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New Norm: Less Dealer Inventory

Discussion in 'Road Side Pub' started by 13COBRA, Feb 22, 2021.

  1. 13COBRA

    13COBRA Resident Ford Dealer Premium Member Established Member

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    Article out of Automotive News (Dealer specific), written by Hannah Lutz.

    When General Motors launched its "employee discount for everyone" sale in the spring of 2005, its U.S. dealerships had nearly 1.2 million vehicles crammed onto their lots.

    This winter, the automaker has only about one-third that much inventory. Many pickups and SUVs have buyers within days of arrival, or even before they come off the delivery truck.

    It's no coincidence that GM expects to earn about the same amount this year — at least $10 billion, it projected this month — as it lost in 2005. Executives at GM and other automakers, after pandemic-induced factory disruptions showed what tight supplies can do for the bottom line, aim to keep dealer lots sparser long-term.

    "I suspect that you're going to see a permanent change in our industry. I do not think that we'll ever get back to the high, high levels of inventory and slower turn," Sonic Automotive President Jeff Dyke told analysts and investors last week. "We're all pushing for that, including the manufacturers."

    Of course, there's a big difference between dealers starving for supply and avoiding the chronic overproduction that pushed the Detroit 3 into destructive price-slashing cycles. Automakers say shortages of hot products will eventually get worked out and that they have the ability to keep stocks trimmer than in the past, thanks to better data and more efficient labor contracts that don't force them to keep plants running regardless of need.


    But it might require some adjustment for dealers, who fear losing business to a rival down the street if they don't have the exact color and configuration a customer wants.

    According to Automotive News' 2021 Dealer Outlook Survey of 183 dealership executives in January, most dealers — 59 percent of respondents — expect inventory to meet demand by the end of June, but 25 percent say that won't happen until at least next year. More than half of those surveyed said the lower stock has increased their new- and used-vehicle profit margins, but 40 percent doubt the staying power of those profits after inventories normalize.

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    Automakers and dealers "have a taste of what happens with margins and profitability when supply is constrained, and I believe that is likely to factor into long-term production planning," said Jonathan Smoke, Cox Automotive's chief economist.

    Despite growing profits, dealers still depend on selling a certain number of new vehicles, said Rick Ford, CEO of RFJ Auto Partners Holdings in Plano, Texas, a group with 28 dealerships in several states.

    "We need that new-car volume for the whole stratosphere to be successful in dealerships," he said. In a "perfect world," Ford said, manufacturers would produce "just enough or just slightly less than what the public demand is."

    Having 20 percent less inventory than in the past seems to be the sweet spot for most dealers, said Glenn Mercer, a consultant who wrote a study for the National Automobile Dealers Association called "The Dealership of Tomorrow."

    "A small reduction of inventory will make a significant difference in [a dealer's] bottom line," Mercer said.

    GM had a 49-day U.S. supply in January, down from 73 days a year earlier, according to Morgan Stanley estimates, while Ford Motor Co. dropped from 107 days' worth to 70, and Stellantis went from 96 to 70.That's a stark contrast to the way the Detroit 3 have historically operated. For decades their dealers were so overstuffed that even hot products often needed generous discounts, such as the employee-pricing frenzy that GM started in 2005.

    A race for share meant they never significantly reset production volume, even as Japanese automakers ran with much lower inventory levels and vehicle combination options. Meanwhile, heavy legacy cost burdens dragged down their finances even more, contributing to GM's loss of $88 billion from 2005 until its 2009 bankruptcy wiped much of the slate clean.

    "We've got this great base to start from right now, which is we don't have enough inventory. If we build it the right way, we don't have to get back to those levels," said Tyson Jominy, vice president of data and analytics at J.D. Power. "The real win is producing the right configurations that consumers want."

    Data-driven approach
    Automakers should be able to exercise more discipline post-pandemic, in part because of enhanced technology that shows which vehicles are in high demand, Mercer said.

    Steve Hill, vice president of Chevrolet, said stock levels don't need to be as high as before the pandemic with the help of tools such as VIN View, vehicle tracking software that GM began using last year.

    "Excess inventory — whether it's sitting on the dealers' books or sitting on our books — in the enterprise, it's waste. You've got to have the right car, right place, right time," Hill said. "The closer we can match demand and supply and eliminate that waste, that's a competitive advantage for the whole — not just for GM, for the dealers enterprise-wide."

    Too often, said Chevy dealer Mike Bowsher, vehicles languished for months.

    "I'd rather be in the environment I'm in now where stuff sells as fast as it does," said Bowsher, owner of Carl Black Automotive Group in Kennesaw, Ga. "And I think GM has the data to make that happen."

    Last year, Dave Kelleher, owner of David Dodge-Chrysler-Jeep-Ram in Glen Mills, Pa., sold a record number of vehicles before they reached the showroom. Customers were comfortable with waiting a few weeks for their vehicles, and the dealership saved money on floorplan interest, he said. He doesn't want to go back to selling 190 vehicles a month while 700 linger.

    "It's valuable capital that's being bled out there," Kelleher said.

    Last week, Kelleher had 238 new vehicles on hand, which he said is too few to run his business long term. His ideal range is 350 to 450.

    No build-to-order
    The U.S. is unlikely to adopt the made-to-order model that's used in Europe, analysts said. Such a model may be more efficient for automakers, but consumers expect instant gratification.

    Judy Wheeler, Nissan division vice president of sales and regional operations in the U.S., said Nissan plans to match supply to demand so the automaker won't have to rely on incentives to move inventory.

    "However, in the U.S., customers still generally prefer buying from dealer inventory, rather than placing an order and waiting weeks for it to arrive," she said. "We don't see that changing dramatically over the near term."

    Dealers — scarred from shortages caused by the pandemic, GM's 2019 UAW strike and the global microchip shortage — may fear a day when supply is too depleted, said Jeff Schuster, president of global forecasting at LMC Automotive.

    "You don't want to be caught without vehicles customers want when they want them," he said.

    Still, the industry has learned that it can run with tighter supply, so asking customers to wait patiently for their desired vehicle could become common, Schuster said.

    For the industry to maintain slimmer stocks, every automaker would need to follow suit, Smoke said. "If you don't have all players behaving that way, eventually, from economic theory, it becomes unsustainable, but we'll have to see how things progress."
     
  2. TAF

    TAF Trilogy Twin Screwed #004 Established Member

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    I've come to realize that auto manufacturers WANT to put Dealers Out Of Business. They are going to embrace Online Ordering, and will provide "Warranty Service' through THEIR OWN OWNED "jiffy lube Style" Places...it has already begun. Look in rural areas and see them putting small dealerships down for the count by cutting off inventories...it's here with more to come.
     
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  3. IronSnake

    IronSnake Beers for the boys Established Member

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    Read that this morning.

    I've been saying this since before COVID. The average age of a vehicle on the road has continued to get older every year. Vehicles made in the late 90's to early 00's have proven to be reliable, cheap to repair, and robust. They're a staple of the aftermarket and repair shop community.

    Outside of fleet sales, the retail side was always going to take a hit. Especially when inventory was through the roof. GM is just adjusting it's expectations of demand. Good for business moves. Bad for the consumer though.
     
  4. IronSnake

    IronSnake Beers for the boys Established Member

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    13cobra can dispute this better than I can, but in noway do manufacturers want to have to own, manage, and deal directly with customers at the very base service level.

    Dealerships are shields of liability and a second layer of management for them.
     
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  5. IronSnake

    IronSnake Beers for the boys Established Member

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    13cobra can dispute this better than I can, but in noway do manufacturers want to have to own, manage, and deal directly with customers at the very base service level.

    Dealerships are shields of liability and a second layer of management for them.
     
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  6. 13COBRA

    13COBRA Resident Ford Dealer Premium Member Established Member

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    Couldn't be further from the truth. They want no part in it.

    It's needed for the manufacturer and dealers...it will hurt consumers.
     
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  7. CobraBob

    CobraBob Authorized Vendor Premium Member Established Member Single Barrel Sirs

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    I can totally understand why dealerships want to reduce their inventory levels. It makes perfect sense. Sure, customers may not be able to find their exact match as easily, but my experience over the past few years is that a local dealer almost never had what I've wanted. But, they were able to local what I wanted with minimal delays. That delay time, though, would increase as overall inventories shrink dealership to dealership.

    I personally would have no issue with ordering what I want from the factory and waiting a few months for it to be delivered, or shopping around for my preferred model with most of my preferred options.
     
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  8. 13COBRA

    13COBRA Resident Ford Dealer Premium Member Established Member

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    This is the beginning of where the mega dealerships will have to change their philosophy. Are there mega dealerships that have good customer service, sure...but there are a TON that rely on their massive inventory pools to sell vehicles and meet quotas. There will be massive restructuring and mindset changing at that level.

    Inventories have tanked. My store for example, volume was down 2.3% last year over 2019. BUT my inventory level was down 71%. We typically stock 280-300 new/used. Right now, I have 85 combined.
     
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  9. 5.0 Hatch

    5.0 Hatch Active Member Established Member

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    Just when I thought vehicles couldn't get any more expensive... For the average buyer, what's that, around $170 per month more without the normal F150 incentives?
     
    Last edited: Feb 22, 2021
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  10. RedVenom48

    RedVenom48 Ghost Editor-in-Chief Premium Member Established Member Beer Money Bros.

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    Essentially, this means used car pricing will remain where it's at and deals and incentives for new cars will be nearly non existent. If you know a dealer that will give the homie hookup, then you'll be alright.

    @13COBRA I wonder how high volume dealers will be affected. Will this put a squeeze on the smaller dealer's inventory?

    Sounds like the day is here where MSRP is the price, and year-end closeout is where you'll save the most. Probably the leftovers that no one really wants.

    I also think you'll see more units produced closer to "loaded" than to base configuration, thus the average unit price will be higher.
     
  11. q6543

    q6543 Well-Known Member Established Member

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    Its gonna be a interesting few years in this cycle.
    1. Finally having pricing power over customers.
    2. Finding the limits before interest rates compromise sales.

    in a goldilocks scenario right now...

    Edit... google just said the avg interest rate is already over 5% in a new vehicle. WOW.
     
  12. Weather Man

    Weather Man Persistance Is A Bitch Premium Member Established Member Top Shelf Gentlemen

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    GMC dealers have been severely crippled with no inventory. Every dealer around here would instantly refill their pickup inventory, if they could.
     
  13. 13COBRA

    13COBRA Resident Ford Dealer Premium Member Established Member

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    Dealers already tend to order more 'loaded' versions than base version because the margins are significantly higher.

    That's probably nationwide. The average interest rate for new cars at my store in the last 365 days is 3.87%. Even 5% isn't a high interest rate though. I foresee rates getting back to 7-10% in the next few years. 1-3% is not sustainable long term.

    Same with Ford. The F-150 plant in Dearborn is running 30% capacity and the Kansas City one is at 50%. Super Duty plant is down to 50% and will go down.

    It's insane.
     
  14. IronSnake

    IronSnake Beers for the boys Established Member

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    I would also predict that used car pricing is going to go up on the average, what used to be cheap, car. And cars that are newer but used will hold closer to MSRP value longer, in lieu of tanking off the lot.

    Unless it's a Kia or Suzuki lol
     
  15. DAVESVT2000

    DAVESVT2000 Well-Known Member Established Member

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    @13COBRA how does this affect dealership swaps ?

    would dealers be more or less likely to trade with another dealer for a vehicle a customer wants ?

    I would think less likely to swap
     
  16. 13COBRA

    13COBRA Resident Ford Dealer Premium Member Established Member

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    100%. This shows auction prices. The obvious dip last year when COVID broke out. Then, since then it's been super strong. Kinda hard to read. But it's based off of 'yesterday' (5 days). So on 2/1/20 it was 100%. On 2/6/2020 the average auction price was up about .05% from 2/1. Then on 2/11 it was about the same as it was on 2/6.

    Since December, it's been trending up to about 101.5%. That doesn't mean that it's 101.5% of 2/1 of last year.... it means that it's up 1.5% in the last 5 days.

    For example (for rough numbers):

    MMR: $25,000 on 2/22/2021

    On 2/28/2021 it is $26,100. Meaning it went up 4.4%, or at 104.4% of MMR.

    On 3/5/2021 it is $26,300. Meaning it went up .7% from 2/28, meaning it will show on the graph as 100.7%.

    The graph shows that beginning in April, prices started jumping. Some people would look at the graph and think of it as equalizing, which it kinda did in August, but the lows aren't as low as the highs were high. I'd guess that if we look at the chart with YOY numbers, MMR is up about 8-9%.

    upload_2021-2-22_10-37-35.png


    Much more difficult to swap inventory. You either have to have something in stock that they really want or need, OR have a good relationship with that dealer. This is precisely the reason why you never want to burn a bridge in the car business. With a big or small dealer, it might just work out that some day you need them a lot more than they need you.
     
  17. RedVenom48

    RedVenom48 Ghost Editor-in-Chief Premium Member Established Member Beer Money Bros.

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    I was thinking more along the lines of most options checked than reasonably loaded. Every Lexus dealer I worked for had their cars optioned with nav and the 1st tier luxury package as standard order. I'm guessing that's going to be top level package now with stuff like air suspension etc as the outlier options.


    My dad was telling me about how bad it was back in the Reagan years when housing interest was in the double digits. Low to mid teens was considered a good rate... insane


    I'm surprised at the amount of new product our agency is getting from Ford at the moment. I'll be curious if we have to start adding more Silverado 2500/3500 and RAM 2500/3500 to meet our fleet needs if Ford cant/wont increase production in the coming fiscal years. Fleet manager will be a lot busier that's that's for sure!
     
  18. MFE

    MFE Well-Known Member Established Member

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    Don't count on incentives going away. It's one of the factories' key levers to pull when inventory is building up. Which it will when the unsustainable buying frenzy slows down. Stores I work with here in Phoenix are having best EVER months, month after month after month. It can't keep going. And the manufacturers can't just ramp production up and down quickly. So the dealers might not carry as much inventory, but the inventory will be stored somewhere, it isn't switching to just-in-time any time soon.
     
  19. 13COBRA

    13COBRA Resident Ford Dealer Premium Member Established Member

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    Fleet won't slow down any.

    Manufacturers love rebates. They can help control sales and that little extra push to maintain sales leads over their competitors.
     
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  20. IronSnake

    IronSnake Beers for the boys Established Member

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    Interesting. So in all actuality it pays off to have a car/truck from the last 2-3 years if it's from a good Brand that holds it's value. Depreciation is a bitch
     
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