After meeting with a host of dealer principals and mangers during NADA Show 2022, ACV chief executive officer George Chamoun said through a company news release that, “Dealers are the most resilient business leaders.”

But even the most resilient operators are starting to show a little weariness as shown in the latest Cox Automotive Dealer Sentiment Index (CADSI).

While the current market index remains above the positive threshold, Cox Automotive explained how the combination of facing a slow start to the year and concerns over inflation and the economy resulted in dealer sentiment softening in the first quarter, marking the third consecutive quarter-over-quarter decline in current market sentiment.

Still, Cox Automotive pointed out that the index reading of 57 indicated that more U.S. dealers feel the current market is strong compared to the number who feel the current market is weak. The key drivers of sentiment saw marginal shifts in Q1.

Analysts said the three-month, forward-looking market outlook index rose modestly — reflecting the typical spring bounce — and, at 64, is above the 59 recorded in Q1 2021.

The overall profit index saw a small decline to 54, down from 57 last quarter, but remains well above any point before the COVID-19 pandemic.

The price pressure index, likewise, increased slightly in Q1 but remains historically low, indicating fewer dealers feel pressure to lower their prices.

“As we enter the spring market, we can see the small green shoots of optimism from the U.S. auto dealers,” Cox Automotive chief economist Jonathan Smoke said in another news release.

“Most dealers have weathered the storm well, and we suspect there is hope the pandemic may finally be waning. Views of the economy weakened modestly, but dealer profits are historically strong and demand remains robust. Those are good signs for the industry,” Smoke continued.

Cox Automotive mentioned that the Q1 2022 CADSI research was in market from Jan. 24 to Feb. 7, just past the height of the Omicron variant.

Importantly, though, analysts noted the research was done before the Russian invasion of Ukraine and before gasoline prices in the U.S. moved into record territory.

Even before the situation worsened, Cox Automotive said the U.S. economy index score dropped from 52 in Q4 2021 to 49 in Q1, indicating more dealers felt the economy was weak compared to those who thought it was strong. The score of 49, however, is higher than it was a year ago in Q1 2021 when the index score was 44.

“The tragic situation in Ukraine, of course, adds a level of uncertainty to the U.S. economy that will impact the U.S. consumer,” Smoke said. “Higher gas prices, a struggling stock market, inflation, and the potential for more supply chain disruptions — these factors will slow any anticipated market recovery and may impact dealer sentiment in Q2.

“Right now, though, it’s too soon to know how long the situation will last or how bad it will get,” Smoke added.

Talking inventory

Cox Automotive highlighted that one positive sign in the latest CADSI report is a notable jump in the new-vehicle inventory index for franchised dealers.

While still historically low at 25, the index increased by 11 points and marked the highest score since the first quarter of 2021. The index for the new-vehicle inventory mix also increased quarter over quarter.

“Inventory issues have been the biggest concern for dealers for more than six months now,” Smoke said. “In our latest study, inventory remains a top priority, but the initial signs of a recovery are there. And that is a positive for the market.”

On the used-vehicle side, Cox Automotive said the inventory index jumped up in Q1 2022 as well, reaching 36, the highest score in the past 12 months. The used-vehicle inventory mix index improved also.

However, Cox Automotive said all index scores associated with inventory remain well below the 50 threshold, indicating dealers are still facing inventory challenges.

The view of new-vehicle sales improved for the first time in two quarters, increasing from 45 to exactly 50, meaning dealers were evenly mixed on their opinions of new-vehicle sales. One year ago, the index score was 61, meaning more dealers saw the market as good.

The new-vehicle incentives index dropped by one point quarter over quarter, to 23, the lowest level since the question was added to the CADSI in Q3 2019.  The incentive index measures if OEM incentives are large (above 50) or small (below 50).

The used-vehicle sales index, on the other hand, fell one index point to 52.

For franchised dealers, the used-vehicle sales index has now dropped for three straight quarters and is below year-ago levels. There was no change in the used-vehicle sales index for independent dealers, which held steady quarter over quarter at 48, meaning more independent dealers see the market as poor than see it as good.

In the ACV news release, Chamoun said, “Facing global supply chain challenges for new cars, franchise dealers are seeking additional pathways to acquire vehicles more effectively and to better merchandise vehicles online. Connecting with dealers at NADA this past weekend was inspiring.

“We feel honored to be the digital partner for such incredible companies and continue to support them with innovative technology and our talented and rapidly scaling team,” he went on to say.

Potential spring bounce

Cox Automotive reported that the market outlook for the next three months increased to 64 in Q1, up from 60 in Q4. Analysts explained the score indicates that most dealers feel that the outlook for the next three months is positive, which reflects the springtime optimism routinely seen in the report.

In fact, Cox Automotive indicated the Q1 outlook is higher than it was one year ago  — ahead of a year of record profits — and at the highest point since Q1 2020, before the pandemic began.

Analysts pointed out that the quarter-over-quarter increase, however, was driven mostly by independent dealers. The franchised dealer outlook was, in fact, flat quarter over quarter at 69. Still, the market outlook index score of 69 for franchised dealers is above pre-pandemic levels.

“While profits remain historically strong, particularly for franchised dealers, tight inventory and no quick fix in the making are likely weighing on dealers,” Cox Automotive said. “Overall, limited inventory continues to be the top factor holding back business according to the Q1 2022 CADSI.”

Analysts said the factors saw little change from last quarter, with the top four factors unchanged from Q4, including limited inventory, market conditions, economy and COVID-19 impacts. In Q1, political climate dropped out of the top five, replaced by expenses, according to Cox Automotive

Costs and staff

In Q1, Cox Automotive said the cost index — specifically the cost of running a dealership — was at the highest level since the survey began in 2017.

After reaching a record low in Q2 2020 of 51, at the height of the pandemic, the cost index has been steadily increasing.

“One factor contributing to rising costs may be staffing,” said analysts, which pointed out that the staffing index, at 46, improved slightly from Q4, but generally remains below pre-pandemic levels.

With a score below 50, analysts noted that the metric indicates more dealers feel their staff is declining rather than growing.

As a factor holding back business, Cox Automotive said more dealers noted staff turnover was an issue in Q1 than in the same timeframe last year.

In fact, 11% of dealers point to staff turnover as a factor holding back business in Q1, compared to only 7% in Q1 of last year and 8% in Q1 2020.

In terms of staffing issues, service is the top area of concern, particularly for franchised dealers, followed by sales, according to Cox Automotive research based on 1,146 U.S. auto dealer respondents, comprising 591 franchised dealers and 555 independents.

The complete survey results can be downloaded via this website.