Inventory shortages plague every level of the automotive industry. Thanks to ongoing semiconductor and microchip production shortfalls, new and used vehicles are getting harder and harder to come by, no matter the OEM.
Combatting these issues will be difficult for at least the next few months. Many of the factors at play are out of any single sector’s control. Thankfully, there are some steps you can take to offset low inventory levels. Just know these are primarily short-term solutions. Until the market stabilizes, we all need to do more with less.
On the other hand, we’re living in a seller’s market. Prices and demand are at historic levels, allowing proactive dealers to offset the future issues with additional profit in the present. Nevertheless, everyone needs to exercise caution in case slowdowns grow any worse.
State of the Industry
Our industry stands at a crossroads. On one side, sky-high prices on both new and used cars driven by incredible demand. On the other side, quickly dwindling supply across the board. There’s no telling when either will change. All we know is there are opportunities here with equal difficulty ahead.
Let’s start with two positives based on how the year’s gone so far.
- Business at your dealership is only going to increase.
- Economic recovery means rising prices, pushing potential profits higher.
Be ready for additional customers. Demand has increased so much that some potential buyers are braving long-distance travel to get a vehicle. Recent research by Cars.com notes more than 10% of recent buyers traveled to out-of-state dealerships to make a purchase. More than 50% of those traveled upwards of 25 miles, and some drove 250 miles or more. In short, your customer base is expanding, opening the door to extend your business’s reach farther than ever before.
Prices also couldn’t be higher. As of the end of May 2021, the average list price is $40,566, over 10% higher than 2019. Pre-owned vehicles are selling at a premium — and quickly — with March and April of this year nearly doubling 2020 sales values. May saw a year-over-year increase of almost 70,000 CPO sales.
Buying customers are ready and willing to pay despite new difficulties. Neither distance nor premium prices seem able to slow the increasing demand. Take advantage of these circumstances whenever possible, but do so cautiously because not all the news is so rosy.
Ongoing Pain Points
Here’s a big number: as of mid-May, the auto industry is on track to lose $110 billion in revenue in 2021. The reason? A pile-up of logistical nightmares. There’s the Suez Canal blockage, a chip shortage exacerbated by drought in Taiwan, and a fire at a chip-making plant in Japan, plus a severe drought in Texas, all putting additional strain on production. Worse yet, those are just some of the most recent reasons.
Many OEMs are still feeling the effects of COVID shutdowns of spring 2020. Chip manufacturers also shifted a large portion of their output to consumer electronics to keep product moving. Now automakers are back looking for the same semiconductors you might find in a high-end TV or game console, and demand far outpaces supply.
You’ve probably seen the results on your lot or those of your competitors. Across the country, dealerships for 14 different makes had less than a 40 day supply. Another 11 makers are below 50 day’s supply. The national average clocks in at a concerning 35 days’ worth of vehicles. Put another way, total supply is 43% behind 2020 and 54% behind 2019.
It doesn’t matter if the car is foreign or domestic, either. The lowest inventory level out of all OEMs is Toyota at a paltry 18 days’ supply. Second place belongs to Lexus at 23 days, then third and fourth belong to Chevrolet and GMC at 25 days. Subaru follows at fifth, then Kia and Chrysler. It isn’t until the eighth OEM that inventory breaks 30 days with Land Rover.
Righting the ship won’t happen quickly. The timeframe for getting back on top of the chip shortage varies depending on who you talk to. Goldman Sachs’s Andrew Tilton expects things to see improvement as soon as fall this year, with a return to some normalcy into 2022. LMC Automotive, a forecaster for the industry, expects semiconductor shortages to continue through the second half of 2021 and doesn’t leave out 2022 seeing at least some difficulties.
How to Offset Inventory Issues
While there is a lot of bad news, we’ve also talked about fair few positives to the situation. How does your business make the most of the market’s current position?
Here are three strategies you can use to capitalize on the dual disruptions of skyrocketing prices and the significant reduction in stock.
Cast a Wider Net
We mentioned above that customers are traveling great distances, sometimes across state lines, to buy their next vehicle. Get ahead of the game by increasing how far your marketing reaches. If your advertising only engages customers out to 25 miles, increase that radius to 50 miles, or whatever distance makes financial sense for you.
You don’t need to change almost anything about your ads, either. Your incentives, deals, imagery — most of that can stand regardless of how far away your customers live. The one difference you can boast about is your stock.
Take a few minutes to research what dealerships in your wider area have on their lots and compare them to your stock. Check places like AutoTrader for articles detailing the hardest-to-find models. In the event you have something another dealership doesn’t, jump on that fact. Create a quick email campaign letting customers know you’ve got what they’re looking for.
Since the current market won’t change overnight, you could also go further and retool some of your higher-effort marketing. Take time to evaluate your television, radio, direct mail efforts. Focus on what you have right now or can confidently predict to have in the near future. Understand that in these cases, there’s no guarantee you’ll have as many in-demand vehicles as you might expect. Everything is in too much flux for anyone to nail down who can make what, when. Should you have a line on some sought-after product, don’t be afraid to make it known.
Purchase Now, Sell Later
Not every customer will leave your dealership in a new or certified pre-owned car, but that doesn’t mean you can’t buy what they bring you and sell it later. The pandemic has changed a lot for everyone. Some of your customers might be looking to downsize to a single vehicle. They might also have an older car that isn’t getting any use or at least know someone who does.
If you find yourself running dangerously low on pre-owned stock, see how many people are willing to sell their car to you without buying one in return. Don’t be afraid to run events or campaigns based solely on taking in inventory. You never know if you’ll land one of those in-demand vehicles that you can send to your service drive and then to certification.
Lean on Your Service Drive
It’s never been more vital to own a working car. With supply so tight, a breakdown can be catastrophic to almost anyone. Regardless of your inventory situation, make it a priority to push customers toward their regular service appointments. Impress on them how slim the pickings are while assuring them being proactive now will pay off later.
Take time to upsell additional protections and services, as well. Assure your customers of longer vehicle life and reduced long-term costs with a little more upfront.
Showcase the effectiveness of your service people whenever possible. If a customer’s looking to pick up a CPO vehicle, consider talking up the care your service professionals took to bring it up to certifiability.
Think too about the value a service customer could see if they upgraded the day of their appointment. What can you offer them right now for their pre-owned car if they drive off in something years newer? Would the upgrade ultimately save them money and make you some in return? These kinds of questions should only become more common as you consider when and how to sell the inventory you do have.
One final caveat: if the current market taught us anything, it’s that our industry is agile, adaptable, and sound enough to weather storms of great magnitude. We’ve learned to do more with less, change our business models to best meet new challenges, and that business can be better than it’s ever been in the face of unprecedented difficulty with cooperation and trust.