U.S. retailers are missing out on $15 billion a year in profit because they have the wrong mix of vehicles on their lots, according to an estimate by J.D. Power.
The problem: Dealers are still relying on what is essentially a guessing game to know which models and trim packages to stock.
But the issue goes deeper than dealer decision-making, said Mathew Racho, J.D. Power managing director of configuration analytics: It starts with manufacturers that are also struggling to know what models and trims will sell in which market, and making guesses early in the pipeline about what to build.
The result is a drag on retail profits, Racho told an industry audience here Friday at J.D. Power's annual Auto Summit.
"You have models in inventory that aren't selling," he said. "So it becomes an inventory financing expense and winds up generating additional marketing costs and discounting."
Power has created a venture called Helix that is now working with an automaker, which Racho declined to identify, to implement a more reliable approach to building vehicles and creating retail inventories based on specific sales data from around the country.
Power is compiling details from 125 million vehicle transactions from 2008 to the present, analyzing results across 250 data points and from local market to local market.
The complex problem, Racho said, is that while a Chevrolet dealer might know that he wants to stock more Silverados in a particular trim, the dealership can't know what specific options and colors are selling at the most profitable levels.
Rachor calculated that there are approximately 667,000 different model trim packages on the market before factoring in vehicle color options.
"The dealer is sorting through huge numbers of variables without really knowing which models are going to sell fastest and most profitably," Racho said after his presentation.
Doug Betts, president of J.D. Power's Automotive Division, added that the inventory guessing game is further complicated by unique local market conditions. Betts shared with the audience a real-world example of two 2020 Silverados retailing at two different prices, one in Dallas and the other in Phoenix.
One of the trim packages sold at a dealership net profit of $1,172 after barely three weeks in inventory, the other at a net loss of $1,186 after sitting on the lot for 85 days.
"The complexity is enormous," Betts said. "It's a huge cost that nobody's figured out because they don't think they can do anything about it."