At the most fundamental level, dealerships have four basic functions: order vehicles for inventory, market vehicles, sell vehicles, and service vehicles. We are keenly aware of the marketing, selling, and servicing component of the franchise dealer world, but we rarely consider, or are concerned about, the inventory component — until now.
Dealers are running alarmingly low on inventory without verifiable relief in sight. The outlook for all dealers, large and small, is bleak with a continued shortage of vehicles, potentially through the end of the year. Dealers that are normally able to stock 1,000 units may have only 200-300 on their lot. Reportedly, even the largest dealer groups have been unable to maintain adequate inventory levels. Automotive News recently reported that AutoNation is working with a 29-day supply and Lithia is coping with a 41-day supply rather than a typical 60-plus day supply.
Vehicles have got more bells and whistles today that rely on microprocessors — more commonly referred to as semiconductor chips. These chips are used to manage the engine, transmission, steering, brakes, infotainment systems — in short, almost everything. Today’s cars have as many as 100-plus chips per vehicle. At the beginning of the pandemic, virtually all of the vehicle manufacturers closed their factories for up to two months, and dealerships reduced orders, underestimating the need for new cars. The automotive market rebounded quickly, but automakers found that chip suppliers had taken on additional contracts for other technology products that were booming in sales due to stay-at-home orders, which worsened the chip shortage on the automotive side. Automotive manufacturers have always relied upon on companies that also supply chips for consumer electronics, making them more vulnerable to supply chain disruptions. For example, in 2019 auto manufacturers built 93 million vehicles worldwide versus 1.4 billion smartphones.
Vehicle manufacturers are currently facing a $60 billion global chip shortage. This has led to manufacturers saving their available chips for their most profitable models. Factories have been shut down that build their less-profitable vehicles. They are producing cars without electrical components and parking them until the parts are available and even eliminating the availability of certain options.
According to consulting firm AlixPartners, the ongoing semiconductor chip shortage could cost the global automotive industry as much as $110 billion in revenue this year alone. That forecast is up by 81.5% from an initial forecast of $60.6 billion, which the New York–based firm released in late January.
Following the factory and scattered dealership shutdowns, manufacturers helped kickstart sales by offering strong incentives on vehicles. Highly motivated dealers took advantage of surprisingly strong consumer demand following the shutdowns, aided by the manufacturer incentives, and the industry recovered much quicker than experts anticipated.
Rental Car Fleets are Shrinking
The lack of vehicle production also affects the rental car companies. The rental car giants typically order about two million new cars, trucks, and SUVs every year. With the four largest rental car groups maintaining fleets in the six to seven figure range, rental car companies combine to be the largest purchasers of new vehicles. Rental car companies on average keep a vehicle in rental service for about 13 months or to 40,000 miles. The disposal of the rental vehicles can occur several different ways: an OEM repurchase that sends them to the auction as program cars, they are directly sent to auction, or they can use them to stock their own retail lots.
Rental car companies are unable to get the new cars they need, so they are holding on to their vehicles much longer and have had to rely on purchasing late model used vehicles at auction. The a-typical addition of rental car companies to the already red hot used car market has increased the average auction price dramatically. Dealers hoping to replace their vanishing new vehicle sales with used sales now have to compete with Enterprise, Hertz, Avis, and Budget for that inventory.
Opening the Road to New Opportunities
Dealers now find themselves caught in the middle of idle manufacturing facilities and a booming buyer-filled economy. They have no choice but to wait on production of new vehicles from manufacturers. However, dealers can and should use this as an opportunity to focus on enhancing existing areas of profit and finding new untapped sources of revenue.
Existing areas of opportunity include the used vehicle and parts and service departments. Focusing on used car inventory and sales allows dealerships to capitalize on every trade-in opportunity and dealers can aggressively market for used inventory trades. Consider supercharging of fixed-ops for an increased service absorption percentage by shifting some of the advertising budget from new inventory sales campaigns to parts and service department campaigns. Keep the dealership brand awareness at the forefront and bring customers in the service department doors. An optimized service absorption percentage is the key to dealership profitability.
A great source of untapped revenue for dealerships is right at their fingertips, and best of all, it doesn’t require the sale of a vehicle to produce income — it’s their existing customer data. Existing customer data can be used to promote the sale of vehicles, make outright purchase offers, market service department specials, and capture missed vehicle service contract sales before the third-party call centers have time to act on them and literally take the dealer’s opportunity away.
Tom Abraham is VP of national sales at APC.