The New Car Inventory Derby of 2021

Every spring I look forward to the first weekend in May to watch The Kentucky Derby. In this year’s race, Bob Baffert set a record by winning his 7th trophy with the horse Medina Spirit who beat Mandaloun by a ¼ length. It was the closest finish at the Derby since 2005.

The official outcome of the race is still under review, as Baffert was accused of trying to gain an edge with the use of a banned substance. Every advantage counts in horse racing where the prize is so big and the margin of victory so small.

This summer, the new car business is beginning to look a lot like a high stakes horse race, but it’s no longer a race to the customer, it’s a race for inventory.

The supply and demand curve in the new car business has been completely flipped upside down. Demand for new cars is now significantly stronger than supply. We’ve never seen anything like this before in an industry that’s generally swimming in inventory. The microchip shortage has compounded the inventory challenges which began last year when nearly 3M units of production were lost during the Covid factory shutdowns.

Cox Automotive reports the industry current Days Supply of new cars is at 37 days, which is down 70% vs. a year ago. In terms of raw inventory, some industry observers believe this more constrained environment may be the new normal and OEMs are unlikely to return to the days of high incentives and high days supply.

Dealers desperately need inventory and manufactures reward inventory to the “fastest horses” who have the highest retail sales coupled with the lowest inventory availability/fastest turn. Dealers who optimize this equation earn a larger percentage of their manufacturer’s limited production.

In January if you were a Chevy Dealer with an average Days’ on lot of 62 days (based on vAuto data) you were an average Chevy Dealer. Today the average has dropped to 50 days. The speed of the race is only getting faster and if you’re not keeping pace with the fastest horses, you’re losing out on production.

While I would never advocate “cheating the system” to gain a competitive edge like Bob Baffert has been accused, I would encourage Dealers to focus on these three inventory management tactics to maximize your monthly allocation and gain an edge on your competition.

1. Any Aged New Vehicle Older than 90 days needs to be addressed immediately. Recently I was visiting with a Mazda Dealer who had 4 identical CX-9’s all over 120 days. SRP counts were over 700, VDP counts were less than 3. Plenty of Demand, but no retail success. I mentioned to the GM, “you realize these 4 units are absolutely punishing your ability to earn more CX-9’s right?” The manager went back to the basics of lowering the price off MSRP, updating his merchandising, and running digital promotion. All 4 vehicles sold in less than 15 days and the Dealer’s CX-9 average days on lot has dropped from 44 to 14. He’ll be glad he made these adjustments when the July CX-9 production allocation takes place.
2. Don’t become too intoxicated with these hefty new car grosses – What I’ve witnessed in this current inventory constrained environment is many Dealers pricing 100% of their inventory at 100% of MSRP. And no doubt, on hot product there is no reason to discount. But if you’ve got a less than desirable color/option combination you may end up costing yourself factory allocation if you sit on it for too long. Don’t assume that every new vehicle in stock is going to bring with it maximum gross. The financial benefits of moving a unit, picking up the F&I, gaining a potential trade, and lowering your availability for earning more allocation is far greater than holding out for full sticker.
3. Report vehicles sold “early and often” – The month end sales close typically account for 20-25% of all retail sales being reported to the OEM’s. This practice of “cleaning up RDR’s on the last day of the month” can have an impact on allocations. Dealers really have no idea what day of the month the factory might run a supplemental allocation. It’s never been more critical to be timely reporting vehicles sold. Reporting incoming units sold is even better.

The current inventory challenges we face in the new car business are not likely to be resolved anytime soon. Ford recently told their Dealers not to expect any improvement in inventory until after Q3.

In the meantime, Dealers who pay closest attention to their new vehicle aging, who proactively discount and promote slow moving combinations, and show urgency around reporting vehicles sold will be in the best position to maximize their allocation.

Bob Baffert was quoted after winning the Preakness a few years ago that his key to winning was simple: “Show up with the Best Horse”. Dealers need to focus on being the best horse in their race for inventory.

Brian Finkelmeyer is senior director of new car solutions at Cox Automotive.