Franchised dealers are in a bit of pickle these days.
As Automotive News reported this week, new vehicle inventories have risen to their highest level since July 2017. The estimated tally of 4.2 million unsold vehicles is just 114,300 units shy of the industry’s inventory record set in 2004.
The inventory levels are tied to declining demand for new vehicles, a softening that owes, at least in part, to ever-higher new vehicle purchase prices. I’ve heard more than one dealer marvel at the number of 84-month new vehicle loans they’re now writing in their F&I offices.
This supply/demand imbalance has also lit up a floorplan problem. Not so long ago, when sales were growing, dealers were making money from their floorplan programs. Now, most dealers are writing four-, five-, and sometimes six-figure checks every month to cover floorplan interest expenses.
I spend the bulk of my time every day working with dealers to improve their used vehicle performance.
But lately, these conversations have included discussions about new vehicles, and how dealers might work their way out of the current pickle, or at least make it less problematic.
Here are three best practices I’ve gleaned from top-performing dealers who are proactively attacking the performance and profit slow-down in new vehicles:
1. Identify and address your aged inventory. Age management has been a growing discipline for top-performing dealers for some time. Many set performance benchmarks, such as no more than 15 percent or 20 percent of new vehicle inventory older than 90 days. I’m told that when dealers don’t pay close attention to new vehicle inventory age, as much as 40 percent of their vehicles qualify as “aged” or distressed units.
A key principle in new vehicle inventory age management aligns exactly with the way dealers manage age in used vehicles—once vehicles cross a specific time threshold, say 30, 45, 60, 75, 90 days or more, they tweak the vehicle’s price, positioning and promotion to speed its retail sale.
The absence of an age management strategy in new vehicles is at least one reason why, as the Automotive News article indicates, many dealers don’t know they’ve got an inventory and floorplan problem until they run into trouble finding parking spaces for their cars.
2. Stop making your situation worse. Once dealers begin managing their aged inventory, they can start asking why it’s there in the first place. Several dealers noted that force of habit and personal preferences, when ordering cars, approving vehicle allocations and making dealer trades, are primary root causes of aged inventory problems.
A general sales manager at a California Toyota dealership shared that he started paying closee attention to his aged inventory, he’d find multiple copies of the exact vehicle, often in striking colors like salsa red, that suggested someone played a hunch about a hot color/equipment combination that proved to be incorrect. “There’s a lot of ego in ordering that we’ve had to unwind,” the manager says.
Similarly, the vice president of operations at a 13-store group says he found had a “mind-boggling” number of vehicles that were nearly a year old and older when he focused on reducing aged inventory. He traced the problem to managers repeatedly ordering, and trading for, the wrong cars.
“There was no attention to it,” he says. “The managers knew they were cars that were ordered wrong and would never sell. So they’d just park them out back and let them get dusty and that was it. Some of them didn’t even have photos and weren’t online.”
Both of these dealers now take a much more circumspect approach to new vehicle stocking decisions. They’re using data to inform and configure their factory orders and dealer trades to bring in a larger share of vehicles the market deems desirable. And, when they’re forced to take inventory the data reveals as less than desirable, they more immediate steps to retail or trade away the vehicles before they become aged and costly to carry.
3. Push back with proof. When you’re using market data to optimize your new vehicle inventory, you know the cars that sell quickly and those that won’t. Dealers say this data is becoming more valuable when factory reps press them to add less-desirable vehicles to their inventories.
I liked how the 13-store group vice president puts it: “Documentation is negotiation on the OEM side, just like it is in retail sales,” he says. “If I want to keep my great relationships, I can’t just say, ‘no, I won’t take those cars.’ All my conversations are data-driven so I can say no, or not so many, and they can love me when they leave the room.”
If you take a step back, and view these best practices from a broader lens, they all amount to the same thing—dealers working harder and smarter to control what they can in their new car departments, and getting past the current new car pickle.