Chicago Automobile Trade Association

As inventories tighten, margin getting smaller for error in new-car operations

July 24, 2020
The U.S. economy and the country’s consumers are returning to some semblance of normalcy, but the new-car business is likely to be anything but normal for the foreseeable future, with dealers facing a rare situation in many markets: Consumer demand is higher than supply.
Pure retail sales (non-fleet) increased 63% in May from April’s sales volume, according to Cox Automotive. The most optimistic analysts could not have predicted that sales would rebound so quickly in such a gloomy economic environment.
The increase in retail sales has made an immediate impact on new-vehicle inventories. Total inventory across the nation dropped 667,000 units from the beginning of May to the beginning of June, representing a 20% decline, Cox reported.
The obvious concerns are the implications of the more than 60 days absent of vehicle production, coupled with the fact that many of the auto plants reopened only gradually.
Not only are automakers facing the challenges of mitigating the spread of the coronavirus in their manufacturing operations, they also face enormous supply chain challenges. It likely will take three months to 12 months before new-car manufacturing returns to regular production levels.
That leaves dealers with a challenge: How to manage their new-car inventory when the margin for error just got smaller? Among the key opportunities:
Turn to earn
For a dealership that normally gets 100 units in its allocation, ordering a few of the wrong combinations is not a big deal. But if the allocation now is only 50 units, ordering mistakes must be minimized. J.D Power reported that 88% of combinations across the industry sell 50 units or less total on an annual basis.
These "unicorn" combinations generate only 25% of the sales and often bring with them longer days on lot and lower grosses. Dealers need to focus on stocking the 12% of the combinations that make up 75% of the sales.

Conventional new-car inventory management involves reacting to aged inventory.  While that remains fundamentally important, it is even more important that dealers have a clear understanding of "distressed inventory" on the first day rather than on day 300.
It involves taking proactive steps to minimize potential for financial pain. All OEM’s allocate production on a "turn-to-earn" basis. The OEM allocates the most to the dealers with the highest sales and lowest availability. Each straggler unit that hangs around punishes dealers’ ability to earn more of the "good stuff."
This is especially true for hot-selling products. Having a game plan on the first day for both aged units and high market days’ supply configurations means dealers can earn a higher percentage share of the OEM’s constrained monthly allocation.
Win the battle of the online showrooms 
Today’s consumer more than ever is spending less time inside car dealerships and more time on dealer websites.
There are countless examples of online showrooms that are missing hundreds of thousands of dollars in rebates they should be leveraging to move inventory. In one case, $359,000 worth of missing incentives was missing online. With new cars being shopped like commodities, dealers cannot afford to be missing factory incentives on their vehicle detail pages at the same time their competition promotes them.
There is a silver lining in this dark COVID-19 cloud: It’s forcing dealers to pay closer attention than ever before to their new-car inventory. Those dealers who are most effective at managing their inventories will be well positioned to grow their market share in this contracted new-car market.
The good habits of dealerships — taking the time to ensure they are stocking the fast movers rather than the unicorns, proactively addressing inventory problems on the first day, and making sure their online showrooms are buttoned up — will pay handsome dividends for a long time to come.


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