin per retail vehicle:||Q2 2021||Q2 2019||2 year change|
|New||$ 4,153||$ 1,780||+ 133%|
|Used||$ 2,239||$ 1,452||+ 54%|
|Finance and Insurance (F&I)||$ 2,339||$ 1,921||+ 22%|
In new vehicles, the 133% explosion in gross profit per vehicle partly reflected higher prices, as customers were willing to pay anything to get a new truck or SUV; and partly a shift to high-end models in the mix, as we’ll see in a moment.
If you add the F&I profits, the average customer has made the dealership close to $ 7,000 in gross profits. These are just mind-boggling numbers and reflect a disrupted market. Customers pay, no matter what. The price has become a loose cannon.
In used vehicles, the 54% increase in gross margin per vehicle occurs despite the historic surge in used vehicle wholesale prices, which exceeded 40% on average in the second quarter compared to the second quarter of 2019, according to the Manheim used vehicle value index.
Thus, dealers pay much more for their used vehicles, both in terms of exchanges and in terms of units bought at auction; and they are able to pass those higher, more certain costs on to customers who are eagerly scrambling to overpay.
For dealers, it’s a revolution. Before, American consumers were known to be smart, research and walk away when the price was too high. All kinds of tricks were played to get consumers to pay more; and now forget about it. Consumers are impatient to pay more.
Cars and trucks are mostly discretionary purchases. Most people can drive what they already have for a year or two, or they can exercise the option to purchase their leased vehicle at the end of the lease at the price set at the start of the lease (the “residual value”). . They don’t need to buy or lease another vehicle.
And people who have the money splurge. These are the beneficiaries of the asset bubbles created by the Fed, and they spend part of their earnings. This is how the Fed’s preferred strategy, the wealth effect, is supposed to work.
AutoNation reported that “segment revenue” (operating income minus floor plan interest expense) grew across the board, but modestly with domestic brands, and exploded with imports and top of the line.
|Sector income||Q2 2021
|2 year change|
|National brands||169||166||+ 2%|
|Import brands||204||82||+ 149%|
|Upscale luxury||226||95||+ 138%|
These huge profits per vehicle document the explosion in prices that dealers have managed to get their customers to pay; and they blew up the increases in input costs that dealers faced.
And the fact that customers threw decades of training into the wind and went to bed and paid for anything when they didn’t even need to buy a vehicle, and could have waited a year or two until this madness stops, shows how bad the vehicle market is, and how bad the customers are ultimately. With this kind of attitude that the price doesn’t matter, inflation has become entrenched in mentalities.
If enough customers had refused to pay these prices and continued to drive what they already had, sales would have plummeted and inventory would have piled up until dealers began to cut prices and close deals. But that did not happen. Customers eagerly played with the worst spike in inflation in four decades.
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