The lead partner for automotive, Steve Bragg, has told GoAutoNews Premium that while dealers are enjoying record margins on new and used cars due to the shortage of supply to Australian dealerships from overseas car plants, the comfort these profits are showing on the overall bottom line of the business is hiding the fact that the back end of car retailing is not doing all that well.

Mr Bragg said that parts and service is under pressure for the following reasons:

• Lower sales of new vehicles, while being made at record profits, is seeing significantly fewer new cars presenting at service departments for warranty and service
• Fewer internal predelivery sales
• Diminishing fixed service prices directed by OEMs
• Increasing demand for valet and loan car services
•  Increasing competition from independent service chains operating under new rules governing the sharing of vehicle service data
• While sales are still modest, EVs require little service compared with ICE vehicles. This will increasingly show up in back end service and parts sales  

Steve Bragg

Mr Bragg said that the time to seriously analyse and address back-end issues is while vehicle sales margins are holding up.

“There will be a resurgence of new vehicle volumes as supply returns and used grosses will begin to experience significant margin pressure. This will expose the biggest concern and that is  the service & parts gross profit hole that is materialising,” Mr Bragg said.

“Before we even consider the impact of EVs on service gross, normal dealer ICE service gross has been falling as dealers rely on warranty period servicing at ever diminishing fixed prices.

“If EV sales rise to 25 per cent, traditional locally produced used car sales and servicing falls by 30 per cent and service gross continues to decline as costs increase and prices remain static, then dealer profitability will be decimated.

“As always, following the recent price increases of about 40 per cent in the last 2.5 years, when new car supply improves and gross normalises and the “old price“ residuals from the current market disappear, they will be replaced by high-priced used cars (because they were high-priced new cars).

“Long-standing dealers know that the walk from the penthouse to the outhouse is a short one, Mr Bragg said.

The latest warning follows the release of data by Pitcher Partners – Sydney in July that showed that the short supply of new cars between 2019 and 2022 is likely to affect the used car market for years and put a dent in ongoing service revenue because cars not sold cannot be resold and serviced. They are lost forever.

The research, by Steve Bragg and Aidan Cousin, said that the lower sales of new cars would cause a ‘black hole’ in on-going used car sales opportunities and service opportunities that would flow through car retailers for the next five years. 

The hole created by the lower sales on new cars since 2019 will be as much as 500,000 vehicles which dealers will not have the opportunity to buy or sell or service.

The report said: “It will have a lasting impact, with fewer cars flowing through the parc causing supply constraints at different age bands.” 

“Historically the one-to-five-year-old used car market has been the franchise dealers’ sweet spot. Between 2022 and 2024 there is going to be up to a fifth of the market missing because of COVID-19,” the report said.

Click here to read: Used car ‘black holes’ loom

By John Mellor