Are Dealerships Dying?

“When do you think car lots will be ‘normal’ again? Do you think this is a plan to force more manufacturer leverage by reducing inventory and giving the customer less leverage? Is the government forcing EVs with gas prices and vehicle shortages?” These are questions we were sent by a YouTube subscriber.

In all honesty, we don’t think dealer lots will ever be “normal” again. There are quite a few flaws with how car lots and dealerships operated in the past. Dealerships used to have 900 new cars in stock at any given time. While the wide variety to choose from is good for the consumer, dealerships have to pay interest on those vehicles. That is called “floor plan.” The current price for a new vehicle is $47,000. If a dealership has 1,000 vehicles in stock, that is $47 million worth of inventory. With the floor plan, the interest rate is usually 5.5% APR. That leaves $2.6 million just in interest for a dealership to have the wide variety. $216,000 will be spent every month on interest and that cost will be passed on to the consumer. If dealers are able to sell their vehicles faster, they’re able to avoid that cost but it also leads to a better deal for the consumer once the inventory shortage is balanced out a little more.

Speaking of dealer profitability, we are in a very unique market. There are many more buyers than there are vehicles. This is simply the result of supply and demand. This isn’t dealers price fixing to get higher profit but because demand is so high, they are allowed to charge over MSRP. Because consumers are willing to pay the markup, dealers will keep charging it. Dealers may get the customer to pay the markup for the vehicle once, but I don’t believe that it will create a return customer.

If you are new to Town & Country Ford, we want you to know that we don’t charge over MSRP on any of our customer orders. Not the Bronco, Bronco Raptor, F-150 Lightning, or any other ordered vehicle. We don’t believe it is right to charge a customer over MSRP for a vehicle they have to wait for.

Consider this: you’re selling your house and you get eight offers on the first day; the highest being $350,ooo but they’re all above the asking price. If Zillow appraises your home for $290,000, you aren’t going to pass up the highest offer just because of Zillow’s appraisal price. Supply and demand always dictate the price of an item. We completely understand why many dealers charge a markup.

Let’s address the MANY articles on the internet about how the CEO of Ford, Jim Farley, wants to abolish dealerships. He did confirm that Ford intends to sell EVs entirely online with no-haggle pricing however, many news outlets have taken the presentation that Farley gave and are twisting the truth for click-bait. The truth is, we are pretty much already doing that. You can place an order for a Lightning or Mach-e online, we can remotely do all of the paperwork, and we can deliver it right to your door! We can make it where you never even have to see a salesman. This is the exact process Ford has in mind. Dealerships will have to buy into this process but we are very excited about it!

With that being said, Ford will be changing their business model a lot over the next 36 months. In fact, I believe it will change more in the next 36 months than it has in the last 10 years. Ford has already announced that they are splitting the company into two legs: Ford Model E and Ford Blue. This is how they are restructuring the company to separate their EVs from ICEs. Numerous executives at Ford have assured the public that dealerships are the competitive advantage they have over other EV startups. There are approximately 3,100 Ford dealerships in the US and 30 in the state of Alabama alone. While many people don’t enjoy the process of buying a car at a dealership, there are many benefits to having one close by. For instance, if you have an F-150 Lightning that needs service, there are numerous dealerships that could service your vehicle. If you have a Rivian R1T, the closest Rivian Service Center to Birmingham, Alabama is over nine hours away in Orlando, Florida. Buying a Ford EV gives you the convenience that you may not realize comes with a dealership.

Let’s talk about why the auto manufacturers won’t let things get back to normal. The F-150 has been the #1 selling truck in America for over 45 years. In 2019, Ford sold nearly one million but we’ll say 900,000 to be conservative. This is a guess, but the average rebate was probably around $5,ooo. Today, Ford isn’t offering any rebates at all so Ford Motor Company is saving $5,000 per truck sold. That means they are saving $4.5 billion in a single year! Keep in mind that rebates are 100% funded by the manufacturer and have nothing to do with a discount a dealer would provide. This means that reducing rebates is money directly in the pockets of Ford Motor Company which allows them to reinvest into better, more innovative products.

Why should you not want huge rebates? Cars depreciate by thousands of dollars as soon as you drive them off the lot. Usually when a manufacturer dumps huge rebates, they are trying to clear out old inventory. Basically, they are lowering the cost of the vehicle by the amount of the rebate. If you can now get a brand new F-150 for an extra $5,000 off, your used F-150 automatically depreciated by at least that much. If manufacturers had a history of not offering rebates, I am of the belief that vehicles will not depreciate nearly as fast as they have in the past. This is what is happening with the used car market right now. Since so many people are paying way over sticker for new cars, it is also driving up the cost of used cars.

Let’s go back to the main question: “Do you think this is a plan to force more manufacturer leverage by reducing inventory and giving the customer less leverage?” No, I don’t think this is a plan at all. Every major auto manufacturer is having supply chain issues. If there weren’t real issues out there, this would be a huge opportunity for one of the smaller manufacturers to gain more market share by providing cars in the middle of this shortage. There are legitimate supply chain issues going on right now, and I currently don’t see an end in sight. Plus, I’m lucky enough to have a number of friends that work at Ford Motor Company, and trust me, they are doing everything they can to balance out this massive shortage.

What about the fuel prices? Is the government forcing EVs with gas prices and vehicle shortages? The government may be trying to push EVs by higher fuel prices but there’s no way to really know. The Ford F-150 Lightning started development sometime around 2018 when gas was $2.74 per gallon. I think the reason that Ford and other manufacturers are moving towards EVs are purely because of what that technology is capable of. I think the timing of the F-150 Lightning is a complete coincidence. Electric vehicles are not for everyone but if it can work for your lifestyle, it is (in many ways) a superior product. EVs have more torque, which comes on instantly. They are faster, more convenient, and they have some unique features. In the case of the F-150 Lightning, your house provides the power to your vehicle, but when times get bad the truck can power your house for up to a week!

At the end of the day, what is the solution? In regards to EVs, I think the F-150 Lightning will make a lot of people consider an EV for the first time ever. I think EV adoption will happen slowly enough that the electrical grid will be able to keep up. In regards to the car business in general, I think that the customers, the manufacturers, and the dealers could benefit by finding some kind of middle ground. First, we need to find a way to relieve the pressures that the supply chain is creating. Next, the major manufacturers need to go to an ordering system that is efficient and reliable. If we go to a system that prioritizes ordering vehicles, we need to be able to provide that customer with a pretty accurate timeline of when they could expect to see that vehicle. In addition to that, we need to stick to MSRP pricing across the board with no rebates. That means NO discounts. That also means NO additional dealer markup. It creates more trust and transparency for the customer. Customers will also have higher residual values for their vehicle. Profitability for the dealerships and manufacturers will be fair and reasonable.

And there you have it, a very detailed answer for a short question! The way the car market is right now is new to all of us so we’re figuring it out together!