Lower inventory, new strategies: Dealers adapt post-COVID

New-vehicle supply has yet to rebound to levels seen before the COVID-19 pandemic halted production for months, forcing automakers, dealers and lenders to adapt to a landscape marked by fewer cars on dealership lots and a shift in how consumers purchase vehicles.

Pandemic-related manufacturing plant closures and the ongoing chip shortage have continued to plague vehicle production. The supply of new unsold vehicles totaled 1.34 million cars at the end of June 2021, or a record-low 29 days’ supply, according to Cox Automotive. This is down from 1.74 million vehicles, or 34 days’ supply, at the end of May, and 2.17 million vehicles at the end of April, representing 41 days’ supply. Days’ supply is calculated by measuring inventory against the pace of vehicle sales.

Tight inventory contributed to floorplan balance declines at major captives nearly every quarter in 2020, including at Ford Credit and GM Financial.

Toyota dealers, too, have faced consistently tight inventory for the past four months, dramatically decreasing floorplan expenses, Brian Mouffe, finance director for Big Two Toyota of Chandler in Chandler, Ariz., told Auto Finance News.

“Most dealers don’t have the inventory they had a year ago, or certainly two years ago, pre-COVID,” Mouffe said, noting that many Toyota vehicles are now presold before they hit lots.

New normal: Lower supply

On the heels of more than a year of dwindling vehicle supply, OEMs have redefined what it means to be well positioned with new-vehicle inventory, a shift that could benefit dealers in the long run.

“I think going forward I don’t know that we’re going to get back to that 90 to 100 days’ supply on hand, I think you’re going to be lucky to get 50 days,” Bill Golling, president of Bloomfield, Mich.-based Golling Automotive Group, told AFN. “That’s not a bad thing because what it does is lowers costs and keeps everything fresh.” Golling Automotive operates eight dealerships in Michigan and has about 500 employees, according to the group’s website.

General Motors, for one, is aiming for about 60 days’ supply as opposed to the pre-pandemic norm of 90 days, Steve Carlisle, executive vice president and president of General Motors North America, said recently at a JPMorgan Chase investor event.

“I think when the chip situation resolves itself, it’s not going to probably be a massive sort of influx of manufacturing right out of the gate,” Paul Jacobson, General Motors’ chief financial officer, said on the company’s Q2 earnings call. “So, we do see continued tight inventories going into 2022.”

A pullback on inventory will result in fewer incentives and lower floorplan cost for dealers, Carlisle said. This, in turn, will push down the captive’s floorplan outstandings. GM Financial provides floorplan financing for 1,558 dealers in the U.S., with dealer penetration reaching 35.9% as of June 30, up from 30.3% a year ago, GM Financial President Daniel Berce said on the company’s Q2 earnings call.

GM Financial’s floorplan book has been shrinking since the start of 2020, with floorplan outstandings falling to $8.9 billion in the fourth quarter of 2020 from $11.7 billion in the first quarter, according to the captive’s earnings reports. In 2021, outstandings have declined to $7 billion in Q1 and $5.7 billion in Q2, a decrease of 27.9% year over year.

Ford Credit, too, has seen a consistent decline in commercial outstandings since the start of the pandemic. Outstandings dropped to $19.5 billion by Q4 2020 from $30.6 billion in Q1 2020, and fell again to $16.8 billion in Q1 2021, according to the company’s earnings reports. By the Q2 2021, outstandings clocked in at $11.4 billion, a 43.8% YoY decrease.

Ford Motor now aims to have a 50 to 60 days’ supply on hand versus the regular 75 days, Ford Motor Chief Executive James Farley said on the Q2 earnings call.

Vehicle retailers and banks are not immune from inventory constraints. Georgia-based retailer Asbury Automotive, for example, saw new-vehicle supply fall to 17 days as of June 30, down from 52 days’ supply a year ago.

“Some of our stores were at five days’ supply during the quarter, as we experienced major challenges due to the lack of inventory,” Dan Clara, senior vice president of operations, said on the company’s Q2 earnings call. “We expect day supply to remain low throughout the remainder of the year.”

Huntington Bank’s commercial floorplan loans also declined 34% YoY to $1 billion in Q2. The bank experienced a 40% YoY decline in its floorplan business to $1.4 billion in the first quarter of 2021, and has not posted floorplan growth since the Q4 of 2020, according to Huntington’s earnings report.

Maximizing profitability

Lower new-vehicle inventory and competitive pricing is driving strong profitability, with GM Financial and Ford Credit both logging record earnings before taxes of $1.6 billion at the end of Q2.

Tight supply is also likely to contribute to competitive pricing for both GM and Ford products into 2022. This holds especially true for Ford’s F-150, Bronco and Mach-E, Ford Motor’s Chief Financial Officer John Lawler said.

“We see continued demand for those strong products. Supply is well short of that and it’s allowed us to continue to keep the pricing strong,” Lawler said. “As we go through the year and we start to see supply and demand normalize, we’ll see some of this pricing come off a little bit in the fourth quarter, and then we have to see how that runs through next year. But given the strength of our product lineup and the demand we see, we expect to have a relatively strong pricing power for the foreseeable future.”

Asbury Automotive executives, too, expect gross profit per unit to settle above pre-pandemic levels in 2022 even as fiscal stimulus, pent-up demand and low interest rates begin to wane, management said at the JPMorgan event. Asbury’s finance and insurance revenue in Q2 increased 60.6% YoY to $107 million, accounting for 21.5% of the retailer’s gross profits.

Meanwhile, Fort Lauderdale, Fla.-based retailer AutoNation expects gross profit per unit to remain elevated for the rest of the year as consumer demand continues to outpace supply, management said at the event.

Similarly, the nation’s largest dealership chains are benefiting from lower floorplan costs. AutoNation’s floorplan interest expenses, for one, decreased 59.9% YoY to $6.6 million in Q2 even as new-vehicle sales increased 42% YoY to 77,164 units, according to the company’s earnings report. The retailer’s finance and insurance revenue also clocked in at $369 million, an increase of 49.8% YoY and 7.9% from last quarter.

“U.S. automakers won’t go back to bloated output and bulging dealer lots, even after the global semiconductor shortage ends,” AutoNation Chief Executive Mike Jackson previously said.

Adapting to change

Meanwhile, industry experts believe supply chain issues are likely to continue into early next year, prompting OEMs to turn to new ways to capitalize on strong consumer demand.

Ford Motor, for one, has shifted priorities to build-to-order vehicle sales. “We have learned that, yes, operating with fewer vehicles on lots is not only possible, but it’s better for customers, dealers and Ford,” Farley said. Instead of working toward getting back to pre-pandemic inventory levels, OEMs have started to rethink their market strategy when it comes to stocking dealer lots.

“Navigating these chip constraints has led us to make important permanent changes in our business model at Ford,” Farley said. “We’re placing a greater emphasis on build-to-order sales banks, not just low stocks.”

The change has led to fewer incentives, a simplified order system and the ability for customers to get the cars they want more quickly, Farley added, noting Ford Motor’s retail order bank sits at about 70,000 units.

Still, Ford Motor’s shift to build-to-order sales is not expected to impact Ford Credit’s ability to provide customer financing, Brian Schaaf, chief financial officer, said during the investor event, noting that the captive will reinvest any realized savings from lower supply to support customers and dealers.

For dealers, build-to-order vehicle sales lowers costs and improves turnover, said Golling, of Golling Automotive Group. “When a car comes in, it goes right back out. It’s already accounted for.”

Meanwhile, as some dealers anticipate lower costs and expect more OEMs to follow Ford Motor’s lead, others don’t see pre-orders taking over the sales market. “People either want what you have or don’t,” Chapman Dodge Scottsdale Finance Manager Wyatt Chatburn told AFN, noting he doesn’t anticipate pre-ordering vehicles to be attractive to most consumers due to the six-to-eight-week wait time between order and delivery.

Whether pre-orders will take off remains to be seen, but manufacturers, dealers and auto lenders will likely move away from stocking dealership lots to the brim in favor of streamlined inventory strategies that yield lower costs and meet changing consumer preferences.

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