Low inventory, auto dealers take advantage of higher prices

Illustration by Michael ByersCar and driver

Extract from the November 2021 issue of Car and driver.

Dennis Groom, a stay-at-home dad from Dexter, Mich., Thought he could search for a new car the same way he had in the past: shop around, take a few test drives, pick out his favorite car, and negotiate the price. the lowest. Then he went to a few dealerships.

“Even if you see cars on the grounds, they’re not really there,” Groom says. Dealers park cars they can’t sell, vehicles shipped from the factory without critical microchips, to make it look like there is inventory. Realizing that these cars were just for the show “was a kick in the pants,” Groom says. “We weren’t going to be able to go to a dealership and get what we wanted.” He couldn’t even find anyone willing to let him take a test drive. In desperation, he bought a 2022 Hyundai Tucson at the sticker price without even sitting in one, simply because he was about to arrive at the dealership in two weeks and needed some help. ‘a car.

The current lack of new car inventory can be devastating for a multitude of people – sales staff who depend on commissions, autoworkers facing temporary layoffs, suppliers facing temporary shutdowns from manufacturers and, well. Sure, the customers – but certainly not that great for one group: the dealers. Although they have virtually nothing to sell, auto dealers have made $ 42 million through July, according to the National Association of Automobile Dealers, compared to $ 36.7 million until July 2019, before the pandemic.

scarcity tactic
Sparse inventory, as seen at this Ford dealership in California, has become the norm across the country.

David Paul Morris / Bloomberg via Getty Images

“Not too bad for auto dealers, that’s one way of putting it. Fantastic for auto dealers is another,” says Dan Hearsch, managing partner of automotive and industry practices at Alix Partners. Dealers benefit in two ways: They can increase the price of new cars, often selling them without a test drive to people willing to pay the sticker price or more, and they also benefit from used car prices. This is such a high level for dealers, Hearsch says, that it will be difficult for them to readjust when inventory returns to normal levels at any time. This summer, in a second quarter earnings call, Ford CEO Jim Farley said his company is committed to moving more towards an order-based system and keeping actual inventory more. lower than in the past. “I know we are wasting money on incentives,” he said.

Over a decade ago, when executives from the Big Three automakers sat down in front of Congress to demand that the bailout money stay afloat, this economic scenario would have seemed like a feverish dream. At the time, American automakers were trapped in their own success. As they grew over the years, they added workers, offered them amazing healthcare plans, built new manufacturing plants, and opened dealerships across the country. It worked when sales were hot, but as soon as the economy cooled, the industry had to contort itself to pay all of its obligations. Automakers often resorted to generous discounts and incentive programs to keep things going. And it worked for a while too, until it all fell apart in 2008. Eventually, domestic and international manufacturers had to rent parking lots outside of Detroit Airport and close to the ports of Detroit. Los Angeles to store surplus cars they had built for customers. who did not show up.

This economic situation has changed today. Recently, Jeremy Beaver, president of the Del Grande Dealer Group in San Jose, Calif., Reviewed an inventory tracking spreadsheet at the company, which has 15 dealerships and normally has around 4,000 cars in stock. “I’m looking at him right now, and it’s crazy,” Beaver said. “We have 600 new cars. The cars are coming and they are leaving almost immediately because people have already bought them.”

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And yes, Beaver says that being on the happy side of the tug-of-war between supply and demand certainly has its perks. But ultimately, the dealer group doesn’t want their customers to feel ripped off. “Consumers shouldn’t have to pay the highest price available just because there is no stock,” he says. He hopes this period will mark the start of an industry transition that will make car buying a bit more like other retail experiences, with a more modern approach that focuses on the customer experience and is much easier with technology.

It’s easy to attribute the microchip shortage to the automotive chip shortage, but Hearsch says it’s more appropriate to cite a generic “supply chain disruption” at this point. Even if the microchip shortage subsides by the end of the year – and there is no guarantee that it will – Hearsch says other issues in the chain will prevent manufacturers from resuming production at full speed for some time. There is a labor shortage at factories and ports where import cars are unpacked, lingering COVID issues and political upheaval in countries like Malaysia where some parts are made.

“Not too bad for auto dealers, that’s one way of putting it. Fantastic for auto dealers is another.” —Dan Hearsch, Alix Partners

And while automakers could ramp up production and start making cars faster than ever before, it will be a long time before the dealer lots start to fill up. Newly produced cars will fill orders from current customers first, then orders from car rental companies and corporate fleet customers, and finally surplus cars will flow to dealerships to start bridging the imbalance between l ‘Offer and demand. It will take “absolutely” until the end of 2022 if there are no more disruptions, says Hearsch, and until 2023 if things remain difficult.

So make yourself comfortable by buying a car without trying it. Colby Buswell, owner of a gym in Pinckney, Michigan, ordered a 4xe Jeep Wrangler without even sitting in one. Motivated to get better fuel economy than what his current Wrangler offers him, Buswell started looking for Jeep’s plug-in hybrid online, but couldn’t find one. “I should have walked 750 miles to find one on testing ground,” Buswell said. “It made things a little less fun.” There was no negotiation on the price, although he was able to haggle the interest rate a bit, and now he’s waiting the promised eight to 12 weeks for his new Jeep to arrive. “I’m in no rush,” he said. “I can wait.”

Hearsch predicts that consumers who can wait will be rewarded in the future. US buyers who order in advance will be the ones who can get incentives and discounts, while people who need cars immediately will have to deal with what’s on the lot and pay the sticker price. . Ultimately, the situation will calm down, he promised. “At some point, the cyclical nature of the industry will kick in and demand will go down, along with prices,” he says. “But it’s going to take a long time to come out of the pent-up demand we have now.”

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