By Alysha Webb, Editor and Publisher
The Federal Reserve announced a long-signaled interest rate increase last week. New car sales have long been supported by extremely low interest rates. Though loans may get a bit more expensive now, few think the tiny rate increase will have much impact on new car sales.
Dealers will get hit in another way, however. The rate they pay to carry inventory – their floor plan in industry lingo – will rise. That means higher costs for dealerships.
“All of our floor plan costs will increase because our costs are tied to LIBOR, which was adjusted with the Board’s decision to increase the prime lending rate,” Randy Jones, CFO of Rusnak Auto Group, tells Automotive Buy Sell Report.
Rusnak is a premium luxury brand dealership group based in Pasadena, Calif. Its franchises include BMW, Bentley, Jaguar, Porsche, Mercedes-Benz, Rolls Royce, Maserati, Volvo, Audi, and Hyundai.
LIBOR is the interest rate at which banks lend money to each other in the wholesale money market in London. It is a common benchmark for various interest rates such a mortgages.
The Federal Open Market Committee of the Federal Reserve raised rates 25 basis points on December 16. LIBOR rates tend to follow FOMC rates.
Dealers benefit from low floor plan costs by being able to carry large selections of vehicles at very low costs. The expected rise in flooring costs leaves Tommy Brasher, owner of Brasher Motor Co. in Weimar, Tex. with a Hobson’s choice.
He basically will have to absorb the increased cost at his Chevrolet Buick GMC dealership, says Brasher.
“I could say we would cut back our inventory but that is not a good way to do it,” he tells Automotive Buy Sell Report. “You lose your way of making money by not having enough vehicles.”
Low flooring costs have made his dealerships “sloppy” about inventory control, says Ben Keating, owner of more than a dozen franchises, the majority domestic brands, in Texas.
“Instead of keeping [inventory] down to 90 days’ supply, some of our stores have gone to 150 days’ supply,” he tells Automotive Buy Sell Report.
Keating isn’t too worried about this rate increase, though. “Relative to history, rates are still ridiculously low,” he says. “It is going to cost me money but I am not that bothered by this increase.”
Jones at Rusnak says his group will see a slight increase in flooring costs, but “will continue our efforts to reduce days’ supply and increase our turn rate to minimize the effects on the bottom line.”
Fortunately, that should be possible because new car sales are expected to remain strong in 2016, and many expect consumer loan rates to remain extremely low even as the Fed raises its rate.
Rusnak has seen sales surge since the recession, helped by low rates, says Jones. He thinks they will remain low.
“I anticipate the competition to be strong with auto loans from banks, credit unions, and zero interest rates with extended terms from manufacturers to continue to fuel vehicle sales,” he says.
The lenders will be the ones who take the hit, says Jessica Caldwell, director of pricing and industry analysis at Edmunds.com. Subvented lease deals and zero percent loans from captive finance companies and affiliated finance companies are helping sell more cars.
“If it is working, they are going to keep doing it,” she tells Automotive Buy Sell Report.
Publicly-owned dealership groups are also unconcerned about the impact of the rate increase on sales.
The 25 basis point rate hike is an indication that the economy is strengthening, points out Anthony Pordon, executive vice president at Penske Automotive Group Inc.
“Stronger employment [and] consumer confidence points to sales strength,” he tells Automotive Buy Sell Report.
Mike Jackson, CEO and president of AutoNation Inc., says succinctly: “The auto industry does not need a free lunch on interest rates. Auto sales in 2016 will be above 17 million, even with higher interest rates.”