If folks say they see no inflation, they should look at industry reports now bragging about steep price increases. And consumers are willing to pay those prices – the sign of a sea change.
By Wolf Richter for WOLF STREET.
AutoNation, the largest chain of franchised auto dealerships in the US, reported fourth quarter earnings this morning – and even as the total number of new vehicles sold in the quarter fell from a year earlier, the company bragged about a number of records, all of them related to higher prices and stupendous growth in high profit margins, a sign that consumers are willing to pay those higher prices and that they have kissed their hopes for good deals goodbye.
That broad acceptance by consumers of higher prices that allowed for record fat profit margins for the seller is a mega-sign that inflation in new and used vehicles retail is making breath-taking headway.
And yes, now is a terrible time to buy a new or used vehicle. Get ready to pay an arm and a leg, and then watch the dealer and the automaker laugh all the way to the bank.
Inflation is a great thing for the companies on the other side, charging the higher prices. They get to boost their revenues and profits without having to sell more items. It’s not so great for consumers who have to pay a lot more.
New vehicles – a record that caused me to do a double take.
The number of new vehicles that AutoNation sold in Q4 fell by 2.7% year-over-year, to 72,404 vehicles. So no, the business is not booming.
But revenue per new vehicle retailed rose by 6.2% to $43,188, powered by a huge jump in profit margins.
Gross profit per new vehicle sold – the difference between the cost of the vehicle and the selling price – jumped by 50% or by $919 from Q4 2019 to a fabulous record of $2,775 per vehicle, up from $1,850 in Q4 2019, which had already been strong. This was such a huge jump that I did a double take. At first, I thought it was a typo.
The number of used vehicles sold rose by 4.2% year-over-year to 61,526 vehicles. But revenue per used vehicle rose by 7.3% to $22,998 per vehicle. And gross profit per used vehicle jumped by 9.6% to $1,567 per vehicle.
Finance and Insurance products (F&I) – another record:
Dealership F&I departments arrange loans between a customer and a lender or arrange a lease between a customer and a leasing company, and get a commission for doing so. In addition, the F&I department gets paid a commission for selling extended warranties, credit life insurance, and similar products. These commissions all combined form the gross profit of F&I.
And F&I gross profit per vehicle retailed jumped 11.1% year-over-year to a record $2,209 per vehicle sold.
Consumers’ astounding willingness to pay these big price increases.
Combined gross profit per vehicle sold, new and used vehicles and F&I altogether, soared by 21.2% to $4,429 per vehicle. In other words, on average across all brands and dealerships, AutoNation made $4,429 in gross profit per vehicle sold. This is an astounding number for a chain of dealerships with mass-market brands.
What is astounding, actually, is that the normally astute and tough American consumers were willing to lay down and pay those prices, that they allowed the company to get away with effectively raising prices like this across its 230-plus stores.
But it’s not booming demand that causes these price increases. This happened even as unit sales of new vehicles (-2.7%) and used vehicles (+4.2%) combined barely ticked up (+0.4%) from a year earlier.
But no big changes in the mix of segments.
In terms of the number of vehicles sold:
- The share of domestic brands – Ford, Lincoln, Chevrolet, Buick, Cadillac, GMC, Chrysler, Dodge, Jeep, Ram – ticked up to 31.3% of total sales (from a share of 30.0% in Q4 2019).
- The share of import brands ticked down to 42.6% of total sales (from 43.9% in Q4 2019).
- The share of luxury brands remained flat at 26.1% of total sales (v. 26.1% in Q4 2019).
What we’re seeing here is pricing power. AutoNation was able to charge higher prices, even with essentially no growth in unit sales, and its profit margins ballooned to records. The normally astute and price-conscious American consumers went along with it.
This is the sign of substantive consumer price inflation – when consumers no longer resist, when they accept the higher prices, when they accept to pay a whole lot more to fatten the profit margins of the sellers, in this case AutoNation, and further up the line, for the automakers, and ultimately their suppliers.
The Consumer Price Index for used vehicles picked up some of the price increases: it jumped 10% in January compared to a year earlier.
But the Consumer Price Index for new vehicles still refused to pick up the increases in prices that consumers are paying and that are now being reported across in the auto industry. The average transaction price in the US for new vehicle sales in January jumped by 11% year-over-year, according to J.D. Power. But the CPI for new vehicles for January ticked up only 1.3%.
So if folks out there say that they cannot see the inflation, I would encourage them to look at industry data, and those industries are now bragging about and reveling in steep price increases leading to big gross margin increases – until their own costs are rising. This phenomenon is now cropping up everywhere.
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