COVID-19 Expected To Trigger Sales Declines; OEMs Should Plan Ahead

Seyfarth Shaw LLP
Seyfarth's Future of Automotive Series

Seyfarth Synopsis: At the beginning of 2020, industry pundits predicted only a moderate decline in auto sales for the year. Those “moderate decline” predictions took a sharp turn on Wednesday, with Morgan Stanley slashing its estimate for 2020 U.S. auto sales by 9% (one million vehicles) and predicting a “demand shock” as consumers delay new car purchases because of the coronavirus. First quarter sales reports will not be out until April, but early reporting from J.D. Power indicates that areas hardest hit by coronavirus have already seen sales drop sharply. Auto sales last week in Seattle, for example, reportedly dropped by 20%. A precipitous decline in sales, even if relatively short lived, will present a challenge for dealers and OEMs. The following are just a few of those challenges.

Enhanced Focus on Internet Sales: We’ve written a fair amount about digital marketing and the consumer-driven shift to online sales (see, e.g., here). All of that was before COVID-19, “social distance,” and steps consumers are being told to take to avoid exposure. As consumers focus on health and safety, many will put off major purchase decisions. Consumers still in the market will likely turn to online resources for pricing, comparison shopping, and auto purchases. That is good news for dealers with robust internet sales and marketing departments, but for others it will demand immediate focus on updating and enhancing websites, inventory listings, lead generation and conversion procedures, and designing on-line sale processes that reduce actual face-to-face time with customers.

OEMs also will want to review their online presence and procedures. The ability to reach customers through digital marketing, engage in digital chat, and generate and distribute leads are all part of a well-developed process that will enable customers to complete online as much of the purchase process as possible. COVID-19 should accelerate efforts to enhance and expand online auto retailing.

Plan for Supply Chain Interruptions: There is little question that COVID-19 will disrupt the global supply chain. While automakers and suppliers so far have avoided shut downs in the U.S., thanks principally to existing parts inventories, a supply interruption may affect production lines and eventually available new vehicle inventory as well as the parts necessary for warranty service. While reduced demand may balance inventory shortages, OEMs need to be mindful of how inventory shortages may exacerbate already declining sales and impact dealer performance and profitability, and also consider how customers might be affected if supply chain issues result in extended service delays.

Anticipate Financially Distressed Dealerships: Unless met with aggressive cost saving measures, any meaningful decline in sales will lead to dealership failures. Failing dealerships cause negative publicity, dissatisfied customers, limited or shuttered operations, and out-of-trust sales. Litigation often follows.

If they have not done so already, OEMs need to develop, implement and follow a comprehensive, proactive business strategy for responding to financially distressed dealerships. Such a strategy should include procedures for protecting operating standards, enforcing brand and marketing standards, and monitoring and enforcing credit policies. Suspending floor lines, enforcing operating standards, and pursuing termination(s) may be warranted. An OEM’s strategy should consider the impact financially distressed dealerships may have on the dealer network as a whole and the brand’s performance in particular markets.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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