AutoNation Inc.’s top executive warned that softening car prices will likely fall further as inventory grows, a welcome sign for inflation-weary buyers but worrisome for dealers facing new pressure on profit margins.
AutoNation, one of the largest car dealership chains in the US, saw gross profit on each new vehicle sold plunge 25% in the second quarter, as automakers dial up discounts while replenishing supply that was depleted during the pandemic. Deals on new cars are aimed at improving affordability and boosting sales in an uncertain economy.
“Prices are clearly coming down,” Mike Manley, AutoNation’s chief executive officer, said on a call with analysts Friday to discuss quarterly earnings. “Margin compression will continue, but won’t reach the levels — certainly this year, in my opinion — that we saw pre-pandemic.”
Read More: AutoNation Beats Expectations on Rising New Car Sales, Repairs
The comments echo those of Carvana Co. CEO Ernie Garcia III, who told Bloomberg Thursday that the company’s “best expectation” is that used-car prices will continue to slide. Both executives see deflation in pricing stimulating demand after pandemic-related parts shortages emptied dealer lots and drove the average price of a new car to almost $50,000.
“The increase we saw in incentives, the move to leasing are all about affordability, all about maintaining momentum in the new-vehicle market,” Manley said.
AutoNation is seeking to make up for profit shortfalls on new and used car sales by boosting income from its repair, financing and insurance units.
“We just have to stay very agile on pricing,” Manley said of used cars. “You’re going to see, as you always do, fluctuations in margin but we want quality business, but we want our fair share of business.”
