With few cars to sell, where do ad dollars go?

There are two schools of thought on how dealerships should approach advertising in a time of low inventory.

One, said Sariah Heaton, marketing director for Jerry Seiner Dealerships in Salt Lake City, is to pull back on spending while dealerships have so few cars to sell.

"A lot of dealerships are really, really slashing their budgets down because the demand is there either way," she said, "and we are subscribing to that for the most part."

The second: Keep a foot on the pedal and stay top of mind with consumers through brand awareness messaging until vehicle supply normalizes.

For a second year, dealership marketers are evaluating their advertising strategies in a challenging sales environment. But unlike last year, the point isn't to contain costs to survive showroom and factory closures and plunging demand. Instead, profitability is setting records, and demand for new models is so hot that vehicles are selling before they're even built — a byproduct of a microchip shortage that has contributed to the decline of more than 1.8 million vehicles from dealer inventories in the first half of 2021, according to Cox Automotive data.

Some retailers are responding by scaling back advertising budgets until inventory recovers, while others are maintaining spending at least at 2020 levels — but moving money out of new-vehicle campaigns and into other areas, such as used vehicles, fixed operations and "why buy" messages, several dealership marketing staffers and vendors told Automotive News.

Colin Carrasquillo, digital marketing manager for Nielsen Automotive Group in East Hanover, N.J., has not cut his group's advertising budgets since the height of the pandemic last year. In some cases, he said, budgets actually increased this year, despite the inventory shortage.

"We've definitely lost deals based upon not having a specific model or trim level that someone's looking for," Carrasquillo said, "but if you do have it and you know you can sell it, it's definitely important to be out there."

The chip shortage that has crimped new-vehicle production is not going away anytime soon. Stellantis CEO Carlos Tavares told the Automotive Press Association last week that he suspects computer chips will remain scarce easily into 2022. On Thursday, July 22, Intel CEO Pat Gelsinger said supply should improve in the second half of this year but may take two more years to fully catch up.

Through May this year, dealerships' advertising expenses are above year-earlier levels, according to the National Automobile Dealers Association's average dealership financial profiles. Dealerships spent an average of $204,580 on advertising through May, the most recent month available, up 13 percent from $180,950 a year earlier, according to NADA.

But that spending is also more efficient: $530 per new vehicle retailed through May, down 21 percent from $667 a year earlier. Data through May 2019 was not immediately available.

"You don't need to market when you don't have as many cars and there's an automatic demand coming from the consumer," Lithia Motors Inc. CEO Bryan DeBoer told Automotive News last week.

DeBoer said Lithia spent 4.9 percent of its gross profit last year on advertising and marketing but only 3.7 percent so far this year. In the second quarter, it was a bit lower, at 3.5 percent, he said.

"We have been able to be pretty constructive in managing that cost and still grow the business," DeBoer said.

It's unlikely that many dealerships are spending at 2019, pre-pandemic levels, several dealership marketing managers and providers said, since some spending that was turned off during the pandemic never restarted. Some retailers used the pandemic pause to reexamine the effectiveness of their advertising strategies and say they have stayed lean because they found ways to get better results at less cost.

Increased profitability is one reason some dealerships may be opting to temporarily rein in marketing spending, said Diana Lee, CEO of Constellation Agency, which provides automotive marketing services.

"It's the hottest in terms of gross margin that I've ever seen, that the dealer's ever seen, and so that's why there's a pullback in advertising in terms of new-car and used-car sales," Lee said.

The chip shortage has inventory "super low, and demand is super high," she added, "and so they don't feel like they have to advertise because they can get sticker or more for every vehicle that's on the ground."

At Jerry Seiner Dealerships in Utah, Heaton said she cut marketing spending at its General Motors dealerships by 25 to 30 percent since January because new-vehicle supply is so constrained. That means fewer ads via TV, radio and direct mail and more digital messages for fixed ops and used vehicles.

"We were planning on doing a little more broadcast, a little bit more cable, a little bit more of those extras," she said, "and it doesn't make sense when you don't have the inventory."

Yet experts caution dealerships not to pull back now, calling the current challenge the result of a supply chain issue, not a cash-flow issue.

"We're not in an economic situation to cause a contraction," said Cory Mosley, principal of automotive consultancy Mosley Automotive in Richmond, Va. "And I would argue that unless a dealership only has a financial interest in new-car sales, stepping off the gas — when you probably have more cash in the bank than ever — in terms of trying to acquire customers in different ways probably isn't the greatest idea."

Market share is an important consideration for how much to budget for marketing, said Lauren Donalson, senior director of national accounts for dealership marketing provider PureCars.

"If we can pivot dollars to work for you more effectively, perfect. ... If that means that your overall ad spend reduces, and you're still crushing your objectives and not losing market share, great," she said. "That means that your ad cost per unit sold has effectively gone down, and more [profits are] in the dealers' pockets."

Bobby Sight, vice president of Rob Sight Ford in Kansas City, Mo., said his store's marketing budget has stayed mostly consistent since last year. His goal is to keep the store's order banks full so that vehicles turn quickly, giving the dealership the ability to increase its allocation from Ford Motor Co.

During the pandemic, Sight said he turned his attention to the service department, an area he hadn't spent much to promote in the past beyond direct mailers. He said he has continued digital marketing for service in part because some customers might want to keep older vehicles running longer rather than buy while retail prices are high.

"Just because you don't have inventory on the ground doesn't mean there aren't other areas in the dealership that you need to market towards," Sight said. "Those other areas, I think, also keep you relevant from the sales perspective because you always want to keep your dealership name in front. You never want to go dark."

Staying in front of shoppers throughout the car-buying process is important, even while inventory is low, because it could take awhile to restart the advertising pipeline when vehicle supply returns, said Nick Brunotte, digital solutions director at DHG Dealerships.

Some marketing vendors say sales offers and incentives will always have a place, especially as inventory levels normalize. But some of the changes adopted during the pandemic and chip shortage may stick, such as pitches to buy customers' used vehicles.

"It's oriented towards filling their inventory at a lower cost of what they would do at auction," Donalson said. "Now that dealers' eyes have been opened to the increased profits that they see by deploying this type of messaging, they'll continue to pursue it."

Melissa Burden contributed to this report.