Brett Hedrick (above) watches Greg Elrod service an engine for a Chevy Silverado at the Hedrick’s Chevrolet dealer in Clovis. The Silverado is currently the best-selling full-size truck on the market. Photo by Edward Smith.
As the summer car buying season kicks into high-gear, economists are predicting strong sales along with changing marketing costs and consumer trends for bigger and better.
Industry experts with business forecasting service Kiplinger expect 17 million cars, trucks and SUVs to be sold this year, down slightly from last year’s 17.2 million, but up considerably from a decade ago, when the U.S. sold only 13 million during the recession.
While this comparatively high volume of sales means people are going to car lots, e-commerce has allowed people to shop around for the best price, meaning lower profit margins at the dealerships.
Profit margins on new vehicle sales sank to 1.2% from 2.1% five years ago, according to the Wall Street Journal, citing J.D. Power.
This comes at a time when expenses are growing for dealerships as well. Profits have also shrunk due to additional costs in advertising, said Brett Hedrick, general manager/owner of Hedrick’s Chevrolet of Clovis. “It’s just a lot more difficult to keep your expenses under control.”
“Digital advertising is taking more of our ad budget now, and I think that’s true for every dealer,” he said.
In the digital world, advertising space is a must, Hedrick said, but in terms of effectiveness, “you just don’t know.”
Most of the customers exposed to the online ads are the ones ready to buy, said Hedrick, the “low-funnel ones.”
Looking toward the future, Scott Biehl, the new dealer principal at Mercedes-Benz of Fresno, predicts dealers with the advantage of scale are going to be successful in online marketing.
Biehl and his investment group, who recently bought the majority stake in MB of Fresno, are looking into acquisitions to not only expand their physical presence, but also increase efficiency.
Marketing, personnel and health care costs can all be shared. A single dealership might spend $50,000 in advertising whereas a group of five dealerships can spend $80,000 divided in as many ways.
California auto dealers are better inoculated against online sales than other retailers such as bookstores because California law says buyers have to at some point go to a dealer.
“People still want to come in and smell the leather, drive the car, make sure it’s comfortable,” Biehl said. “Brick-and-mortar with car dealerships isn’t necessarily going away, it’s the transaction piece of it that’s changing.”
A dealership’s presence is no longer limited by its physical market size.
While this means a customer in San Francisco can buy a Chevy in Fresno without traveling the three-hour drive just to look, it also means dealerships need to differentiate themselves.
In 2018, Hedrick’s Chevrolet experienced a 15-20% dip in sales, due at least in some part, Hedrick said, to other dealerships’ extras, such as warranties.
Selma Auto Mall began offering its 20-year/200,000 mile warranty that garnered a lot of attention.
“After watching what that did, even though we didn’t think it added a lot of value to the sale, evidently a lot of people did,” said Hedrick. As a result, Hedrick’s implemented its own 30-year/300,000 mile warranty.
Since doing so, this year has begun looking a lot more like 2017, when sales were booming, he added.
Across the nation, dealerships are turning to extras like these to make up for losses at their bottom lines. Today, 46% of new-car sales came with extended warranties, up from 40% in 2013, according to the Wall Street Journal, citing the National Automobile Dealers Association.
And an extended warranty might bring a customer to a service center, where Biehl says return customers are made. (YOU CAN CUT HERE IF TOO LONG)
“There’s a saying,” said Biehl. “The sales department sells the first car and the service department sells every car after that.”
That customer service might be the key to retaining that customer.
In previous years, aversion to the cost of maintaining a car often drives customers to trade-in their vehicles, but that balance may have changed, Hedrick said.
There are fewer used cars available in Hedrick’s eyes because people are keeping them longer and “driving them into the ground” rather than trading. Drivers are seeing a shifting value in retaining a car and changing out a transmission when its due rather than trading in every two years.
According to Kelley Blue Book, average transaction prices have risen 4% year-over-year in January 2019 to $37,149 averaged amongst all vehicle types. A lot of this is due to rising sales for costly Tesla vehicles as well as the continued popularity of full-size trucks and SUVs.
The popularity of SUVs has inversely followed lower gas prices, which have appeared back on the rise.
A number of years ago, 65% of sales for luxury brand like Mercedes could reliably come from sedans and coupes, with the remainder falling to SUVs. The number has climbed of late to where SUV sales have outpaced sedans, so much so that Mercedes is adding another SUV to their lineup.
Other manufacturers have cut back on their passenger vehicle lines. Ford executives said in 2018 that they would phase out the Fusion, Focus and Taurus models in favor of trucks and SUVs.
Chevrolet will be striking the Cruze, Impala and Volt lines from production this year. That may be due to the prospect of competing with powerhouses like Toyota and Honda, Hedrick said.
“I think Ford’s kind of realized they have to spend a great deal of money and go up against them or they get out of that market,” said Hedrick. “Chevy just decided they had too many passenger car models being made.”