Industry Trends

How to Insulate Your Automotive Business Against Economic Uncertainty

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The automotive industry and car dealerships have been on a wild ride the past few years, and it doesn’t show any signs of slowing. However, we’ve witnessed how many dealerships embraced this uncertainty and prospered, despite a proliferation of challenges. With the never-ending cycle of threats that every business faces, how can a business insulate itself from big swings in the market?

When The Going Got Rough

The early days of the pandemic saw dealerships closing stores and laying off staff. They rushed then to embrace a full online sales experience, known in automotive as “digital retailing.” Then the chip shortages hit, causing a massive decline in new vehicle production. Interestingly, this resulted in some of the most profitable years for dealerships. Demand for vehicles increased while supply dropped, so vehicle values began to appreciate. Many dealers realized more profits simply from negotiating less. Others used the laws of supply and demand in their favor, charging above the manufacturer’s suggested retail price (MSRP).

As 2022 rounded its second half, rumblings of a recession and rising interest rates caused the automotive market to shift again. Despite persistent inventory shortages of new vehicles, these new market conditions diminished demand. As a result, vehicle values have once again begun to depreciate. At TradePending, we measure the 100 most in-supply used vehicles on dealership websites. At the peak, the average vehicle value had appreciated by 22%, with some, such as trucks, by over 40%. In the last 13 months, though, the TradePending 100 has declined 13%.

The Great Recession was absolutely brutal for the automotive industry. GM and Chrysler received a government bailout to avoid bankruptcy, while Ford took out a line of credit to stay afloat. Profits and sales tanked, and these macroeconomic trends cascaded down to the retail dealerships. To top it all off, manufacturers such as FordLincoln and Buick are putting out strong signals they’d like the franchise dealership model to change significantly. Ford recently split into two divisions—one for internal combustion engines, the other for electric vehicles (EVs). They then announced that dealers wishing to sell EVs must agree to new terms and investments; otherwise, they’ll be cut off from selling them at all. It doesn’t take a lot of “reading the tea leaves” to see that the major automotive brands are making plays to reduce the roles their dealerships play in selling cars, instead shifting to a direct-to-consumer model like Tesla.

3 Things To Remember When The Industry Is Under Threat

Despite its recent hardships, the automotive industry has survived and even begun to thrive again. But even when things seem great, there’s still a chance to make wrong moves. As a business owner or entrepreneur, we can easily connect the dots between the experience of dealerships and any other industry. There’s never any shortage of competitive challenges and existential threats to any business, ebbing and flowing at any given time. When you feel like your business is on the verge of blowing up, here are a few ideas to help you power through.

1. Maintain your self-discipline during abnormal market conditions.

We’ve seen this strategy manifest itself in two different ways with car dealerships during the pandemic. The first aspect is letting your internal processes slide when your business is booming. Use this busy time to look for ways to make yourself even more efficient to increase your sales. When things turn lean again, you’ll be better positioned to scale down with minimal pain.

To accomplish this, look inward to your teams. They are a wealth of knowledge, and if you’ve built a culture of trust, your teams shouldn’t have any issues telling you where they’re struggling, where their bottlenecks exist and what you can do to operate more efficiently. Use this institutional knowledge to build processes and a culture that further protects you from external forces.

The second aspect that we’ve seen car dealerships change is charging above the MSRP set by the manufacturer. There are dealerships on both sides of this debate, and both are right. The discipline needed here is to over-communicate with customers about the market conditions without exploiting them. Businesses that exploit a market situation will likely find themselves developing a bad reputation amongst consumers. Leaving a bitter taste in the mouth of your customers is the worst form of marketing.

2. Slow down before making big decisions.

If the news you read seems incredibly negative, or you see a doomsday slide deck from a venture capital firm, stay calm. While your knee-jerk reactions are valid, don’t act upon them immediately. Instead, dig into your numbers to quantitatively understand your financial position and sales pipeline. Speak with your team in-depth to hear their qualitative feedback on the market, digest it all and then make a plan.

3. Craft different scenarios.

When making plans, have your leadership team sit down and craft different outcomes based on a variety of future scenarios. Have them outline what will change if things go better than expected, stay about the same or start to fall apart. Creating these plans in advance allows your team to be more proactive as events unfold rather than nervously reacting to each market change.

As the saying goes, the time to repair the roof is when the sun is shining. By focusing on proactive strategies, you can better protect your automotive business when difficult economic times arise.