New car sales in Canada in 2023 followed a downward trend. Sales peaked in May at 171,889 units, reaching $9.64 million in total sales value. In December, sales dipped to 128,827 units with a total value of $7.45 million.
Published: May 07, 2024
Updated: May 07, 2024
The automotive industry has seen its fair share of change in recent years. Pre-pandemic, consolidation and rising real estate values were key trends, driven by strong financials and a growing economy. COVID-19 threw a curveball with its initial shock and subsequent surge in demand. This surge, driven by low interest rates, government support, and production disruptions, led to a hike in used vehicle prices and record earnings for dealerships—all happening despite the challenging pandemic circumstances.
Emerging challenges
Now, new post-pandemic challenges emerge. Government support has waned, supply chain issues persist, and rising interest rates threaten to dampen consumer demand. The industry also faces the increasing influence of fintech in leasing and financing, concerns over profitability, the growing electric vehicle (EV) market, human capital constraints, and the potential impact of AI on the traditional dealership model.
In this ever-changing landscape, one thing remains clear: inaction is not an option. Dealerships must adapt and proactively position themselves to navigate these challenges to succeed. To understand the specific hurdles at play, let’s delve into the current market situation.
A perfect storm of high debt, low supply, and stressed consumers
The Canadian automotive industry is undergoing a period of uncertainty due to several factors. Consumer confidence is declining, likely due to high debt loads and rising interest rates. Additionally, production constraints at some OEMs limit the supply of new vehicles, which is helping to support demand in the short term but could lead to more significant problems if left unaddressed.
The uncertainties are also negatively impacting the specialty finance sector. BMO’s decision to exit this space is a sign of the industry’s challenges, and there has also been an increased number of delinquencies on auto loans.
Dealerships that were able to survive or even prosper during the pandemic, particularly smaller ones, are now facing a return to reality, coupled with a stagnant economy and stressed consumers. Meanwhile, those already struggling before the pandemic are now particularly vulnerable, and lenders’ decreasing risk appetite is causing some of them to exit the market through sale or a wind-down.
2023 Canadian new car sales: A downward trend
New Motor Vehicles in Canada
Source: Stats Canada
Future-proof your car dealership for success
The auto industry landscape demands agility and innovation. Dealerships that embrace these by streamlining operations and revamping their vision and customer experiences can thrive and even become attractive acquisition targets in the continued increased level of M&A activity. The following key considerations will help you prepare.
Step 1: Assess your strategic vision–Define your narrative
As the business model for auto retail has begun to transform, so too has the strategic vision of the principal. Gone are the days of riding the status quo dealership business model—a new wave of diversification has entered the landscape. Although business strategists often suggest complex models to assess the pros and cons of various opportunities, from our experience, the best place to start is to ask yourself this simple question:
Where am I right now, and what am I good at?
Be introspective and do some soul searching. Are you operationally strong and excel at the day-to-day operational management of the business? Are you a savvy real estate investor—have you made lucrative land purchases, and do you want to expand your portfolio? The diversified business model means the options on the table for dealers are expanding along with the investor matrix. We have seen dealers sell the real estate, but keep the operating business, as well as others sell their best stores in urban centers to fund large scale growth plans outside of city centers.
Determining your core competencies will help you build your strategic vision and navigate the path to opportunity.
Step 2: Build liquidity - Position your company for success
Once you have determined your strategic vision and have begun mapping out your unique road to growth, you need to consider how to fund your planned investments. The key is to build liquidity that supports your best use of capital and your strategic vision.
Historically, rising real estate prices gave dealerships and groups a financial cushion, allowing them to access liquidity through their property value. However, this option is becoming less viable with flat or falling prices. This shift necessitates exploring alternative funding strategies to support growth plans outlined in your strategic vision. Two decades of low interest rates have fueled a debt boom. However, the tide appears to be turning. Rising interest rates burden borrowers and favour savers who can now potentially earn more on their cash.
The following are potential paths for funding growth:
Debt structuring: The dealership business model is one that is highly leveraged, so restructuring debt can have immediate impacts on the business’s bottom line. Cleaning up the balance sheet will help position the business to gain access to capital from both traditional and non-traditional lenders. If you are carrying debt from multiple lenders at different rates, consider engaging your professional service provider to discuss a strategic plan to rebalance the debt. This can open options for better rates, more flexibility, and higher thresholds.
Non-traditional sources of capital: The diversification of the pool of financial buyers has continued as auto dealerships have maintained their status as a lucrative investment. From private equity looking for entry points to family offices aiming to diversify, the options to raise capital for investment into real estate portfolio expansion, operational expansion, or both, are available from many sources. Remember, different players will have different interests—make sure you are seeking out the right fit for your strategic vision.
Maximize access to capital—The benefits of financial modeling
Working with a professional services advisor to prepare a financial model can help you position yourself as a strong investment option to both traditional and non-traditional sources of capital—a robust model will help you showcase the strength of the business and model the potentially lucrative impacts of expansion opportunities. As you go to market, consider how you will lead prospective investors through the financial impacts of your strategic vision.
"Don’t wait for the narrative to unfold on its own. Proactively outline the story and guide your stakeholders through the process every step of the way, you can foster understanding, build trust, and achieve a shared vision for the journey ahead."
Step 3: Review operations–Strive for continuous improvement
Good business hygiene sets the foundation of your operations. Conducting a deep dive into the operational management of the business will invariably uncover opportunities to improve cash flow. You can start by monitoring supply chains and diversifying inventory, investing in upskilling your workforce, and adapting staffing solutions. Dealerships can also track economic indicators, offer flexible financing options, and prioritize excellent customer service to maintain resilience and give themselves a competitive edge despite market uncertainties.
BDO can help
You have challenges and we have solutions. BDO’s automotive retail team understands every piece of the auto dealership lifecycle and can help achieve your strategic vision. Our professionals have the experience to help from value ideation to value creation. We have an extensive stable of clients, understand the industry, and provide high value services.