The state of the sector

No dissection of how car dealerships have fared these last 12 months would be complete without mention of the COVID curveball thrown at the industry.

When the pandemic hit early last year, it sent car sales into a tailspin. New car purchases were down significantly in April and May as consumers grappled with what the pandemic would mean for them – and how hard it would hit them in the hip pocket¹.

With new vehicle sales (and dealer profitability generally) down in the two years prior to the COVID outbreak, it’s fair to say the sector went into the start of the 2020/21 Financial Year bracing for the worst.

What we’ve seen since May 2020, however, is a surprising return to form for the sector.

James Voortman, Chief Executive Officer of the Australian Automotive Dealer Association (AADA), says dealers have had a good 2020/21 Financial Year in spite of the odds.

“When the pandemic hit, we thought we were looking at a perfect storm of negative impacts on the industry,” Voortman says.

“New car sales were tracking backwards as we headed into the pandemic. But what we found after getting those very poor results in April and May was that the industry really bounced back.”

He says this was largely a result of consumers not wanting to use public transport and realising that overseas holidays were off the cards for the foreseeable future. An additional factor was the rapid rise of food delivery and other services that are heavily car reliant.

“This environment, combined with very low interest rates, led to demand for both new and used car increasing,” Voortman says. “That lead to a lot of dealers last financial year having a very successful year².”

Are the prospects for car dealers as rosy now that we’re into a new financial year?

There’s no doubt the pandemic will continue to impact how dealerships interact with their customers. At the time of writing, Sydney is in the midst of a prolonged lockdown, Melbourne is undergoing the latest in what has been a series of lockdown, and other parts of the country have had business interruptions of their own – or face the imminent threat of them.

With the exception of some states, there is plenty of uncertainty about when dealerships can throw open their doors again.

Dealerships also face the issue of supply constraints caused by a global shortage in microchips. The shortage was largely caused by the unexpected surge in demand for new cars in the wake of COVID, but it was exacerbated by the decision of electronics makers to pivot towards smartphones and other devices to keep their factories running³.

“We’re told that this is an issue that’s resolving itself, but when that will be is the big question,” Voortman says. “Hopefully it will be by the end of the year, but it’s difficult to say.”

As for consumer appetite for new cars, Voortman says that demand for new cars remains strong, with VFACTS showing an increase in sales every month compared to the month before. This remains a positive, even if the industry is coming off of a couple of lean years.

The uptake of digital tools to facilitate car buying has helped maintain demand in spite of the purchase hurdles presented by the pandemic.

“Dealers and manufacturers have realised how important it is for much of the transaction process to occur outside of the physical dealership,” Voortman says. “That means they have equipped themselves with many of the digital tools that can allow customers to visit the showroom virtually.”

It marks the continuation of a trend that has been building steam for several years.

“We’ve recently seen in Sydney, for example, that dealers can still sell a car, but they need to do it on a click-and-collect basis,” he says. We’re seeing remote test drives, finance and insurance being handled remotely, and dealers doing vehicle demos via Zoom – they’re using all of these tools to bridge the gap between them and their customers during a pandemic era.”

Has COVID accelerated the willingness of people to purchase a vehicle in full online? It appears some consumers have made the leap, but they remain in the minority.

“Our research shows that although consumers are happy to do the bulk of their research online, they still want to do the deal after having a test drive,” Voortman says.

“It’s clear they still want the confidence that comes with having that face-to-face interaction.”