September 29, 2020

Dealers should prep for sluggish economic recovery

Franchised dealerships benefited from high vehicle demand amid short supply in the second quarter, with inventory levels as the leading risk for immediate sales in the back half of the year. Analysts view the economy as far more fragile, with consumer confidence — the main driver of sales— in jeopardy the longer the U.S. battles the coronavirus pandemic.

Though some dealerships have made strides in selling finance-and-insurance products on vehicles after purchase, the bulk of the industry relies on selling those products at the point of sale.

John Pappanastos, CEO of F&I product company EFG Cos., told Automotive News that he believes the outlook for the economy in the short term hinges on government intervention.

“The government will continue to provide stimulus as needed throughout the year, but consumer confidence will wane the longer [consumers] stay out of work,” he said. “Dealers are making greater investments prudent in used cars, they’re managing better F&I numbers. The big challenge will be new-car inventories.”

On the credit side of the industry, Moody’s Investor Services believes there will be further tightening in auto lending in the second half of the year. The spike in unemployment that Moody’s predicts will occur later this year will drive a rapid rise in delinquencies and unpaid vehicle loans peaking in 2021.

“We expect credit card and auto loan demand to remain soft, given likely weakness in retail and auto loan sales for the rest of the year,” the company said in a report.

Dealerships should expect a much slower economic recovery than initially expected. Additional government stimulus — and a vaccine — are key to expediting economic convalescence and kick-starting vehicle sales.