How long would you wait to get exactly the car you wanted? Some luxury car makers are trying to convince Americans that good things come to those who wait and they should opt to order a custom vehicle instead of taking one off the lot (Lean (Inventory) Times for Luxury Cars, Wall Street Journal, Dec 8).
In the old auto industry business model, dealers stocked a lot of different cars and trucks in a wide array of colors and option combinations to serve customers who wanted to drive in, find a new vehicle, make the trade, and drive out more or less on the same day.
After the economic crisis left dealer lots full of unsold inventory, luxury-car makers and dealers now are doing things differently. They want to keep the dealers’ supplies of cars and crossovers as lean as possible, and persuade more customers to custom order their vehicles—or work with dealers to find a vehicle with the color and option combinations they want in the “pipeline” that extends all the way to BMW’s factories in Germany (or South Carolina).
“They want us to sell vehicles before they arrive,” says Frank Ursomarso, chairman of Union Park Automotive Group, which owns a collection of dealerships in Wilmington, Del. To encourage customers to order, BMW offers certain colors and option combinations only on vehicles that are ordered for a customer—not on vehicles a dealer orders to sit on the lot.
BMW isn’t at a 100% built-to-order system, but about half of the BMW X5 models sold now are spoken for before they hit the showroom floor, a company spokesman says.
At one level, firms are exploiting the increased discipline car makers have shown since the end of the recession. Firms had curtailed production during the downturn and the ramped up more slowly than demand during the recovery. That leaves little inventory on the lot and added incentive to order. This obvious works to the advantage of the manufacturers and dealers since cars don’t sit long before the customer turns over the cash and drives away. On top of that, customers are on average paying more. The article reports that discounts off of MSRP are down significantly for BMW, Mercedes and Audi. I suspect that this applies to both those ordering cars and those buying off the lot. Having only a handful of vehicles on hand has to strengthen the bargaining position of the dealers.
I wonder how this will affect consumers down the road (so to speak). This potentially has firms building a more diverse set of cars. That’s good if the customers value that customization. It also means that there will be a more idiosyncratic mix of vehicles in the resale market. That raises the question of whether a seller of a “unique” vehicle is likely to easily match up with a buyer who has the same tastes. That could ultimately suppress prices in the used vehicle markets. (A similar thing applies in home renovations. As a Northwestern loyalist, I might redo my kitchen in purple. I might like that a lot; a buyer might not.)
The flip side, of course, is that since buyers get the “perfect” car, they hold on to them longer. Fewer vehicles then hit the resale market, propping up used prices. That, however, may be bad for manufacturers if it means fewer people coming back for another new car.