June 25, 2021

Gp Delivers1

The excellent automotive artisans1

Car dealer lots could stay emptier long term

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.

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.