COVID-19 and the New Game of Inventory Roulette

There’s an interesting game of roulette being played in the new-car business right now, with about half of the dealers betting on red and the other half betting on black. The wagered bet is how dealers should be handling new-vehicle inventory.

Earlier this month, many dealers became understandably unnerved by this pandemic and placed themselves on finance holds to halt any additional vehicles from being delivered. Meanwhile, OEMs tried to combat this fear by offering additional wholesale incentives or by providing deferred floor plan terms. A recent inventory analysis at vAuto uncovered that 60% fewer new vehicles were delivered to dealership lots the first week of April 2020 versus the same week a year ago. Clearly, the pandemic created a lot of pessimism at the inventory roulette wheel.

But I’ve spoken with more optimistic dealers this month who’ve expressed good reasoning for why they will continue to take new-vehicle inventory, when and where they can get it, despite the gloomy economic outlook.

Let’s take a closer look at the two differing perspectives on this topic and try to understand which group of dealers is making the wiser bet.

First, a look at days’ supply in February and March and a rough projection for April:

In March, sales volumes were off by 38%. Ouch. That drove the days’ supply numbers up by 26 days. And April is going to be worse. Our team is currently forecasting auto sales in the U.S. to be down 53% in April which is better news than the estimates from earlier in the month, which showed the industry down more than 70%.

The April sales forecast puts retail sales volume at 558,000 units for the month. If we apply this sales volume to the ending March inventories, we can see that the industry days’ supply will climb from 94 days to 148 days. That’s a significant increase. However, that equates to about a 5-month supply of inventory on dealer’s lots. Based on this math, it’s easy to understand why some dealers are betting on “red” or against taking additional new-vehicle inventory.

Now, let’s look at the reasons why the more bullish dealers continue to place their chips down on black – taking more inventory. Consider the following:

1. OEM production has essentially halted globally, and it will likely be 6 months before normal production and inventory volumes begin flowing again. What dealers have on their lots today is likely what they will have to sell from for the next 4–6 months. Based on the math above, most dealers will need what they have on the ground just to get through this downturn in manufacturing.
2. The auto industry is simply “too big to fail.” There are strong indications that the government will launch another “Cash for Clunkers”-type program to spur demand sometime this summer, once there is more certainty around the health crisis. Morgan Stanley auto analyst Adam Jonas is reporting the new program would be in the $10 billion range versus the 2009 “Cash for Clunkers,” which was $3 billion.
3. Unlike with used cars, new-car dealers have a motivated partner in their OEM to help drive demand. The domestic makes have already shown a willingness to be aggressive with programs, like 0% APR financing for 84 months. In March, average incentive spend was 10.5% of average transaction price – which is higher than in any of the past 5 years. According to the latest Cox Automotive 2020 COVID-19 Impact Study, one-third of shoppers are delaying their vehicle purchase; however, almost half of those could be spurred into action if they find the right deal.
4. Necessity vs. Emotional Purchases. Dealers tell me that about 50% of their new-car sales are “necessity” purchases – lease turn-ins, life-changing events, totaled vehicles, etc. There will continue to be “necessity” purchases – some of which are likely being postponed until summer.
5. The financial cost of holding new-vehicle inventory is quite low – as interest rates have plummeted.
6. Cash flow – new-car deliveries bring with them holdback, floor plan, ad assistance dollars, and pre-delivery inspection money for the technicians. In this moment where dealers are conscious about their cash on hand, new-car deliveries do create more cash.

This economic downturn is having a massive impact on consumer demand and their ability to buy new vehicles. As a consequence, dealer days’ supply at most stores has more than doubled since February, which has certainly raised some eyebrows and caution around the inventory roulette wheel.

However, with 2020 being an election year, there will be HUUUUGE political motivation to get the economy and the American consumer back on track. The potential Cash for Clunkers II program could drive nearly 4 million units of sales volume. The OEMs are going to be more concerned about their own cash flow and less focused on margins – which means bigger consumer incentives. All of these elements combined could create some big winners at the inventory roulette wheel.

Last week, a dealer friend from North Carolina told me, “Dealers are optimists by nature, and we always find a way to figure it out.”

If I were placing my bet at the new-vehicle inventory roulette wheel, I’d be betting with the optimists on black because I believe in three things: the American consumer’s resilience, American politicians’ willingness to spend money, and in the American car dealer’s ability to always figure it out.

Brian Finkelmeyer is senior director of new car strategies at vAuto, a Cox Automotive company. Watch Brian discuss his article on CBT News.