Dealer lots could stay emptier long term

When General Motors launched its "employee discount for everyone" sale in the spring of 2005, its U.S. dealerships had nearly 1.2 million vehicles crammed onto their lots.

This winter, the automaker has only about one-third that much inventory. Many pickups and SUVs have buyers within days of arrival, or even before they come off the delivery truck.

It's no coincidence that GM expects to earn about the same amount this year — at least $10 billion, it projected this month — as it lost in 2005. Executives at GM and other automakers, after pandemic-induced factory disruptions showed what tight supplies can do for the bottom line, aim to keep dealer lots sparser long term.

"I suspect that you're going to see a permanent change in our industry. I do not think that we'll ever get back to the high, high levels of inventory and slower turn," Sonic Automotive President Jeff Dyke told analysts and investors last week. "We're all pushing for that, including the manufacturers."

Of course, there's a big difference between dealers starving for supply and avoiding the chronic overproduction that pushed the Detroit 3 into destructive price-slashing cycles. Automakers say shortages of hot products will eventually get worked out and that they have the ability to keep stocks trimmer than in the past, thanks to better data and more efficient labor contracts that don't force them to keep plants running regardless of need.

But it might require some adjustment for dealers, who fear losing business to a rival down the street if they don't have the exact color and configuration a customer wants.

According to Automotive News' 2021 Dealer Outlook Survey of 183 dealership executives in January, most dealers — 59 percent of respondents — expect inventory to meet demand by the end of June, but 25 percent say that won't happen until at least next year. More than half of those surveyed said the lower stock has increased their new- and used-vehicle profit margins, but 40 percent doubt the staying power of those profits after inventories normalize.

Automakers and dealers "have a taste of what happens with margins and profitability when supply is constrained, and I believe that is likely to factor into long-term production planning," said Jonathan Smoke, Cox Automotive's chief economist.

Despite growing profits, dealers still depend on selling a certain number of new vehicles, said Rick Ford, CEO of RFJ Auto Partners Holdings in Plano, Texas, a group with 28 dealerships in several states.

"We need that new-car volume for the whole stratosphere to be successful in dealerships," he said. In a "perfect world," Ford said, manufacturers would produce "just enough or just slightly less than what the public demand is."

Having 20 percent less inventory than in the past seems to be the sweet spot for most dealers, said Glenn Mercer, a consultant who wrote a study for the National Automobile Dealers Association called "The Dealership of Tomorrow."

"A small reduction of inventory will make a significant difference in [a dealer's] bottom line," Mercer said.

GM had a 49-day U.S. supply in January, down from 73 days a year earlier, according to Morgan Stanley estimates, while Ford Motor Co. dropped from 107 days' worth to 70, and Stellantis went from 96 to 70.That's a stark contrast to the way the Detroit 3 have historically operated. For decades their dealers were so overstuffed that even hot products often needed generous discounts, such as the employee-pricing frenzy that GM started in 2005.

A race for share meant they never significantly reset production volume, even as Japanese automakers ran with much lower inventory levels and vehicle combination options. Meanwhile, heavy legacy cost burdens dragged down their finances even more, contributing to GM's loss of $88 billion from 2005 until its 2009 bankruptcy wiped much of the slate clean.

"We've got this great base to start from right now, which is we don't have enough inventory. If we build it the right way, we don't have to get back to those levels," said Tyson Jominy, vice president of data and analytics at J.D. Power. "The real win is producing the right configurations that consumers want."

Automakers should be able to exercise more discipline post-pandemic, in part because of enhanced technology that shows which vehicles are in high demand, Mercer said.

Steve Hill, vice president of Chevrolet, said stock levels don't need to be as high as before the pandemic with the help of tools such as VIN View, vehicle tracking software that GM began using last year.

"Excess inventory — whether it's sitting on the dealers' books or sitting on our books — in the enterprise, it's waste. You've got to have the right car, right place, right time," Hill said. "The closer we can match demand and supply and eliminate that waste, that's a competitive advantage for the whole — not just for GM, for the dealers enterprise-wide."

Too often, said Chevy dealer Mike Bowsher, vehicles languished for months.

"I'd rather be in the environment I'm in now where stuff sells as fast as it does," said Bowsher, owner of Carl Black Automotive Group in Kennesaw, Ga. "And I think GM has the data to make that happen."

Last year, Dave Kelleher, owner of David Dodge-Chrysler-Jeep-Ram in Glen Mills, Pa., sold a record number of vehicles before they reached the showroom. Customers were comfortable with waiting a few weeks for their vehicles, and the dealership saved money on floorplan interest, he said. He doesn't want to go back to selling 190 vehicles a month while 700 linger.

"It's valuable capital that's being bled out there," Kelleher said.

Last week, Kelleher had 238 new vehicles on hand, which he said is too few to run his business long term. His ideal range is 350 to 450.

The U.S. is unlikely to adopt the made-to-order model that's used in Europe, analysts said. Such a model may be more efficient for automakers, but consumers expect instant gratification.

Judy Wheeler, Nissan division vice president of sales and regional operations in the U.S., said Nissan plans to match supply to demand so the automaker won't have to rely on incentives to move inventory.

"However, in the U.S., customers still generally prefer buying from dealer inventory, rather than placing an order and waiting weeks for it to arrive," she said. "We don't see that changing dramatically over the near term."

Dealers — scarred from shortages caused by the pandemic, GM's 2019 UAW strike and the global microchip shortage — may fear a day when supply is too depleted, said Jeff Schuster, president of global forecasting at LMC Automotive.

"You don't want to be caught without vehicles customers want when they want them," he said.

Still, the industry has learned that it can run with tighter supply, so asking customers to wait patiently for their desired vehicle could become common, Schuster said.

For the industry to maintain slimmer stocks, every automaker would need to follow suit, Smoke said. "If you don't have all players behaving that way, eventually, from economic theory, it becomes unsustainable, but we'll have to see how things progress."

Melissa Burden, Vince Bond Jr., Amy Wilson and Urvaksh Karkaria contributed to this report.