There is no sugar coating the current situation. The economic downturn caused by the COVID-19 virus has hit dealerships hard. Presidio is talking with dealers all over the country on a daily basis and we know that you are making heart-wrenching decisions, especially regarding personnel, every day. The times look dire but, ultimately, we at The Presidio Group see a path to recovery.
In the near term, the Federal government has passed a $2 trillion package that offers substantial relief for dealerships through, among other measures, an expansion and potential forgiveness of Small Business Administration loans, and deferral of employer payroll taxes. The Federal Reserve made the biggest interest rate cut since the 2008 financial crisis and stands ready to inject more liquidity into the market. This reduces floor plan and other costs for dealerships and makes new car loans more affordable when consumers come back into the market.
As they did in 2008, OEMs are offering consumers deals ranging from zero-percent financing to delayed payment offerings to fuel more sales. They are also offering flexible payment plans for existing customers who fear to lose their jobs. For dealers, automakers have pledged to scale back facility upgrades and other capital-intensive investment requirements.
Vendors, who have a vested interest in seeing their customer base not just survive but thrive, have cut costs to dealers. For example, Cox Automotive cut subscription prices for a wide swath of its products by 50 percent. From experience, we know that dealerships have already begun reducing spending and will keep spending down even as sales begin to return, putting them on a firmer financial footing to take advantage of growth opportunities.
Dealerships are getting a break in another way, as well. Presidio believes consumer mobility is going through a long-term structural change that will ultimately disrupt the market and change behavior in ways that are not positive for most auto dealers. But COVID-19 is itself a disruptor, and the resulting crisis has shifted customers’ emphasis away from autonomy and ride-sharing towards the “safety” of private transportation. This may also boost sales and service.
For many of us, this time stirs unpleasant memories of the financial crisis that began in 2008. That was similar in that the U.S. was also hit hard and fast, which resulted in a huge market drop. The Federal government also stepped in with a massive stimulus package. We saw this as an opportunity. During the period of late 2008 through 2010, Presidio advised dealers to be buyers of auto retail assets rather than sellers. Our viewpoint then was that consumers would still need cars and that the vehicles in operation were aging every day. Sooner or later, demand would snap back. Those who heeded that advice were well rewarded.
COVID-19 is fundamentally different because in 2008 people were worried they would lose their life’s savings as major brokerage firms folded. Today they are worried they will lose their livelihood and possibly even their lives. On top of this anxiety, people’s lives have been turned upside down as they are prevented from socializing, going to the office, or traveling. The financial crisis was caused by economic greed and structural flaws. Determining its impact was ultimately easier. The impact of COVID-19 is impossible to determine because there are still too many unknowns. It is highly contagious and though most of us will likely, in the end, not suffer any adverse health effects, that fear is hard to dispel.
There are also important positive differences, however. In 2008 through 2009, the credit markets froze. Captive lenders did not have access to capital to make loans to consumers who did want to buy cars. A study by Northwestern University’s Kellogg School of Management concluded that around a third of the decline in new car sales then was due to captives’ inability to lend. Today, captives are healthy, and liquidity is already flowing into the financial system. When consumers want to buy cars, the money to buy those cars will be available. So, in our minds the most important question is how long we will be under “shelter in place” protocols. The longer those last the greater the anxiety, not to mention the job losses and thus fewer consumers able to buy cars.
As more testing and treatment lead to a flattening of the infection curve, the fear, and uncertainty that pervade the market will begin to subside. Consumers will be eager to resume their lives as quickly as they can. However, we predict that travel behavior will be modified for some time and that most people will prefer their own car versus mass transportation by plane, train, and bus or ride-sharing alternatives. This should lead to greater car sales and service business. As in 2009, there will be pent-up demand once the skies begin to clear. When that happens, this will give dealerships just what they need to bounce back.
The Presidio Group provides M&A advisory services through its wholly-owned investment bank, Presidio Merchant Partners LLC, Member FINRA and SIPC.