How Car Dealers Can Avoid Bloated Year-End Inventory

This year’s sell-down season presents a few new potholes car dealers will need to avoid.

Sitting on too much of the wrong inventory is becoming increasingly costly. The National Automobile Dealers Assn. reports new-vehicle holding expenses are the fastest growing item on dealers’ financial statements – up 142% in 2019 vs. 2018. This is driven by the fact that new-car inventories are up compared with last year, while retail sales are beginning to slide.

What’s unique about this year’s sell-down season is that there are an unusually high number of model year ’18 vehicles still collecting dust on dealers’ lots, while a lower percentage of ’20 vehicles have come through.

“This is probably the biggest carry-over problem we’ve seen in the last several years,” said Mike Maroone, a former president of AutoNation Inc., who owns dealerships in Colorado and Florida. “It has been very painful.” 

What’s the best way to handle this situation if you’re a dealer representing a brand with an overabundance of current and prior model year vehicles? 

1. Watch your dealer days’ supply vs. your market days’ supply by model. Too often, dealers solely rely on their OEM partner to provide the necessary insights to manage their inventories.

However, OEMs don’t provide dealers with the critical reference of the actual market days’ supply; they only provide the dealer days’ supply. Dealers need to understand how far above or below they are compared with the market average. Imagine an investor trying to evaluate a portfolio performance without having the S&P 500 as a reference point? No way. Nor should dealers manage their sizeable capital investment without understanding their relative inventory position to the market average.

2. Don’t get too far in front of the model year sell-down. Dealers who are too eager to begin attacking the sell-down can find themselves absorbing the financial consequence of cutting gross margins to blow out inventory, which may very well be offset by factory incentives in the future. If you have clear visibility into an overstocked situation for the OEM on a specific model, take a breath and be patient for a likely factory incentive adjustment. Don’t be the only dealer in town sitting on mostly model-year ’20 vehicles with little to no rebates, while everybody else is enjoying bigger incentives and sales on the ’19 vehicles.

3. Be bullish on trucks and SUVs, skittish on sedans. Consumer demand continues to shift away from cars. I recently noticed a Hyundai dealer with a 555 days’ supply of 2019 Sonatas and 196 days’ supply of Elantras. Both metrics on those cars are well above the overall market average.

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New-car dealers who play the model sell-down game correctly with the right data insights and strategy can enjoy a profitable fall selling season. Those who don’t pay close attention are likely to hit one of those potholes and pay the price.

Brian Finkelmeyer develops new car selling tools and strategies for dealerships at vAuto, a Cox Automotive brand.