Honda dealers managed solid profitability despite a difficult year caused by the coronavirus pandemic, with brand sales falling 17 percent and underperforming the U.S. auto market as a whole.
Now, as inventory recovers and the sales outlook moves toward some normalization this year, Honda retailers are looking for ways to maintain those profits in a climate where fixed operations are likely to remain weak.
“Profitability has been very, very strong for Honda dealers. It’s been a very good year,” said William Feinstein, 50, chairman of the Honda National Dealer Advisory Board and president of Planet Honda in Union, N.J.
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“As inventories and sales return to normal, what happens with gross profit per vehicle? I tend to think that the evaporation in gross profit will happen, but I think it will happen over time. I don’t think it will be dramatic,” he said.
There are positive signs for the Honda brand with a strong certified pre-owned program, more aggressively styled light trucks in the pipeline to better match consumer taste and flexible facility requirements for dealers.
Feinstein spoke with Staff Reporter Laurence Iliff. Here are edited excerpts.
Q: Do dealers embrace Honda’s plans to sell electric vehicles being developed in partnership with General Motors? Is that something dealers want?
A: I think there is a false notion put out there by Tesla and the direct-sales model that somehow dealers are against EVs. Dealers will sell whatever the customers want and whatever is in the consumers’ best interest.
Dealers don’t have any opposition to EVs or hybrids or whether it is hydrogen next or whatever the next iteration is. Dealers sell what consumers want to buy, and they offer them choices.
Dealers certainly welcome electrification, just like we welcomed moving from eight-cylinder cars to four-cylinder cars over time because they are more fuel efficient.
So if it’s good for the consumer, it’s good for the dealer. Honda has a longstanding commitment to the environment, and it’s one reason you can be proud to be a Honda dealer.
This is a natural evolution for Honda and for Honda dealers. Honda has really put a big push behind not just making their production footprint better from a carbon standpoint, but also their dealer body. They’ve been very supportive of their environmental leadership program for dealerships. When our dealership rebuilt our facility six years ago, we did it to Honda’s platinum environmental specs and it’s been a great return on investment for us.
Are Honda’s production and inventory levels coming back in line with demand?
I think most of the supply disruptions are relatively past us. Everyone, obviously, went through a pretty tumultuous period during the spring and early summer. Honda weathered it pretty well. Their plants are pretty much back at full capacity and the flow of product has been fairly normal.
Is Honda addressing some of the concerns about inventory mix to dealers, such as two-wheel drive vs. all-wheel drive in terms of light trucks? Have you heard dealers complaining about getting the right vehicles to their regional markets?
I think that’s always the hardest part: getting the right car at the right time. Markets are geographically different. Some are four-wheel drive, some are two-wheel drive, some are heavier car than truck. I think all of the OEMs struggle with that from time to time. I think Honda continues to get better and better at putting the right vehicle in the right place.
But it’s a pretty big ask. Sometimes we all want more four-wheel drives or more two-wheel drives or more trucks when a certain model is hot or not. I do think overall Honda does a good job of trying to get the right mix of products into the market.
How are Honda dealerships’ profitability levels at this point in the pandemic? How sustainable are current vehicle margin and profitability levels as inventory levels improve?
Profitability has been very strong for Honda dealers. It’s been a very good year. It’s been a unique year and there’s been a lot of gyrations to profitability. In the early spring, I don’t think any of us would have said we’re all going to end up having a very good year. I think that is the million-dollar question. As inventories and sales return to normal, what happens with gross profit per vehicle? I think the evaporation in gross profit will happen but over time. I don’t think it will be dramatic. And I’m hopeful that dealers have learned some lessons, and they’ve learned that they can actually make money selling cars. One of the big questions for me is that as fixed operations continues to be under pressure due to people driving less — certainly in suburban communities like ours since we’re a subset of New York City and commuting is way down — people are going to have to look more and more to their new- and used-car operations for profitability because it’s going to be harder and harder to get that profitability out of fixed operations.
Is Honda doing enough to promote certified pre-owned sales? Has Honda recently made or proposed changes to its CPO program?
Honda’s CPO program had a very good year. The program has good value for the customer and good value for the dealer. It’s also a very important part of Honda’s strategy because you need a strong CPO program to support leasing and the full-cycle management and to support used vehicles. You’ll continue to see more innovation and adaptation within the certified program. They recently expanded the Honda certified website to include dealer inventory that’s not certified. And I think Honda is intent on helping its dealers capture more of the used-car market.
Are there any dealer concerns that Honda will want a part of the proceeds from F&I products sold online as part of its promotion of non-certified used cars?
I think that’s a big question mark for every dealer and every OEM. We’re certainly going into new territory here and we’re all going to have to navigate this together with the respective OEMs. The dealer-OEM model has survived for quite a long time now and adapted to many changes, and this is just another one we’re going to have to all figure out together.
Is Honda adequately advising its dealers on how to prepare for such changes as new mobility services, the advancement of autonomous vehicles and more vehicle electrification?
From a mobility standpoint, this has been more of a threat than a reality. We’ve yet to see a negative impact on auto sales because of ride share. And based on the pandemic, there may be some permanent changes because of that. People certainly don’t want to be in mass transit anymore. They’re saying, “you know what, maybe I do want my own vehicle.” And we’re seeing car sales from people who haven’t owned a vehicle in 20 years.
Also, no one yet has been able to do any of these business models, whether it’s ride share or subscription models, and do it profitably.
As it relates to autonomy, this is another place where I think the reality is very different than the hype. I don’t see autonomy being a threat to the dealership models or dealers anytime soon. I think it’s just a more advanced driver-assist technology, certainly in the next five to 10 years. All the OEMs will continue to improve their autonomous functionality. Honda has some pretty cool technology out there, some of the best in the industry.
On electrification, Honda like everyone else has made it very clear that their lineup is going to become electrified. That’s somewhat more of a government mandate than a consumer mandate at this point. I think there are a lot of infrastructure issues that are going to have to be resolved over the next five to 10 years that people aren’t necessarily giving enough thought to.
What’s missing in the product lineup? Would dealers like to see a pickup collaboration with GM for the next Ridgeline as part of the two automakers’ partnership?
Dealers were asking for a Ridgeline with a more aggressive stance. The issue with the Ridgeline has never been its capabilities or how it drives or its performance. People love the vehicle. It frankly just wasn’t packaged well enough for a lot of people. I think they’ve addressed a lot of those issues, and I expect the Ridgeline to do very well.
You’re seeing a more aggressive style across all of Honda’s lineup, and as we get more redesigns, I’m expecting more aggressively styled vehicles. Honda has done a very good job of offering trims within certain models, like the sport trims that do appeal to a younger buyer.
As far as holes in the product lineup, the places where we’d like to see product is something larger than the current-generation Pilot. We think there’s a market for that. And there may be a market for some version of an all-wheel-drive sedan. Certainly in the Northeast and Midwest. As OEMs go toward electrification, it’s not hard to add all-wheel drive to an electrified vehicle.
Some brands have more than one entry in popular segments, such as small crossovers. Is there any desire for Honda to do something like that?
One of the hallmarks of the Honda brand has been simplicity. What’s made it a great franchise for dealers is you don’t have too many products. You have competitive vehicles in most of the major segments.
They want to be No. 1, 2 or 3 in the segments they compete in. But they don’t suffer from an oversaturation of models. Yes, I want an entry in most every segment but I don’t see why we need multiple entries in a segment.
How has Honda helped dealerships navigate changes brought about by the pandemic? What more do dealers want to see them do?
Honda definitely stepped up to the plate with floorplan assistance and deferment of some charges to dealers during the pandemic. They were very supportive with incentives, customer loyalty.
At this point, I think it’s not that dealers need help financially dealing with the uncertainty of the pandemic anymore. But as the market returns to normal, we are going to need the incentive support and marketing support.
Is Honda de-emphasizing physical facility requirements in favor of elevating digital ones? Has the pandemic resulted in any change in facility image programs?
Honda is currently studying their facility requirements in light of the evolution of the business and where they think business is going in the next few years. We look forward to discussing those with Honda. None of us have crystal balls and we don’t know what’s going to happen, but I think Honda like most OEMs will start being a bit more flexible on facility requirements as we look forward to what the landscape’s going to look like.
Is Honda looking into how it can assist dealers with selling used vehicles through a national platform, given the success of companies such as Carvana? Is a brand-level national platform for used vehicles something that dealers support?
Honda is one of the strongest CPO brands out there and they have supported that program very well. I think the effort to include non-certified vehicles on their platform probably speaks to the direction they want to go in. They want more used Hondas to flow through Honda dealers, as dealers do, so my guess is that we’ll continue to see steps in that direction.
How are Honda fixed operations doing? Has revenue returned to pre-COVID levels? If not, what areas remain a concern, and how are dealers and Honda adjusting for that decline?
I think that’s maybe the canary in the coal mine. And it’s not just Honda, it’s everyone. It is somewhat geographic depending on the effects of COVID. For areas that have been significantly impacted and rely on commuting for work, we’re seeing a tremendous drop in fixed operations. We’ve seen a significant disruption at body shops. Part of me says that things will normalize, though obviously we don’t know when.
I do think for dealers this is a little bit of a wakeup call of what things may look like when we hit electrification. I’ve been telling people that this may be your future. So if this is the future of fixed ops, what other things are you going to do to stay profitable?