Best Practices to Turn New Car Inventory Challenges into Opportunity

A milestone moment in new vehicle inventories on dealer lots occurred in late summer 2022.

For the first time in the calendar year, the days supply of new vehicles available at dealerships was higher than it had been the previous year. Cox Automotive reported the days supply of new vehicles at dealerships ran 37 days, up from 29 days in July 2021. At first blush, one might consider this good news—a sign that new vehicle production might be picking up, and dealers might finally start to see their inventories, and retail sales, climbing back to more-normal levels.

But that’s not necessarily what it looks like at dealerships. Depending on the franchise brand, some dealers say they have a more consistent pipeline of incoming cars, but the number of cars on the ground is anemic.

“We’re starting the weekend with nine cars on the ground, and normally we’d have 600,” the general manager of a Los Angeles-based Honda dealership shared in early August 2022. “It’s definitely a bit of a challenge.”

In a press release, Cox Automotive senior economist Charlie Chesbrough sums the situation this way:  

“(The July data) marks the first time in 2022 that the new-vehicle supply has been higher compared with the same week last year. But this is not due to a big jump in inventory recently, but rather an indication of how bad it was last year. Overall, new-vehicle inventory remains essentially unchanged from what it has been, and production is not catching up to demand yet.”

Cox Automotive notes the days supply of available new vehicles has been anemic for nearly two years. In July 2020, the days supply of new vehicles was 66, compared to a more-normal days supply of 88 days in July 2019. In terms of actual vehicles, dealers were carrying 1.09 million new vehicles in July 2022, compared to 3.69 million in July 2019.

Such is the nature of the new vehicle business at franchised dealers. The shortage of new vehicle inventory has crimped retail sales volumes because dealers simply don’t have the vehicles to satisfy demand. The shortage has prompted some brand-loyal customers to switch to other brands where vehicles have been easier to find and purchase. The shortage has also pushed the average retail listing price for a new vehicle higher than ever. In July 2022, the average listing price was $46,440, marking yet another high point in the escalation of new vehicle prices since the COVID-19 pandemic.

But the good news is that while dealers wish they had more new vehicles to sell, they’ve also gained in experience in optimizing the outcomes for their new vehicle departments. The following represent best practices we’ve gleaned to help dealers make every new vehicle count at the time of sale and beyond:

Aim for a 70 percent pre-sale rate. The guidance comes from Brian Finkelmeyer, senior director of new car solutions for Cox Automotive. “Dealers need to think about their new car operations like airlines,” Finkelmeyer says. “Airlines try to pre-sell every seat, and dealers should take a similar approach.” He suggests dealers aim to pre-sell 70 percent of their allocated inventory—a standard that ensures dealers satisfy at least some of the current retail demand and one that drives their ability to turn inventory as fast as possible to earn future allocations. “One thing that hasn’t changed in the inventory-constrained environment is the way factories award inventory to dealers based on their lowest days to sell and sales volume rates,” Finkelmeyer says.

Operate more efficiently. In an environment where inventory levels are more efficient, retail demand is strong and dealers can pre-sell new vehicles, Finkelmeyer points to two areas where dealers might achieve a greater level of operational efficiency for their new vehicle department.

The first relates to sales output per employee. Top-performing dealers have been able to sell as many, if not more, new vehicles with smaller sales teams. Digital retailing tools enable such efficiency as does the imbalance in available supply and consumer demand. Finkelmeyer suggests that dealers should achieve a sales-per-employee ratio of 20 vehicles. The figure would represent an efficiency and cost improvement above the current national average ratio of 16 vehicles, as reported by the National Automobile Dealers Association (NADA).

A second area of efficiency relates to advertising expense per new vehicle. NADA data shows the average ad cost per new vehicle increased from $591 in 2020 to $601 in 2021. In sum, dealers spent more money to generate demand and interest at a time when demand outstrips the available supply of new vehicles. Finkelmeyer says there’s an opportunity for dealers reduce new vehicle advertising expense by doing a better job attributing digital ad spending to actual new vehicle sales.

Know your new car trade-in connection. Used vehicle departments have long relied on trade-ins that arrive with new vehicle sales. In today’s environment, fewer new vehicle sales mean fewer trade-ins, which has spurred dealers to diversify how they acquire used vehicles. But there’s an opportunity for dealers who can understand the quality/type of trade-ins they get from customers who purchase specific new vehicle models, Finkelmeyer advises. “If you know that a certain model and combination produces a high-value trade-in, and it’s got decent retail sales volume, it can make sense to grow your share of sales of the new vehicle to help your used car department,” he says.

Mind the level of new vehicle mark-ups. Cox Automotive reports that the new vehicles have been selling, on average, for more than their manufacturer’s suggested retail price (MSRP) through July of 2022. The question for dealers is this: How much above MSRP can you reasonably go and avoid the risk of blow-back from customers? Dealers who use new car pricing tools can identify prevailing retail asking prices in a market and set their prices accordingly. Some dealers are drawing a hardline about selling vehicles above MSRP: They won’t do it at all or they may limit the practice to out-of-market customers to retain loyal customers. “My advice is that dealers should stay tuned into their local market and track the days supply of the new vehicle models and combinations you have in stock and your prices compared to the market,” Finkelmeyer says. “This analysis will guide you to where the right price should be for you with every new vehicle.”

Keep close with your used vehicle department. In addition to knowing the trade-ins that tend to arrive with specific new vehicle sales, it’s important for new vehicle department leaders to keep their peers in used vehicles in the know on incoming stock and future allocations. It’ll take time, but over time, factory production of new vehicles will improve. As new vehicle inventory levels increase, it’ll be important for used vehicle directors and managers to know the models and segments that overlap with their current inventories. Used vehicle departments across the country are keenly aware that some new vehicle customers who can’t get the car they need as quickly as they need it make prime near-new used vehicle customers. Used vehicle departments are paying up to keep these units in stock. The arrival of same-model new inventory will create pricing and stocking pressures the used vehicle department needs to know in advance—particularly if they’ve been pricing these vehicles in relation to current new vehicle prices and mark-ups.

Will New Car Inventory Challenges Remain?

Executives at some OEMs have suggested that the more lean and limited new vehicle supplies will shape factory production targets in the future. That is, some are saying they won’t over-build new vehicle supplies as they’ve done in the past. They won’t return to an era where they over-produce and then they, and their dealers, rely on incentives to drive new vehicle market share and sales.

“There’s no question that OEMs and their dealer partners have fared better in terms of profitability, if not sales, when supplies of new vehicles are leaner than they have been historically,” Finkelmeyer says. “But I’m skeptical of a new normal where every factory would be content producing to their current sales volume. Market share is the name of the game for factories, and they’ll produce the cars they think they need to reach their goals.”