December 13, 2017

MBAF's Ira Silver shares his insights on what lies ahead for auto dealers in 2018 and beyond in Automotive Buy Sell Report.

In 2016, thanks to a rebounding and robust economy, the auto industry saw its seventh straight year of record sales in the U.S. with 17.55 million purchases in all. As we reach the end of 2017, sales seem to have leveled off. For the first time since the GM bailout, the industry will see a decline from the previous year, off by about 1.5%.

But is it time to panic? I think not, and there are quite a few reasons why.

Sales may have slipped in 2017, but a drop of less than 2% is nothing compared to the plunge the industry saw in the throes of the last recession, when lending stalled and consumer confidence dried up.

In fact, according to industry analyst Autodata Corp., industrywide November sales ran at an annualized rate of more than 17.5 million units, outpacing most industry estimates.

Taking a broader view

I started working with car dealers back in 1982. I have seen recessions, gas shortages and 18% interest rates. Despite the many peaks and valleys, the industry is still here, and indeed thriving.

Beyond the numbers, there are many factors that will affect car sales and buy/sell multiples, that, when taken as a whole, still make me bullish for 2018. When we take a look at the new tax laws that will go into effect in one way or another, the growing impact of electric cars, ride sharing, competition from Amazon, and new driving habits among millennials, the dealers who address these challenges correctly will still have many opportunities to maintain market share and profitability.

In regard to millennials, they are now 25-35 years old, and moving away from the city centers they seem to cherish. They are getting married, having kids, so they now went from zero cars to requiring two cars. They are putting on more miles to get to and from work than ever before, as the suburbs are moving further away from the cities. Marketing and advertising techniques to this group should be tailored to their needs.

As far as electrics go, Tesla has some real competition for the first time. Volvo is becoming 100% electrified. Mercedes Benz, BMW, Toyota and a handful of other manufacturers are spending billions to develop EVs over the next 5-10 years. The question is, will these vehicles be higher grossing and less maintenance?

To date, no one can predict. However, we know that these vehicles are highly complex and will cost more to repair. As always, range, length of time to recharge, and the availability and locations of charging stations, will determine if EVs will become common, or remain a small percentage of cars on the road over the next 20 years.

In regard to ride sharing, in the November 27th, 2017 Automotive News, Mike Jackson, AutoNation’s CEO noted “I estimate the vehicle marketplace today is 70% personal vehicles, and 30% ride sharing. In 5-10 years, the big disruption will be in ride sharing with autonomous vehicles. Brand and scale are a tremendous advantage, given all the challenges facing the industry and the pace of change.”

Tax Impacts

If you believe everything you read, everyone in NY, NJ, IL, and CA is moving to a state with no state income tax as they may not be able to deduct state income taxes on their individual tax return (Form 1040) under the new tax rules. On the other end of the spectrum, with lower taxes, and more cash per family, maybe customers will buy more cars, or even more expensive, higher-grossing cars.

Since so many of these issues will effect dealers, the challenges will either bring out the best in dealers, or their potential flaws. The market will continue to get rid of poorly-performing stores. Larger more profitable stores will likely maximize profits by continuing to push F&I, service, and mostly used cars, since they usually have higher grosses.

The successful dealers will react to the market with better sales trainings, BDC departments, service departments, certainly IT departments, advertising, and taking advantage of new strategies such as social media and content marketing. The most successful dealers will leverage new technologies to be more sales efficient and more profitable.

Unknown factors

No one can say with any certainty if 2018 will be a boom or bust for the industry. There are many unknown factors that can impact sales and profitability. Will profits come from the front-end gross, or back-end gross? Will states squeeze F&I income or administration fees? Will 2018 bring catastrophic events such as hurricanes, fires and earthquakes? Still, I and many of my partners who have 20 – 30 years of experience working in the auto industry all believe we have reasons to be optimistic.

Everyone is giving a cookie cutter reason for the fact that dealers profitability went down in 2017. You have to get deep into the numbers to understand why profits may be down slightly. Higher grosses and lower expenses can lead to higher net income with fewer cars sold. For over 30 years I have been asked this question “how do the overall sales numbers, impact the buy-sell world?” and this year is no different, I see multiple highs as there is much money looking for good deals. 

Alan Haig of “The Haig Report” states that “Significant deal activity implies strong market conditions for future quarters”. I agree with Mr. Haig, consumers will always need cars, as cars continue to be more complex, there will always be a need for parts, repairs and impeccable service. I am therefore going bullish about the buy sell market and the retail sales outlook for 2018 and beyond.

Ira Silver, CPA, CGMA, is a principal in the Tax and Accounting Department at MBAF and is the principal-in-charge of the firm’s Orlando office. Ira has been in the public accounting profession since 1982. He can be reached at (407) 781-0150 or isilver@mbafcpa.com

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