Cars have been the poster child of the current inflation crisis. Dealership executives have made clear in earnings calls why: not because they’re passing on higher costs to consumers, but because they want to net record profits.
Cars are spaced out at Selman Chevrolet in Orange, California, on Thursday, November 11, 2021. (Jeff Gritchen / MediaNews Group / Orange County Register via Getty Images)
The supply chain disruptions caused by pandemic lockdowns have been a leading cause of the economic chaos of recent years, feeding the rage of consumers paying sky-high prices for suddenly scarcer goods. But they’ve also been a bonanza for the firms making those goods, who have outright admitted to using the headlines about inflation to tack on added price markups to their products, whether it’s eggs, airplane tickets, or electricity.
Maybe no product has embodied today’s inflationary pressures quite like cars have, as shortages of parts coupled with continuing strong demand for vehicles has sent their prices soaring. While we’ve been told that firms are simply passing along higher production costs to consumers, car dealers have also been making record profits, with Federal Reserve Bank of Richmond president Tom Barkin telling the New York Times that carmakers and dealers had “discovered that a low-volume, higher-price model was actually a very profitable model.” A Bureau of Labor Statistics (BLS) study from this past April determined that dealer markups contributed majorly to inflation in the price of new cars.
This is backed up by the words of the executives of the country’s largest dealerships themselves, who on earnings calls have explicitly talked about selling cars at inflated prices and making a tidy profit. It points to the need for robust government action to provide relief for consumers against such private sector greed.
“We Actually Would Have Made Less Money”
Take CarMax, the largest used car dealer in the United States. On an earnings call this past April, CEO Bill Nash explained how the firm’s “extensive price elasticity tests,” which look at what happens to the level of demand when prices are raised or lowered, convinced the company it could safely get away with the very low-volume, higher-price model Barkin spoke about. The company had “determined that we could have sold a few more cars, but we actually would have made less money,” Nash explained.
On an earlier earnings call from December 2022, Nash responded to questions about other competitors lowering their prices to move cars off their lots and how that would impact CarMax’s strategy. Nash again cited the firm’s determination that they would have made less money, concluding that “what I’ve always said is . . . what we’re going after is profitable long-term market share gains.” He mentioned that the firm had price-tested both up and down, which “gives us confidence that we made the right decision from a profitability standpoint.”
“In a lot of cases,” Nash said about his competitors’ strategy to sell more units by dropping prices, “it’s not sustainable over the long term because you’re just not making the money that you need to.”
It’s a similar case with Lithia Motors, as of last year the largest dealership group in the country. Asked in a February 2022 earnings call if he was “seeing any hesitation at all among consumers to the elevated prices,” executive vice president Chris Holzshu replied, “Absolutely not.”
“Demand is very high right now, and we’re taking advantage as much as possible in both new and used in that capacity,” he said.
Asked if the firm was selling above the manufacturer’s suggested retail price (MSRP), the cost that carmarkers like Ford or Nissan recommend dealers should sell a vehicle for, CEO Bryan DeBoer answered, “We do have some stores that are charging over MSRP.”
“We allow our network to make the decisions closest to what their customer base is and what the supply and demand is in that local market,” he added.
AutoNation chief financial officer Joe Lower likewise told investors in February 2023 that “more than half of our vehicles were sold at or above MSRP” in the previous year’s fourth quarter, which had “trended down, but it’s still far higher than historical levels.” The quarter before that, CEO Mike Manley noted that revenue was up 4 percent to $6.7 billion, “driven by higher average selling prices of new and used vehicles” and which had “more than offset lower sales of” both.
Two quarters earlier, when asked if inflation becoming a longer-term problem would entice the company to sell more inexpensive brands at lower prices, or if it would stick with “the premium side because those customers perhaps aren’t as bothered by inflation,” Manley replied, “It doesn’t really change my view on the balance that we have in our portfolio” and simply “reinforces we have a good balance.”
In the company’s most recent earnings call, Manley explained that the supply of late-model used cars had dropped, as had their turnover, since consumers were holding on longer to their cars. To offset this, “We focused on enhancing economics through effective staff-sourcing, reconditioning, speed to market, and of course, pricing,” he explained. Later, Lower explained that the firm wanted to “make sure that we maximize the inventory that we had” in terms of used cars, and that “with that, it means that we were even more diligent, I think, in terms of pricing.” According to AutoNation’s filing for that quarter, gross profit from used cars was $154 million for the first three months of 2023, up $18 million from the same period last year.
Coming straight from the mouth of executives of some of the country’s largest dealership firms, this would appear to corroborate the BLS study and confirm the suspicions of those looking at dealers’ record profits and sensing something is off.
Deal of the Century
As Bill Nash’s remarks about CarMax’s competitors deciding to lower their prices shows, these firms aren’t 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 the past few years are simply because dealers are passing on their own higher costs.
Instead, executives at some of the country’s largest dealerships have been openly telling investors that they’re calibrating prices to what will net them the most profit, often by taking advantage of strong consumer demand to charge prices that are higher than they need to be — and explicitly rejecting an approach of selling more cars at lower prices because it’s less profitable.
What was once labeled a “conspiracy theory” — that much of the inflation we’re seeing is driven by corporate greed to feed record profits — is now more and more being widely acknowledged as reality. But unfortunately, those in power are still yet to do much about it, whether instituting price controls to prevent corporate price gouging or passing a windfall tax to claw back the inflated profits that result. And it’s the ordinary American worker who’s being stuck with the bill.