Low inventory, car dealers benefit from higher prices


Illustration by Michael ByersCar and driver

From the November 2021 edition of Car and driver.

Dennis Groom, a permanent home dad from Dexter, Michigan, thought he could look for a new car the same way he had done in the past: shop, take a few test drives, pick his favorite, and negotiate the lowest price. Then he actually went to a couple of vendors.

“Even if you see cars in the parking lots, they’re not actually there,” says Groom. Dealers park cars they can’t sell, vehicles that come from the factory without critical microchips so it looks like there’s inventory. Realizing these cars were only there for the show, “was a kick in the pants,” says Groom. “We weren’t able to go to a dealer and get what we wanted.” He couldn’t even find anyone willing to let him take a test drive. Out of desperation, he bought a 2022 Hyundai Tucson at sticker price without even sitting in one, simply because it would be at the dealership in two weeks and he needed a car.

The current shortage of new car inventories can be terrible for a whole range of people – salespeople on commission, auto workers who are temporarily laid off, suppliers dealing with temporary downtime for manufacturers, and of course customers – but that’s it certainly not ‘not terrible for a group: traders. Despite having little to sell, auto dealers made $ 42 million by July National Association of Automobile Dealers, from $ 36.7 million through July 2019, before the pandemic.

Scarcity tactics
The sparse inventory seen at this Ford dealer in California has become the norm across the country.

David Paul Morris / Bloomberg via Getty Images

“Not bad for car dealers is one possibility. Another is fantastic for car dealers, ”says Dan Hearsch, managing partner for automotive and industrial practices at Alix Partners. Dealers benefit in two ways: they can raise the price of new cars, often sell them without a test drive to people willing to pay a sticker price or more, and they get a boost from used car prices too. It’s such a sweet high for traders, Hearsch says, that once inventory levels return to normal, they’ll find it difficult to adjust whenever that happens. On a conference call this summer, Ford CEO Jim Farley said his company was determined to move more towards an order-based system and keep actual inventory levels lower than in the past. “I know we waste money on incentives,” he said.

More than a decade ago, when the bosses of the Big Three automakers were sitting in front of Congress asking for bailouts to stay afloat, this economic scenario would have seemed like a feverish dream. Back then, US automakers were prisoners of their own success. As they grew over the years, they added workers, gave them amazing health plans, built new manufacturing facilities, and opened dealerships across the country. That worked when sales were hot, but once the economy cooled, the industry had to drag itself out to pay all of its obligations. Car manufacturers often resort to generous discounts and incentive programs to keep things running smoothly. And that worked for a while, until everything collapsed in 2008. Eventually, domestic and international manufacturers had to rent parking spaces outside Detroit Airport and near ports in Los Angeles to hold the excess cars they built for customers who didn’t show up.

This economic situation has turned today. Recently, Jeremy Beaver, president of the Del Grande Dealer Group in San Jose, Calif., Examined a spreadsheet used to track inventory at the company, which owns 15 dealerships and typically stocks about 4,000 cars. “I’m looking at it right now and it’s crazy,” says Beaver. “We have 600 new cars. Cars come in and they leave almost immediately because people have already bought them.”

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And yes, Beaver says there are certainly advantages to being on the lucky side of the tug-of-war of supply and demand. But ultimately, the retailer group doesn’t want their customers to feel chiseled out. “Consumers shouldn’t have to pay the highest price available just because they are out of inventory,” he says. He hopes this time will mark the beginning of an industry shift that will make car buying a little more similar to other retail experiences, with a more modern approach that focuses on the guest experience and is made much easier by technology.

It’s easy to attribute the scarcity of car inventory to the scarcity of microchips, but Hearsch says it is more appropriate to cite a generalized “supply chain disruption” at this point. Even if the microchip shortage clears up by the end of the year – and there’s no guarantee of it – Hearsch says other kinks in the chain will keep manufacturers from resuming production at full speed for quite a while. There is labor shortage at factories and ports that unpack import cars, ongoing COVID problems and political upheaval in countries like Malaysia where some parts are manufactured.

“Not bad for car dealers is one way of putting it. Great for car dealers is another.” —Dan Hearsch, Alix Partners

And even if automakers could ramp up production and start building cars faster than ever, it will take a long time for the dealership to fill up. Newly produced cars will first fill ongoing customer orders, then orders from car rental companies and corporate fleet customers, and finally, excess cars will go to dealerships to correct the imbalance between supply and demand. That will “absolutely” last until the end of 2022 if there are no more disruptions, says Hearsch, and until 2023 if it remains rocky.

So make it easy for yourself to buy a car without having to test drive it. Colby Buswell, a gym owner from Pinckney, Michigan, ordered a Jeep Wrangler 4xe without even sitting in one. Motivated to get better fuel economy than his current Wrangler can offer, Buswell started looking for Jeep’s plug-in hybrid online but couldn’t find one. “I would have had to drive 750 miles to find one on many test drives,” says Buswell. “It made it a little less fun.” The price was not negotiated, although he was able to negotiate the interest rate down a bit and is now waiting the promised eight to twelve weeks for his new Jeep. “I’m in no hurry,” he says. “I can wait.”

Hearsch predicts that consumers who can wait will be rewarded in the future. American buyers who pre-order will be the ones to get incentives and discounts, while people who need cars right now will have to deal with what’s on the lot and pay the price of the sticker. At some point the situation would calm down, he promised. “At some point the cyclical nature of the industry will kick in and demand will fall, as will prices,” he says. “But it will take a long time to get out of the pent-up demand that we currently have.”

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