A Sign of New Vehicle Inventory Imbalances

July 24, 2017

I had an old rule of thumb when I was a dealer: You could get a bead on new vehicle inventory imbalances by the number of full-page ads in the Chicago Tribune on Sundays..

If the paper’s automotive section was chock-full of full-pagers, you could reasonably bet that dealers were sitting on, and therefore more desperate to sell, more vehicles than the local market apparently wanted or needed.

The converse was also true: If the section was relatively light on full-page ads, you could reasonably believe that dealer inventories, and local market demand, seemed in balance.

I thought of this old rule after a colleague says he’s noticed the Tribune’s published larger automotive sections the past few weekends than he’s seen in a long time. He says the ads came mostly from General Motors and Chrysler Dodge Jeep dealers.

The advertising affirms what many of us know: Dealers have a lot of new cars on their hands. An Automotive News story last week notes that the currently nearly 4.2 million new vehicles in dealer inventories is the highest it’s been in 13 years, despite record-setting incentives. The article says dealers currently have a 74-day supply of new vehicles—a tally that might be even higher if not for the proliferation of factory-encouraged rental car programs.

None of this is news to many dealers, particularly those who are renting space to house the additional inventory or doubling-down on their full-page newspaper advertising.

But here’s what is new: The problem’s not universal. Some dealers are blessed to have OEM partners who do a better job of aligning supply and demand. Their inventories aren’t nearly as heavy as their less-efficient competitors. Meanwhile, there are sharp inventory size disparities among dealers who share less market-efficient factory partners—differences that indicate some dealers are doing a better job managing current inventory conditions.

These dealers tend to do the following things to minimize the profitability drag that results when you’re sitting on too many vehicles:

  • Align prices to market conditions. Today, you have the option to apply competitive Market Days Supply, Days in Inventory and online effectiveness metrics to price your new vehicles. Dealers who attune their prices to local market conditions—rather than their own standardized pricing scheme—tend to attract more online and showroom shoppers.
  • Set and stick to a new vehicle age policy. Some dealers care about the age of their new vehicle inventory; others don’t. I’ve seen age policies might limit the number of 90-day and older new vehicles to 10 percent of a dealer’s inventory. Typically, dealers who manage new vehicle age stand the best chance of consistently earning floorplan credits and accompanying profits.
  • Don’t make the problem worse. As my colleague, Brian Finkelmeyer, director of business development for vAuto’s Conquest system, says: “If you or your market don’t need the car, you’re not doing yourself any favors by trading for it.” The same is true with your factory orders. The key here, of course, is knowing the cars and combinations that sell the best for you, and your competitors, in your market as you make stocking decisions.

Perhaps the best news about the growth in new vehicle inventories is that it doesn’t have to continue unabated. The key question is whether factories will do the right thing and trim production, or carry on the current path and make an increasingly difficult situation for their dealers even worse.