High Days' Supply Alert

What was expected to be a robust year has yet to materialize. Through April, only a few franchises are reporting strong results. And for the industry, sales are up fractionally, 3.1%, thanks to trucks.

What is happening though, presenting more of a concern, are rising new-vehicle inventory levels and a higher-than-desirable days' supply. This bodes well for the consumer, with incentives averaging $2,994, according to Autodata Corp.

But many dealers report the high incentives aren't driving traffic to the stores. We need to take a deeper look when we see rising inventories of vehicles that traditionally occupy popular sales positions.

All signs point to an economy that is growing. Economic reports highlight more job creations, increased productivity and the like. Even though fuel prices continue to climb, inflation appears to be in check. Dealers tell me fuel prices haven't affected sales at this point. There are a concerns though, which might have an impact on 2004 model-year sales.

With the economy heating up, the Fed is expected to raise interest rates. One of the top U.S. economists, who last week visited NCM for our quarterly staff meeting, predicts the Fed will raise interest rates in a series of one-quarter point increments beginning in the third quarter of this year. I agree with him.

One of the benefits of lower interest rates has been the ability of homeowners to refinance their mortgages at lower rates and often reduce the loan term and monthly payments, providing more disposable income for automotive purchases.

The other benefit we all know helped stimulate auto sales, and the economy in general, were the individual lines of credit secured by the equity in homes. Even though the country has been in a recession, low interest rates have minimized the impact. One of the questions going forward is the effect higher rates will have on this source of consumer cash.

The primary concern I have relative to dealer operations is the increased cost associated with the current higher-than-normal days' supply. It almost certainly will increase floor-plan costs before the year ends.

I strongly recommend taking a look at your total new-vehicle inventory and projected sales for the balance of the model year. Many of you were overly cautious in your 2003 model year-end planning. It costs you deals. Is this any reason to “throw caution to the wind” this year? I'm sure incentives will remain strong and potentially increase throughout the summer selling season.

I don't want to appear negative nor am I predicting the bottom is going to fall out. However I suggest that you install a series of new-vehicle inventory checks and balances to ensure a profitable year.

Begin by taking a look at your new-vehicle inventory days' supply, total availability by car and truck and model, today compared with the same date in 2003. Then look at your sales for the second and third quarters of 2003. Where would you be or what would your inventory level be if your 2004 sales equaled 2003? If you are forecasting an overall sales increase of 2%-3%, compute your third quarter ending inventory level.

We all know sales rates traditionally decrease late in the third quarter compared with the second quarter. So today is the time to start planning to ensure you are not putting yourself in a bind which will increase your floor-plan cost, advertising expense and more.

Good selling.

Tony Noland ([email protected]) is the president and CEO of NCM Associates, Inc.