For many dealers, the new car business is increasingly all about volume. This reality doesn’t hold for every new vehicle — particularly in cross-over and truck segments that continue to be sought-after purchases by consumers and yield respectable grosses. But overall, the business is less about front-end gross profit, and more about volume, than it has ever been in the past.
This reality owes to several factors. The Internet has brought ever-higher levels of price availability and transparency to the market, which increases price competition and compresses front-end margins. At the same time, manufacturers have steadily narrowed the margin between dealer invoice and the Manufacturer’s Suggested Retail Price (MSRP). According to Kelley Blue Book, the invoice-to-MSRP margin has shrunk 60 percent since 1990.
In addition, factory-to-dealer bonus programs drive an emphasis on volume over gross. You can see signs of this trend at the end of nearly every month, when dealers will effectively give away even their best-grossing units to get their bonus checks. But here’s what I find curious: Even as the new vehicle market moves ever closer to being a low-to-nomargin business where volume matters most, dealers have been slow to change the way they stock, manage and price their new car inventories to capture a greater share of sales.
I’ve come to this conclusion after analyzing new vehicle pricing and inventory management practices for dealers across the country. I undertook the study to find areas where dealers could do a better job, from an operational perspective, at meeting the need to increase sales volumes while maximizing gross profit on the vehicles that deserve it. Here’s what I found:
1. Aged Units
While I understand that dealers often have to take in less-desirable vehicles the factory configured and produced, I was struck by two statistics: First, the average time in inventory runs near 100 days. Second, I found that, on average, 40 percent of a dealer’s new vehicle inventory is over 90 days — well past the point where floorplan expense typically becomes a factor. These findings appear to reflect a longheld belief that inventory age doesn’t matter in new vehicles. But I would disagree, and suggest that dealers could improve the profitability and velocity of new vehicle sales if inventory age became a higher operational priority.
2. Inventory Turns
After seeing the prevalence of 90-day new vehicles, I wasn’t terribly surprised to find that dealers typically turn their new vehicle inventories only five or six times a year. I dug a little deeper and segmented the data by make. I was curious to see if some dealers might suffer from slower-moving inventory because of their factory partners. But what I found told a different story: For every brand, there are dealers who turn their inventory more than twice as often as their peers. This finding suggests that while some dealers fully embrace the importance of sales velocity and volume, others lag far behind.
3. Pricing Practices
My findings around inventory age and turn rates led me to look closer at pricing practices. My premise: Just as in used vehicles, proper pricing in new vehicles is essential to attract buyers and sell more cars in today’s market. I found multiple instances where dealers had a sizable share of their new vehicle inventories (in some cases as high as 50 percent) online without a price (Note: I counted listings “call for details” or MSRP-only pricing, given these are often defaults for vehicles without a dealer-set price). Upon investigation, I found the absence of a market-compelling price owed mostly to inattention. Time and again, I saw that dealers who priced their new vehicles at the beginning of the month were more likely to have cars online without a price than those who pay more frequent attention to new vehicle pricing, particularly as fresh units from dealer trades or the factory arrive.
In addition to inconsistent pricing, I found wide variation in the strategies dealers apply when they do price new vehicles. Some are far more attuned to competing vehicles and their markets than others. These dealers are more likely to include incentives in their pricing strategies to differentiate from the competition. In addition, some of these dealers monitor online activity (e.g., the number of vehicle details page (VDP) views) as part of their pricing strategies to account for current and emerging demand.
Overall, my analysis suggests a lot of opportunity for dealers to tighten up their new vehicle inventory management and pricing practices. Those who do will inevitably capture more market share and sales volume than those who stay the current course.