Supply chain disruptions caused by pandemic lockdowns have been a major cause of economic chaos in recent years, fueling the anger of consumers paying sky-high prices for suddenly scarcer goods. But they’ve also been a boon for the companies that make those products, which have flatly admitted to using headlines about inflation to address the prices added to their products, whether it’s eggs, plane tickets or electricity.
Perhaps no product has embodied today’s inflationary pressures more than cars, as parts shortages coupled with continued strong demand for vehicles have driven up their prices. While we’re told that companies are simply passing on higher production costs to consumers, auto dealers have also posted record profits, and Federal Reserve Bank of Richmond President Tom Barkin said – him News from New York that car manufacturers and dealers had “discovered that a low-volume, higher-priced model was actually a very profitable model.” A Bureau of Labor Statistics (BLS) study last April determined that dealer profits were the main contributor to new car price inflation.
This is supported by the words of the executives of the country’s largest dealerships, who have explicitly spoken on earnings calls about selling cars at inflated prices and making a net profit. It points to the need for strong government action to relieve consumers against this private sector greed.
Take CarMax, America’s largest used car dealer. In an earnings call last April, CEO Bill Nash explained how the company’s “extensive price elasticity tests,” which look at what happens to the level of demand when prices rise or fall , they convinced the company that they could safely get away with it. Barkin talked about the lower-volume, higher-priced model. The company had “determined that we could have sold a few more cars, but we would have actually made less money,” Nash explained.
In a previous earnings call in December 2022, Nash answered questions about other competitors lowering their prices to move cars off their lots and how that would affect CarMax’s strategy. Nash again cited the company’s determination that they would have made less money, concluding that “what I’ve always said is. . . what we’re looking for is profitable long-term market share gains.” He mentioned that the company had tested prices both up and down, which “gives us confidence that we made the right decision from profitability point of view”.
“In many cases,” Nash said of his competitors’ strategy of selling more units by lowering prices, “it’s not sustainable in the long term because you’re just not making the money you need.”
It is a similar case with Lithia Motors, since last year the largest dealer group in the country. Asked on a February 2022 earnings call if he was “seeing any hesitation among consumers on high prices,” Executive Vice President Chris Holzshu replied, “Absolutely not.”
“Demand is very high at the moment, and we are leveraging as much as possible on both new and used in this capacity,” he said.
When asked if the company was selling above the manufacturer’s suggested retail price (MSRP), the cost at which car makers like Ford or Nissan recommend dealers sell a vehicle, CEO Bryan DeBoer replied: “We have some stores that charge more than MSRP.”
“We allow our network to make the decisions that are closest to what their customer base is and what the supply and demand is in that local market,” he added.
AutoNation CFO Joe Lower also told investors in February 2023 that “more than half of our vehicles sold at or above recommended retail price” in the fourth quarter of the prior year, which had “been trending down, but still well above historical levels.” In the previous quarter, CEO Mike Manley noted that revenue rose 4 percent to $6.7 billion, “driven by higher average selling prices for new and used vehicles” and that they “more than offset lower sales” of both.
Two quarters earlier, when asked whether inflation becoming a long-term problem would entice the company to sell cheaper brands at lower prices, or whether it would stick with “the premium side because those customers might not be as bothered by inflation,” Manley replied, “It doesn’t really change my view on the balance we have in our portfolio” and simply “reinforces that we have a good balance.”
In the company’s most recent earnings call, Manley explained that the supply of late-generation used cars had fallen, as had its turnover, as consumers held on to their cars longer. To offset this, “we focused on improving economics through effective staffing, retooling, speed to market and, of course, pricing,” he explained. Later, Lower explained that the firm wanted to “make sure we maximized the inventory that we had” in terms of used cars, and that “with that, it means we were even more diligent, I think, in terms of prices.” According to AutoNation’s filing for this quarter, used car gross profit was $154 million in the first three months of 2023, up $18 million from the same period last year.
Coming straight from the mouths of executives at some of the nation’s largest dealership companies, it appears to corroborate the BLS study and confirm the suspicions of those who look at record dealership profits and sense that something is amiss.
As Bill Nash’s comments about CarMax’s competitors deciding to lower their prices show, these companies are not necessarily representative of the entire industry. But it’s hard to argue in light of all this that the inflated car prices consumers have been dealing with in recent years are simply because dealers are passing on their own higher costs.
Instead, executives at some of the nation’s largest dealerships have been openly telling investors that they are gauging prices to what will bring them the most profit, often taking advantage of strong consumer demand to charge higher prices than they need to. and explicitly reject an approach of selling more cars at lower prices because it is less profitable.
What was once called a “conspiracy theory” (that much of the inflation we’re seeing is driven by corporate greed to fuel record profits) is now increasingly recognized as fact. But unfortunately, those in power have yet to do much about it, either by establishing price controls to prevent corporate price gouging or by passing a windfall tax to recoup the resulting inflated profits. And it’s the average American worker who is footing the bill.
