Auto Retailers Face Shrinking Profits Amid Price Cuts

The growing trend of discounts and incentives is exerting a downward pressure on both pricing and profitability for dealers and automakers.

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Higher vehicle production has smoothed out supply issues, thus reducing dealer margins. Image via Shutterstock.

Several U.S. auto retailers have reported a downturn in profits in the last quarter of 2023, largely attributed to the implementation of price cuts and incentives aimed at attracting buyers in an uncertain economic environment, which has subsequently impacted new-vehicle margins, Reuters reported.

Over the past few years, auto dealers enjoyed elevated prices, benefiting from a strong demand for new vehicles coupled with limited supplies due to supply chain disruptions. However, the scenario has changed with higher vehicle production smoothing out supply issues, thus reducing dealer margins, according to statements made by auto retail chain executives.

A report by Cox Automotive highlighted the growing trend of discounts and incentives on new vehicles, which is exerting a downward pressure on both pricing and profitability for dealers and automakers.

"Discounts and incentives on new-vehicles continue to rise, and that is putting downward pressure on pricing and profitability for dealers and automakers alike," the report noted.

Despite the lowered prices and increased incentives, the pace of U.S. new-vehicle sales has decelerated in the initial month of the year. The automotive sector is also grappling with challenges related to electric vehicles (EVs), which necessitate higher marketing expenses due to their higher maintenance costs and lower resale values. Adding to the industry's woes, EV prices in the U.S. have seen significant reductions over the past year, predominantly driven by price cuts at leading manufacturers like Tesla.

On the financial front, AutoNation's CEO Mike Manley revealed during an earnings call that new vehicle margins continued to decline, albeit at a modest rate of about $120 per month in the fourth quarter, a slower pace compared to previous quarters. Lithia Motors also experienced a dip in new vehicle margin to 7.9%.

Despite these challenges, retailers are finding a silver lining in their aftermarket service units, which have boosted profits from maintenance services for new vehicles. The increasing complexity of vehicles, due to advanced technology and software, has augmented the demand for specialized maintenance services.

The impact of these industry-wide trends was evident in the stock market, with shares of Sonic Automotive, which fell short of fourth quarter estimates, witnessing a 5% decline. Meanwhile, AutoNation's shares saw a marginal decrease, and Lithia's shares experienced a slight uptick, reflecting the mixed responses from the investment community to the ongoing developments in the automotive retail sector.

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