Wait! Car dealers say they really need more inventory!

Last week I questioned whether auto dealers really needed more inventory on their lots. Now Automotive News reports on an “informal” survey in which car dealers pretty uniformly say, “Honest! We need more cars!” (Dealers: We want more cars!, Aug 23)

Automakers “have driven supplies too low,” [Carter] Myers, a former chairman of the National Automobile Dealers Association, said in his rich Southern drawl.

It’s a puzzling refrain heard across the industry. While most dealers and automakers struggle with soft sales, many dealers say they could sell many more vehicles if the automakers would produce them. A handful of hard-to-get vehicles, such as the Terrain, accounts for much of the problem. And many of the complaints are from General Motors Co., Ford Motor Co. and Chrysler Group dealers. Those automakers are determined to boost profits with lean inventory.

In an Automotive News informal online survey last week, 73 percent of the 244 dealer respondents, representing nearly all brands, reported they had too few new vehicles in inventory. And 77 percent of those respondents said they thought they had lost vehicle sales as a result.

Again part of the complaint has to do with hot cars. The article reports that the inventory of the GMC Terrain is only 22 days while the Chevy Equinox is at 21. These are a far cry from the 60 days one usually hears as ideal for the industry (although recall that the head of AutoNation thinks the industry should target 30 days).

Before we think about whether these ideas make sense, here are a couple of other points from the article:

• But Paul Benton, owner of Chevrolet-Cadillac of Goldsboro in North Carolina, thinks he would have sold 20 percent more new vehicles if he had had adequate inventory over the past several months. That equates to about five additional vehicles a month. Benton, whose store is about halfway between Raleigh and the Atlantic Ocean, said he does not have a single Equinox in stock. He said trucks are popular in his area, but he has only five Chevrolet Silverado Crew Cabs, compared with a typical 30 before the GM bankruptcy. Benton said Chevrolet needs lots of stock on the ground because it has many more models and product variations than Toyota, Honda and other import brands do. Pickups, for example, have multiple cab configurations, different engines, varying beds and other attributes that his customers want to experience firsthand. Benton said a healthy inventory for his store is about 80 days. He expects to sell 300 to 350 new vehicles this year.
• Myers said that, ironically, short supplies are not resulting in greater gross margins for him. He said customers are shopping further for deals. And dealers easily can fall short of goals in stepped bonus programs from manufacturers. Dealers often discount heavily as they pursue the monthly goals and then fail to reach the goals that trigger bonuses. “Gross margins are still very, very low,” Myers said.
• He said that with borrowing rates so low, he would rather pay a little more interest on floorplanning tomorrow than lose customers today. What’s more, Myers said, he worries that his dealerships are losing more customers than he knows. He said Internet shoppers who view his inventory and don’t see what they want online probably won’t even stop into the showroom.

So what to make of all this? First, I stand by my earlier statement: It is probably good for the industry as a whole for there to be less inventory and a days-supply basis there is a whole lot less.  Check out these numbers:

	Aug 1, 2010	Aug 1, 2008
Ford	56	82
Chevrolet	53	78
Toyota/Scion	50	53
Honda	49	42
Nissan	46	62
Hyundai	37	53
Dodge	44	101
Kia	24	41
GMC	72	117
Jeep	52	127

Source: Automotive News Data Center

The entire industry is doing a better job of managing inventory. Arguably that doesn’t matter as much as it once might have given that interest rates are so low but I don’t know that that’s a good reason to stock up. The industry is going through wholesale changes. US auto sales averaged nearly 17 million units a year from 2000-2007. A nontrivial part of those sales were financed with subprime loans, discounted leases, and home equity loans. It’s not clear that any of those drivers of sales are going to be booming anytime soon. Sales last year were less than 10.5 million. The industry as a whole is going to be smaller so dealers are going to be smaller so why should they be encouraged to load up on inventory and chase marginal sales?

What about the other claims that the dealers raise? I have to admit that the underlying complaint has some merit. It is hard to believe that a 60 day is right for all models, all markets, and all dealers. Still the specific issues they raise seem as much legacy issues from “old” Detroit that are still haunting US car makers. For one, American car makers have traditionally engaged in too much “badge engineering” which leads to a multitude of models that divide capacity too thinly and require excess inventory to support. Want a way to quickly expand production of the Chevy Terrain? Kill the GMC Equinox. The only real difference between them is that Equinox is worth a lot more in Scrabble. It seems that GM has rationalized its offerings at the brand level by closing Pontiac and Saturn (although it could have probably dropped GMC as well) but hasn’t gone far enough with regard to models. It will be interesting to see how GM manages product variety as it brings out new models.

As for the claim that margins are still low and that lean inventory effectively give customers an incentive to shop around even more, that seems to get back to the issue of how many dealers are needed. If you have too many dealers on the ground, it is too easy for customers to play one off against the other. A quick web search shows that Charlottesville, Va, is a town of a little more 40,000 people. It’s only an hour and a half from Richmond, which is about five time bigger. A dealer up in Richmond will almost always have an absolute higher number of cars even if it has far fewer days of inventory on hand. Is it surprising that a dealer down in Charlottesville has a hard time competing on anything besides price?

A final point, car makers like stair step incentive schemes in which dealers get progressively higher cash rewards for hitting higher and higher sales targets. The targets are usually on a monthly basis. Now obviously that’s going to be a problem if the car maker can’t get the dealer enough cars to sell. However, that is not a problem with inventory availability but with the incentive scheme.