Restocking dealer lots a tough task for industry

Editor's note: An earlier version of this report stated that Southeast Toyota Distributors distributes Lexus vehicles, as well as Toyota vehicles. It distributes only Toyota models. It has been corrected.

Ed Sheehy, the longtime president of Southeast Toyota Distributors, has every right to yell it from the rooftops:

He told you so.

Relatively strong retail sales and continued production hiccups from COVID-19 have pushed new-vehicle inventories nationwide down to just 2.3 million vehicles, according to figures tabulated by Cox Automotive and confirmed by the Automotive News Data Center. It's the lowest nationwide inventory level since November 2011.

So why are inventories continuing to fall if sales haven't fully returned and factories have reopened? It turns out that many of those factories aren't running at a pre-COVID-19 pace all the time.

Collectively, 2.3 million new vehicles represents a 62-day supply based on the July selling rate, according to Cox. But as dealers across the nation will attest, when it comes to the supply of certain popular models, such as the Toyota Tacoma, Kia Telluride and Hyundai Palisade, the stocks available to sell are depleted and likely costing sales as a result — just as Sheehy predicted at the end of March.

"Please, do not turn down your allocations. I implore you to accept everything you have earned because the day will come in the not-too-distant future when you will want every one of these vehicles and more," Sheehy prophetically warned his dealer customers in a video as auto plants and dealerships were shuttering.

Though his warning could have been made for most brands, Sheehy's advice looks especially prescient now for the Toyota and Lexus dealers who are his direct customers. According to Cox, Toyota supplanted Subaru this month for the tightest inventory levels in the industry among mass-market brands, at just 34 days' supply, compared with Subaru's 39 days' supply. Among luxury brands, Lexus was lowest, with just 35 days' supply.

The inventory figures cited by Cox are in real time and differ from the snapshot that Automotive News publishes each month. Most automakers no longer release their monthly or quarterly inventory figures.

Most automakers and suppliers are struggling to keep workers healthy and lines running at speed.
Executives from Ford Motor Co. and General Motors warned this month that absenteeism was an issue in their plants and that production had not yet returned to pre-COVID-19 levels. BMW and Honda have both retrained some staff to fill in for absent workers and keep assembly lines running, while Kia said supplier constraints were holding up output of the popular Telluride crossover, according to a report last week by Bloomberg.

Nissan said it also had shortages in some models and trims, including the Rogue crossover and Frontier pickup. Mercedes-Benz told Automotive News it was "currently facing some limitations regarding new-car inventory, particularly on certain models such as the GLE." The German luxury maker said it was working to minimize the impact on customers and dealers.

At Toyota Motor North America, "We have good days and not-so-good days," said Randy Pflughaupt, group vice president of supply chain management. While each of Toyota's plants is unique, "in certain instances, our plants or our supplier partners may have challenges due to attendance," Pflughaupt explained. "If team members were potentially exposed to someone who tested positive for COVID-19, they're required to self- quarantine for 14 days. Any attendance challenges could impact our production."

At the same point in 2019, Toyota and its distributors and dealers had 458,123 vehicles in inventory, which at the time was a still-tight 55-day supply of Toyota and Lexus vehicles. At the beginning of this month, it had just 266,131 unsold vehicles available, a 42 percent drop.

A spokesman for Toyota Motor North America confirmed that all of its production plants are working overtime right now.

Inventory struggles are in no way only caused by slowed production, said Michelle Krebs, executive analyst at Autotrader.

While inventory levels in August are usually tighter because of model-year changeovers, the COVID-19- related production shutdowns have delayed the rollout of new model-year vehicles.

According to Cox, only 0.5 percent of current inventory are 2021 models, compared with 9 percent of inventory for 2020 models at the same point last year.

"Sales have been stronger than we anticipated, and the consumer has been amazingly resilient — at least those who have jobs and money," Krebs said. "If you look at the price segmentation, you can see where people are hurting."

According to Cox, small vehicles that cost less than $20,000 had the most ample supply levels in the industry, including subcompact cars and subcompact crossovers. On the opposite end of the supply spectrum, midsize trucks such as the Tacoma, Chevrolet Colorado and GMC Canyon were most under pressure.

Tightening inventory levels and continued consumer demand have led to incredibly strong profits for dealers with vehicles to sell. The lack of inventory has some consumers placing deposits on vehicles still en route from the factory and paying sticker price or above, depending on the model.

Not only does that mean strong dealer margins on the sale, but the dealer gets to pocket the floorplanning subsidy as well for every vehicle that turns quickly.

AutoNation Inc.'s new-vehicle sales were down 16 percent in July, and that was "clearly impacted by the availability of product," Joseph Lower, CFO of the nation's largest new- vehicle retailer, said last week during a J.P. Morgan investors conference. "Inventory is tight. It is limiting sales," he said.

But you don't have to be as big as AutoNation to see what's going on.

"Supply and demand has finally come to dealer world," said Don Hicks, dealer principal of Shortline Auto Group in Aurora, Colo. Hicks' Buick-GMC store normally carries 250 to 300 new vehicles on its 8.1-acre lot in suburban Denver, "but right now, I've got a grand total of 20 trucks and 39 Buicks. We've had to park them sideways on our lot to make it look full."

Hicks said the sparse inventory has his customers putting down deposits on vehicles still on the way, allowing him to command much higher margin on those vehicles. At one point, Hicks said, his staff even started calling other dealers in the region who were still listing their inventories online with discounts and offering to buy them outright.

"We told them they could even keep the holdbacks — just let us buy their trucks for what they were advertising," he said. "I think it finally opened their eyes."

So what should dealers do now? Sheehy has an idea.

"Our advice to dealers ... is to take full advantage of the market that's out there," he said last week.

"We have lost ground to reclaim, and we intend to focus aggressively on maximizing retail business through year end."

Melissa Burden, Urvaksh Karkaria and Bloomberg contributed to this report.