The 2024 US Auto Dealer Industry Landscape Report

The sale of a vehicle generates nearly every other revenue-generating service provided at a dealership, from getting a loan to repairs and service. Pre-pandemic, an operating margin of 4% was considered strong for an auto dealer in the US. The drastic vehicle inventory shortage experienced between 2020-2022 gave dealers a surge in pricing power that drove operating margins as high as 8%.

In 2024, the pandemic may be over, but operating margins remain relatively strong even though they did decrease a little year-over-year. That’s mainly due to more microchips being available, the lack of which caused prices to soar in 2022 and 2023.   Morningstar predicts a full recovery in inventory for both new and used vehicles, as well as new vertical opportunities, but it will take longer than just another year or so.

This article was adapted from the 2024 US Auto Dealers Industry Landscape published by the Morningstar Equity Research team. It is only a small representation of the many key findings in the 48-page report. Download it in its entirety here for free.

Morningstar covers seven companies retailing vehicles.  They all have a narrow moat thanks to intangible assets and cost advantages. The first six are franchise new-vehicle retailers but also sell used vehicles, while CarMax only sells used vehicles. CarMax provides service to customers but cannot perform warranty service because that work must be done at a franchise dealer. Several of the franchise dealers are family-controlled, specifically Lithia (DeBoer family), Penske (Roger Penske), and Sonic (Smith family). Only Sonic has a dual share class structure to keep voting control within the family.

Public dealers’ industry knowledge and inventory allocation across multiple stores to maximize customer selection allow them to price new vehicles more optimally than the industry, leading to higher gross profit dollars per unit retailed. Public dealers can also better afford to discount vehicles to earn monthly volume bonus payouts from the automakers. These bonuses are then booked as a reduction to cost of goods sold. Many smaller dealers have painful months when they discount to chase volume and then fail to reach the automaker’s sales bonus threshold. Selling, general, and administrative costs are also usually more efficient at public dealers, as they can negotiate the best prices possible from vendors for health insurance or the dealer management system that runs many aspects of a store’s operations.

At a bit under 3 million, US light-vehicle inventory for now is not quite back to where it will likely settle after the pandemic. Low inventory, along with leasing still below 2019 levels, gives reason to think new-vehicle sales will rise the next few years, though not rapidly. Many consumers who bought in 2020-23 during poor availability may not have bought the exact vehicle they wanted, so they could return to the market early. Still, much higher interest rates than recent years and lower supply means higher prices are holding some consumers back.

Leasing is a popular way to buy a new vehicle because the monthly payment is lower than buying outright and one can get a new vehicle every three years. The events of 2020-21 made leasing penetration contract severely because low new-vehicle inventory did not give automaker captive finance arms a reason to write leases. Low supply also made estimating the residual value very difficult. Captives take residual value risk as lessors. Generally, lease penetration is in the low 30s, so its recovery should help sales grow.

There should be a noticeable gap between new- and used-vehicle prices; otherwise, everyone would buy a new vehicle. US used-vehicle sales often are around 2.5 times the annual new volume for easier affordability and some buyers wanting to avoid the depreciation hit of driving a new vehicle off the lot. This volume difference is why many dealers were foolish for decades by not focusing enough on retailing their trade-ins (simply selling them off to auction firms), which CarMax has been happy to take off their hands since its founding in 1993.

The pandemic and chip shortage distorted this traditional new/used gap. When new-vehicle production suffered, that led to low new-vehicle inventory and in turn more demand for used vehicles. At the same time, far fewer used vehicles were entering the marketplace due to low trade-in volume from low new-vehicle sales. The gap just before the pandemic was about $15,400; it fell 30% to $10,709 by the third quarter of 2021 when new-vehicle inventory bottomed out at under 1 million units. As the chip shortage slowly abated, the gap has improved (widened) and exceeded first-quarter 2020 levels for the first time in the first quarter of 2023 at $15,835. It widened to $16,450 in the second quarter of 2024.

We expect the new/used price gap to widen more in 2024 as new-vehicle prices remain firmer than some expected while used prices should decline, as evidenced by the downward trend in the Manheim Used Vehicle Value Index. The widening pace should slow late this year, though, as off-lease volume will suffer as the industry hits the three-year mark of the worst of the chip shortage in the fall. Used prices were about 56% of new prices in early 2020 but are about 60% in 2024, down from the low 70s in late 2021 and the first half of 2022.

The interest around self-driving cars is continuing to rise. In fact, our recent research suggests that the global market size for autonomous driving will be about $300 billion by 2030. While the journey toward fully autonomous vehicles has witnessed some disappointments, rapid technological advancements in areas like computer vision and artificial intelligence are resulting in dramatically improved driving capabilities.

Autonomous vehicles may also have profound impacts on the auto insurance industry. Given the entire point is that the driver is no longer in control, it’s hard to see how the owner of a driverless car could be found legally liable for damage. In our view, car insurance would most likely morph into product liability insurance and ultimately be borne by the auto manufacturers when full autonomy is achieved. As such, we think multiple hurdles must be overcome for drivers to no longer be required to maintain some level of insurance—including highly autonomous vehicles needing to be available on a wide scale and current regulations changed on a state-by-state basis.

Get the ESG angle, some industry basics, and go deeper on our economic moat ratings when you download the full report.

Morningstar analysts use Morningstar Direct to analyze investment and holdings data. Direct is a comprehensive platform that helps asset and wealth managers build their assets and manage their portfolios by supporting market research, product creation, positioning, marketing, and distribution strategies. You can get a free two-week trial of Direct by clicking here.