Floorplanning remains a hot-button issue

GMC has told dealers it would do them a favor by covering those costs. But dealers who have been making big money from factory credits don't see it that way.

June 07, 2021 12:00 AM

GMC plans to limit dealerships’ floorplan costs for the 2024 Hummer SUV, shown here, and 2022 Hummer pickup.

GMC has told dealers it would do them a favor by covering floorplanning costs for the highly anticipated and high-priced Hummer electric pickup.

But some dealers don't see the offer as helpful. Floorplanning — a frequent sore spot for retailers in the past — has become an extra source of profits in recent years, and they worry GMC could hurt their bottom lines by taking it off their books.

"If we lose flooring credit, that could be a net loss," said Howard Drake, dealer principal at Casa de Cadillac, Buick-GMC Sherman Oaks and Subaru Sherman Oaks in Southern California.

A profitable cost

GMC has told dealers it will cover floorplanning expenses for the upcoming Hummer EV. But some dealers don’t see that as a good thing. Here’s why.

Dealers take out floorplan loans to cover the cost of carrying inventory on their lots.
To encourage dealers to carry more inventory, automakers often provide credits toward the floorplan loans.
Because of low interest rates and fast turn for many vehicles, the credits have often been larger than the interest expenses in recent years, creating a new source of profits for dealers.
If the factory takes over responsibility for floorplanning vehicles, it would negatively affect dealers’ finances during times when floorplanning is profitable, though they could benefit if higher interest rates and inventory levels make the costs outweigh the credits again.

Dealers use floorplan loans to finance inventory while it sits on their lot. Low interest rates and credits that automakers provide as incentives turned floorplanning from an expense into a profit center that has helped compensate for shrinking margins elsewhere in the retail business. And the faster a vehicle sells off the lot, the more profitable the factory credit linked to it becomes.

Industrywide, floorplanning swung from a $96-per-vehicle cost on average in 2019 to a $140- per-vehicle profit in 2020, according to the National Automobile Dealers Association. AutoNation Inc., the largest dealership group in the U.S., made $23 million on floorplanning in the first quarter of 2021, versus a $1.4 million gain a year earlier and a loss of $11.2 million in the first quarter of 2019.

Amid that shift, some automakers have been rethinking the need to provide such generous credits, which were intended to make taking on additional inventory more palatable for dealers.

Though there might be little immediate benefit, GMC's plan to take responsibility for Hummer floorplanning could be beneficial long term, said Mike Bowsher, owner of Carl Black Automotive Group in Kennesaw, Ga. Floorplanning could become a big cost again after interest rates rebound and inventory increases.

"The dealers are getting upside now, but we also have seen the other side when it's not that case, where your floorplan bills are just eating your lunch," Bowsher said.

With the Hummer pickup, which will start low-volume production this fall, dealers won't have an abundance of inventory waiting for buyers and racking up interest, said Justin Gasman, finance director at McCaddon Cadillac-Buick-GMC, in Boulder, Colo. The early Hummer shipments will fulfill customer reservations, which filled up within 10 minutes of the Hummer's October unveiling.

"The dealers don't need help alleviating interest that will never come to fruition because the car isn't going to sit there long enough for it to happen," Gasman said. "The dealers are not afraid to take the car because they can't afford the interest. The factory is trying to put that together because they don't want to pay the dealers."

Duncan Aldred, vice president of global Buick-GMC, told Automotive News in April that GMC plans to limit, and in many cases eliminate, dealerships' floorplan costs for the 2022 Hummer pickup and 2024 Hummer SUV long term to help protect retailers' profits and simplify the sales process. The brand is requiring dealers who want to sell and service Hummers to invest about $200,000 on chargers and other upgrades.

Even though Hummers will arrive pre-sold, dealers will need some time to prepare them for delivery and finalize everything with the buyer. GMC will cover the floorplan cost until the vehicle leaves dealers' lots, for a maximum of 30 days, Aldred said.

"The dealer will be whole," he said in April. "It's more precise than now where basically we give dealers a lump sum, and if it's not enough, that's unlucky, and if it's too much, it's lucky."

Once Hummer dealers deliver the reserved vehicles and regular production ramps up, GMC will implement a more traditional vehicle distribution process, and the floorplan coverage periods will vary, Aldred said.

Today's floorplan credit and inventory management standards industrywide can be "a bit clumsy," he added.

"Sometimes a dealer may get more than they need, sometimes they may get way less than they need."

Jorge Gutierrez, corporate strategist at Bert Ogden Auto Group in Texas, expects the Hummer to sell quickly. Floorplanning credits have generated significant gains across his stores' usual lineup. "We move the inventory really fast and we get the credit. [The credits] not only offset the floorplan expense, they exceed it," he said.

Eliminating those credits would hurt the bottom line, but the extent of the fallout has yet to be seen.

"As far as how many and how much, that's where it becomes a question," Gutierrez said. "Are we talking about five Hummers a month? That probably wouldn't be a big deal. If we're talking about 50 Hummers a month, like we used to sell back in the day, we're definitely going to hurt."