Margin for Error Just Got Smaller in New-Car Operations

Car dealers should stock the 12% of vehicle combinations that make up 75% of the sales.

Brian Finkelmeyer

June 29, 2020

4 Min Read
cars at dealership lot
Dealers should understandi “distressed inventory” on the first day rather than on day 300.Getty Images

The U.S. consumer and economy are returning to some semblance of normalcy, but the new-car business is likely to be anything but normal for the foreseeable future.

Dealers are facing a rare situation in many markets: Consumer demand is higher than supply. 

Online shopping metrics are off the charts across various Cox Automotive properties, such as Autotrader and Kelley Blue Book, as many shoppers are in need of some “retail therapy” and excited to take advantage of compelling incentive offers. 

According to Cox Automotive’s latest analysis of Bureau of Economic Analysis and Wards Intelligence data, pure retail sales (non-fleet) in May increased 63% from April’s sales volume.

The most optimistic analysts could not have predicted that sales would rebound so quickly in such a gloomy economic environment. 

This increase in retail sales has made an immediate impact on new-vehicle inventories. According to Cox Automotive’s analysis of Motor Intelligence data, total inventory across the nation dropped 667,000 units from the beginning of May to the beginning of June, representing a 20% decline.

The obvious concerns are the implications of the more than 60 days of no vehicle production, coupled with the fact that many of the auto plants are reopening 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. 

An OEM contact recently told me they must look at shared parts across various model lines and make tough decisions about building some models at the expense of others.

It will likely take anywhere from three to 12 months before new-car manufacturing returns to regular production levels.

This leaves dealers with a challenge: How to manage their new-car inventory when the margin for error just got smaller?

I see key opportunities:

Turn to Earn

If you normally get 100 units in your allocation and order a few of the wrong combinations no big deal.

But if your allocation is now only 50 units, you better minimize ordering mistakes.  J.D Power reported that 88% of combinations across the industry sell 50 or less units total on an annual basis. 

These “unicorn” combinations only generate 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 this 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.

This 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. 

At vAuto, we have seen countless examples where online showrooms are missing hundreds of thousands of dollars in rebates they should be leveraging to move inventory. 

In one case, we saw $359,000 worth of missing incentives online. With new cars being shopped like commodities, dealers cannot afford to be missing factory incentives on their vehicle detail pages while 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.

Brian Finkelmeyer (2).png

Brian Finkelmeyer (2)_0

These good habits of taking the time to ensure you are stocking the fast movers rather than the unicorns, proactively addressing inventory problems on the first day, and making sure your online showroom is buttoned up, will pay handsome dividends for a long time to come. (Brian Finkelmeyer, left)

Brian FInkelmeyer is senior director-New Car Solutions at vAuto, a Cox Automotive company.

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