Dealer optimism dropped significantly in the fourth quarter as the retail automotive sector wrestled with a normalizing car market and an oppressive economic climate.
According to Cox Automotive’s Q4 Dealer Sentiment Index, dealer optimism dropped five points from the July-through-September period to a score of 40, the lowest since the onset of the COVID pandemic. While independent storeowners have consistently expressed more pessimistic outlooks on the market than others, the current quarter represents the first time that franchised retailers’ confidence in their prospects dropped to a sub-50 score since early 2020. Dealers expect the next three months of business to be poor, reflecting ongoing trends of declining sales and profits since a comparatively stable summer and fall season.
Multiple elements contributed to these declines, but the most significant factors, according to retailers, were economic in nature. Although the U.S. has shown surprising resilience in the post-pandemic era, unabated inflation, rising interest rates and political tensions have clouded sentiments, especially in the latter half of 2023. Dealer optimism reflected these feelings, being most heavily impacted by interest rates, followed by general economic trends, market conditions and consumer credit availability. While not listed as a top factor in Cox Automotive’s research, disillusionment with the electric vehicle market has spread steadily as adoption rates remain behind projections despite last year’s hopes that the new segment would spur sales. Dealer expectations on the future of EV sales dropped five points from Q3 2023 and 17 points from Q4 2022, no doubt contributing to the relative malaise among the retail automotive community in Q4.
With these shifts in dealer optimism, it is clear that the retail automotive community is experiencing an unfortunate but not unexpected shift back to pre-pandemic norms. Demand that was bottlenecked due to vehicle inventory shortages and skyrocketing car prices rose swiftly in the wake of renewed OEM production. However, the period of unrestricted growth has largely ended as the pool of customers in need of a new vehicle has shrunk. Combined with affordability pressures, dealership profits have consequently inched back to normal, although they remain far ahead of 2019 averages.
Nevertheless, it is important to remember that retailers are comparing their current numbers to those from the most recent months or years, during which earnings were artificially boosted by factors stemming from the COVID pandemic. As such, it may be more helpful to see Cox Automotive’s research in the wider context of the U.S. economy as opposed to the automotive industry. By doing so, declining dealer optimism appears as less a sign of a poor car market and more as an indication that the retail automotive sector is simply re-acquainting itself with a typical, competitive economy.
