Being Proactive Amidst Uncertainty
These are precarious instances with the inventory market declining at a big rate and discussions and commentary around the looming recession and unprecedented rise in interest rates dominating major enterprise newsfeeds.
Anxiety is at an all-time excessive, and like many businessowners, auto repair operators are wondering what 2023 holds for their enterprise.
Although none of us have a crystal ball, we are able to nonetheless look to the patterns of the previous to raised prepare for the future.
This week, I did exactly that and am sharing my findings as a fellow enterprise proprietor and operator.
For starters, here’s an article from just this morning (Oct 7, 2022) I thought may offer some insights into the auto repair industry for 2023.
This article discusses the present state of car costs, interest rates and their projected impact on the buying power of the patron and projected new and used car gross sales.
According to Cox Automotive’s Chief Economist, Jonathan Smoke, “The irony for the auto market is that simply because the industry is poised to begin out seeing volumes improve from supply-constrained recession-like low levels, the speedy motion in rates of interest is reducing demand.”
The Increased Cost of New Car Ownership
New loan charges are up 2-percentage factors at the end of the third quarter for each new and used cars.
New car rates are up to 7% whereas used car rates are as much as 11%.
Combining all these elements contributes to the overall cost of ownership.
According to AAA, value of new car possession has reached $10,738, surpassing $10,000 for the primary time ever. Average monthly payment has now reached $894 no small sum for a monthly car fee.
The greater value of latest car possession is predicted to instantly impression affordability of vehicles.
Automakers can offset costs with financing deals and reductions, nonetheless, they don’t seem to be positioned to take action.
According to Money.com, ten car brands have elevated prices by double digits between thirteen – 21% on a YOY foundation. In reality, simply this month, Ford elevated the value of its F-150 Lightning pick-up truck for the second time this 12 months. The price is now up 30% from its May 2021 price.
Such worth increases are a results of provide chain bottlenecks and a big rise in uncooked material costs.
Steep price increases are simply not sustainable. It’s doubtless prices will plateau and reduce within the market’s try and normalize. However, these declines are also likely to be accompanied by greater interest rates.
According to JP Morgan’s Lead Automotive Equity Research Analyst, Ryan Brinkman “There is demand destruction taking place.” His evaluation is predicated on the University of Michigan’s Buying Conditions of Vehicles survey. JP Morgan believes the auto industry will proceed to experience “lower volume, higher prices” for the rest of 2022 and sure into early a part of 2023.
Cox Automotive is now forecasting new vehicles sales of 13.7MM v. a previous forecast of 14.4MM. The decrease in forecasted new vehicle sales is primarily as a outcome of rising rates resulting in elevated value of possession.
Increased Auto Repair Service Demand
Decline in new car sales is usually optimistic for the auto repair industry as a end result of most customers spend their money fixing their current vehicles rather than going out and buying new ones.
Car mileage also can convey an fascinating dynamic to the combination with miles pushed impacted by economic conditions.
An interesting study revealed by Oregon State University highlights the connection between economic downturns and Vehicle Miles Traveled (VMT) throughout the United States. The date range for this examine was from 1929 – 2007.
The chart below exhibits that the majority downturns led to a 5-10% discount in VMT.
Impact of Pandemic on VMTs in is likely to be a bit different because of the impact of pandemic on VMTs.
To higher perceive the impact of work at home on Vehicle Miles Driven, I checked out a study performed and revealed by University of California in June 2005.
The study suggests that VMT declined by zero.8% or much less (94% confidence).
Another study shows miles driven in the state of Maryland dropped by 16% during the pandemic.
The Maryland Department of Transportation team modeled the miles driven restoration, and the research predicts a discount of 3% to 7% v. pre-pandemic levels. This indicates a recovery of 7% – 12% by 2025. This explicit research didn’t take financial conditions into account in their fashions.
Utilize Data and Patterns to Plan
Based on these research, we will expect VMTs to development larger than pandemic levels although the recovery will not be as quick as expected by the University of Maryland research.
Additionally, declining new car sales ought to solely result in shoppers holding on to their used vehicles.
The good news is such situations ought to continue to play a favorable position in auto repair demand over the next 6-12 months! Overall, I do expect close to time period decline in demand as a result of high levels of anxiety available in the market.
However, I do anticipate the industry will hold up well compared to many other areas of the financial system.
Auto repair operators should plan for single digit declines in car rely.
If budgets permit for it, proactive and savvy operators should contemplate expanding their marketing investments in Q4 of 2022 and starting in March of 2023 to beat these expected declines.
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Our economy is already showing signs of a downturn. Now’s the time to plan.