National daysrsquo supply of vehicles 68 in May

National days’ supply of vehicles 68 in May.

Potential Lean Car Dealer Stocks Defy Customer Wants

“Consumers in America have shown an absolute fascination with inventory,” says auto-industry veteran David Kain.

In some automotive people’s wouldn’t-it-be-nice vision of the industry, car dealerships would stock much fewer vehicles, and, instead, customers would order them to their exacting standards, then wait for the finished product.

But that’s far from the world of today. Some skeptical forecasters and dealers don’t see it happening any time soon.

For all the talk of potentially lean dealer stocks in the future, current inventory levels are inflated. The days’ supply for U.S. light vehicles was a hefty 68 in May, and that was the lowest of the year; the high-water mark for 2017 was January’s 85 days’ supply.

Current national inventory is 600,000 units above the optimum level for current market conditions, according to WardsAuto estimates.

Automakers may cut production or goose sales with incentives to reduce inventory levels in coming months, but to some extent consumers like to see lots of cars on dealer lots. They’re drawn to the wide selection. It is a big part of how vehicles are bought and sold in the U.S.

“Consumers in America have shown an absolute fascination with inventory,” David Kain, president of consultancy Kain Automotive and part-owner of a family dealership near Lexington, KY, tells WardsAuto. “They like to be able to walk the lots and touch and feel the vehicles.”

Automotive analyst and researcher Glenn Mercer says in the 30 years he’s been in the business he has heard much about build-to-order – in which dealership customers spec-out what they want, automakers build them fast and the finished product shows up at the dealership ASAP.   

“In the build-to-order world, dealers would truly have a ‘showroom’ with not a lot of inventory hanging around,” Mercer tells WardsAuto. “This seems like a very attractive prediction.”

But it isn’t even close to materializing.

“We have software tools for customers to configure vehicles online, and factories are more flexible. Yet, we’ve seen the build-to-order forecasts reliably fail over the last three decades,” Mercer says.

Consequently, “inventories have not been declining in any significant way,” he says. “It is hard to track the number of cars that are built to order, but it seems to be well below 5% in the U.S., and not trending upward.

“That seems in conflict with the position that the customer wants to be in control, wants more choice and wants a car built to exacting specifications.”

However dealers, aided by technology, are getting better at swapping vehicles among each other to fulfill customer requests, he says. “It’s kind of a virtual build to order. We’re not going to build your car to order, but we can find it for you.”

Dealers and automakers also are getting better at ordering from the pipeline of manufactured products. “You enter the specs and find the requested vehicle in the order flow,” he says.

Mercer foresees a slight decline in dealer inventories in coming years, “but not by much,” he says. “We don’t see a big change to not having much inventory around.”

Veteran dealer Wes Lutz says low interest rates have made the need for leaner inventory less urgent for dealers. 

“We’re all borrowing at less than 2%,” says Lutz, the owner of Extreme Dodge Chrysler Jeep Ram in Jackson, MI, and the National Automobile Dealers Assn.’s 2018 chairman-designate.

“Dealers aren’t paying a lot of attention to their interest payments right now because they are so low,” he says. “Wages, advertising and inventory interest rates once were the three biggest dealership expenses. Today, interest rates aren’t a big deal, especially if you’re getting a credit from the factory.”

Lutz, a dealer for 40 years, recalls when build-to-order talk was a hot topic. The lure was that it would allow dealers to slash inventory levels.

“At one time Chrysler was hell-bent on build to order,” he tells WardsAuto. “We talked a lot about it. Not so much anymore.”

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