STLA, Dealerships, and their Relationship with ALLY - I
An Auto Industry Analysis
Note: This was initially published to our clients on January 26, 2025. Founding Members get a delayed yet actionable version of occasional insightful notes from our sources. Some critical insights are not reported here as they are available only to our clients.
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"…when we get more allocations in, where are they going to put them? There's nowhere to put these cars, and they keep taking allocations. They're not going to be able to sell through all these cars, so you see 2023 sitting on here, you see 2024 sitting on the lot…and Ford keeps pumping these vehicles down their throat…" – Ford salesman
When we started covering the auto dealerships in 2023, we thought new car sales would be stagnant for 2-3 years due to pandemic-related issues. Now, we believe that will extend even further as there are structural changes in the new car market that will limit growth. The negative equity problem is much worse than we thought. The consumer is coming out of COVID-19 in worse financial shape than pre-COVID due to continued inflationary pressure. Three of the five large public dealerships have avoided slow sales through acquisitions. However, that has become untenable as the private chains suffer financially from bulging inventory and floor plan debt. It's too risky for the dealers to make acquisitions. We've seen a disproportionately high percentage of inventory that will go unsold unless painful price cuts are taken.
"Front-end margins declined 30% year over year in 2024, as inventory rebounded from pandemic-era lows, according to data provided to Auto Finance News by JM&A Group, which provides finance and insurance solutions and consulting services for more than 3,800 dealers. Meanwhile, back-end profit, tied to products such as guaranteed asset protection (GAP) and service contracts, rose 3% YoY, according to JM&A.
"New-vehicle inventory reached 3.15 million units in December, a 26% YoY increase and a significant rebound from the historic low in September 2021…"1
The Banks
The banks have been reporting an increase in originations for the first time in 18 months. What's interesting, though, is many of the banks have reduced the size of their auto portfolio. WFC reported earnings on the 15th. Its auto loan portfolio was $43 billion from $49 billion yoy.