Do car dealers really need more inventory?

We haven’t written about car dealers and inventory in a while, so let’s check this out:

For those who prefer to read, the corresponding print story is “Dealers Beg for Cars as Automakers’ New Discipline Curbs Sales” (Aug 10, Bloomberg) and it contains this information:

Ford had 349,100 vehicles of supply at the end of July, 30 percent less than two years earlier, while GM’s inventory dropped 43 percent to 424,000 and Chrysler’s declined 53 percent to 191,000, according to the companies.

“Buyers have always been able to find 10 versions of the same vehicle they want,” said Jeff Schuster, J.D. Power’s executive director of forecasting. “Now we’re in an environment that they’re probably not going to get the exact one they want and they’re going to pay more because the incentives aren’t there.”

So the tone of this article, starting with the headline, strikes me as wrong. Dealers have always been short of popular cars. Almost by definition, that’s how you know they’re popular. Even in the darkest, most-mismanaged days of Detroit, there were some models that were selling well. Thus a shortage of Equinoxes really has little to do with GM’s bankruptcy or a change in GM’s management philosophy. Rather it reflects the reality that it is hard to change vehicle production quickly. Step back, say, six years and you would have seen the similar complaints from Chevy dealers regarding whatever SUV was selling well at the time.

What is different is how GM et al are handling “lesser” vehicles. Not everything is going to be as in high demand as the Equinox. In the past, GM would have continued to pump out vehicles and let them pile up on dealers’ lots (and on dealers’ books). That would eventually lead to some sweet lease offering or diverting a bunch of cars to fleet sales. From the customer’s perspective, if you were actually one of the few people who really wanted to own, say, a Cobalt, you would have both had a lot of choice and a gotten a good deal. That’s not happening anymore.  As the quote above notes, you will now have more limited choice and pay more. So on the one hand, the customer gets a worse deal. On the other, the old deal was not sustainable and society as a whole is better off by having it go away. (Also, I should add that our Cobalt buyer may not be that much worse off over the long run. Yes, she paid more but with fewer Cobalts being dumped on the market, the resale value should hold up better.)

Now what about dealers? Are they really worse off? I have to think that they on the whole are better off selling fewer cars but turning inventory more quickly. As I said, the old system was unsustainable and involved lots of cars sitting around. Now there are fewer new cars on lots and the ones that are there sell at (or at least near) full price. On top of that, fewer over-the-top deals on new cars means more of a market for used cars and dealerships don’t have to share that money with the manufacturer. That sounds like a fair trade. Arguably, the one counterpoint is that a dealership may have overhead (primarily service capacity) that is based on selling X new cars a year. If the new reality is selling Y new cars, that overhead could be a problem if Y is sufficiently small. However, there is a counterargument here as well: Fewer new car sales means that at least for a while people are going to driving their current ride longer. That should mean more spending on repairs and maintenance.

Thus it seems all good for Detroit.  In my opinion, the real test will be how GM reacts when the market shifts. The Equinox is doing well now it but its sales will cool quickly if, say, gas jumps to $5 a gallon. I’m not saying that this is likely to happen between now and the end of the year but at some point gas prices will spike. We’ll know Detroit has really changed if they manage to shift gears quickly when such a thing happens.