These are the real winners of record car awards

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Despite very high prices and growing customer demand, most automakers are set to report that revenues are down from what they were in the second quarter of 2019, a “normal” period before. the pandemic which is used for many comparisons of financial results.

According to Edmunds, the average new car deal in June was just below the record of $ 41,000 set in May, and up 10% from June 2019. The average used car price has risen further, rising by 28% over that two-year period to reach a record high of $ 26,500.

The real winners in this current pricing environment? Car dealers.

Dealerships are independent companies that buy new cars from car manufacturers at fixed prices. And those wholesale prices have generally not increased in recent times, leading to unprecedented profit margins on new car sales.

Typically, the sale of new cars is the least profitable part of a car dealership’s business. Used car sales are more profitable, while service and repairs are the most lucrative part of the business.

The overwhelming majority of dealerships are privately owned, although there are a handful of publicly traded dealer groups, led by AutoNation (A), the largest in the country, with about 2% of the US market. But whether it’s a publicly traded group or a single local dealer, these are the best times, said Ali Faghri, an analyst at Guggenheim Partners who tracks dealer actions.

“All of them will generate record profits,” said Faghri. “I think prices have probably peaked. But these market conditions will likely continue until 2023.”

A timely U-turn

A year ago, dealers were in dire straits. With numerous closures following door-to-door orders and record job losses temporarily killing demand for cars, the second quarter of last year was a particularly difficult time for the industry.

A survey of over 1,000 dealers conducted by Cox Automotive placed dealer confidence in Q2 2020 at an all-time low of 20. A number over 50 indicates more dealers are seeing conditions as strong or positive rather than positive. weak or negative.

What a difference a year makes. The most recent survey carried out in late April and early May found a record confidence level of 70.

And Faghri sees even better times ahead for dealerships, as the traditional flow of service income has still not returned to normal. He expects this to be the next area to see a surge in demand.

“A lot of people weren’t driving a lot during the pandemic and had no work to do,” he said. “I am generally convinced that there are a lot of pent-up service requests and deferred maintenance that will need to be taken care of.”

Dealers have to pay more for used cars, especially those bought at auctions. Supply has been curtailed by car rental companies – which usually put a lot of cars on the market – putting the brakes on the sale of their vehicles.

In 2020, when travel nearly came to a halt, the major car rental companies sold about a third of their fleets to raise the cash they needed to survive. Now, due to the shortage of chips, they are struggling to replenish those fleets. With demand rebounding and rental prices more than double what they were before the pandemic, rental companies are keeping the cars they have, fueling record prices for used cars.

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Some dealerships are now advertising to buy cars rather than selling them for the purpose of building inventory. There are also robocalls from companies offering to buy used cars.

But even with the rising cost of acquiring used car inventory, auto dealers are earning more than ever from used car sales. Carmax (KMX), the largest used-only car dealership, has already posted record profits. AutoNation is due to release its results on Monday, kicking off a series of record profits in the industry. With costs rising due to the chip shortage, automakers won’t be able to say the same when they start reporting results later this month. Ford is expected to report a loss, despite record prices.

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