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Fewer Cars, Bigger Profits: Auto Makers Look to Stay Lean Post-Pandemic

11/22/2020 | 01:15pm

By Nora Naughton and Mike Colias

The Covid-19 pandemic is changing an entrenched aspect of car shopping in America: finding your new ride on the lot and driving it home that day.

For months, dealer stocks have been running about 25% thinner than normal, a hangover effect from two months of pandemic-related factory closures last spring. The shortfall is requiring many buyers to order their cars and wait a few weeks, running counter to the American car shopper's desire for instant gratification, and dealers' impulse to send the customer home in a new car that day.

That change may outlast the pandemic as industry executives find that stocking fewer cars, amid high demand, has lifted profits for car companies and dealers alike. Now both are talking about carrying fewer vehicles on the dealership lot permanently, in what would mark a monumental shift in the way cars are sold in the U.S.

For decades, American car dealerships have kept endless rows of vehicles outside their stores in enough colors and variations for buyers to find what they want, when they want it. Reducing that mass of sheet metal would result in more customers preordering their cars weeks in advance, a practice common in Europe and elsewhere. The change could have implications for dealer-owned real estate and how car companies run their factories.

The benefits of leaner dealership lots have been an unexpected byproduct of the pandemic. Auto makers have been straining to boost output after the spring shutdowns, a task made difficult by an unexpected surge in demand for new vehicles. The result has been a seller's market, with car companies able to hold the line on discounts, driving prices to record highs.

And, because of the inventory crunch, car companies have been giving priority to their most popular models and feature combinations, which has reduced complexity and cut supply-chain costs, the companies say.

Meanwhile, dealers are saving money by holding less inventory, and cars are selling faster, at higher average prices. The typical new vehicle spent about 56 days on a dealer lot in October, down 27% from the same month last year, according to car-shopping website Edmunds.com.

A shift to online shopping has been a factor, too. With fewer prospective buyers visiting showrooms during the pandemic, dealers say they don't need as many cars on the lot for test drives. There were nearly a million fewer cars at all U.S. dealers at the end of October, or 25% fewer compared with a year earlier, according to research firm Motor Intelligence.

"We're spending a lot of time trying to understand this and saying 'Hey, is there a better distribution model?' " General Motors Co. U.S. sales chief Steve Hill said. "You never want to let a good crisis go to waste."

GM's dealers have been working with just one-third of their typical level of inventory in pickup trucks, the biggest moneymaker for the company and dealers. Even so, GM has gained market share in that lucrative category recently, a sign that dealers and customers are adapting, he said.

Georgia dealer Mike Bowsher, who owns four GM stores across the Southeast, said his profit per vehicle is up sharply because of lower discounting. And he is spending less money on inventory because about half his customers have been prepurchasing cars before they hit his lot. In normal times, nearly all his customers buy straight from his on-hand selection.

Mr. Bowsher said he has implored GM's sales chief to continue to run lean.

"I told Steve, 'You guys just had a monster quarter. The customers are happy, dealers are making money,' " Mr. Bowsher said. "We've got to keep this train rolling."

GM, Ford Motor Co. and Fiat Chrysler Automobiles NV each credited strong pricing and lower costs for their solid third-quarter results, with profit margins in North America soaring to record or near-record levels.

"I don't think our dealers want to go back to historic inventory levels, " Fiat Chrysler Chief Executive Mike Manley told investors last month. "What I think we see now is somewhat closer to the new normal of inventory levels."

Auto-industry analysts, dealers and executives likened the new approach to dealer inventories in the U.S. to that of Europe, where customers have for years ordered from the factory rather than picking from a pool of cars at a dealership.

Still, such a shift for American consumers could be a harder sell in the long run, dealers say. Car makers for years have tried to thin dealer stocks and simplify their model offerings, but have historically failed as brands compete for customers.

"I can only assume that the supply will creep back up," said David Hult, CEO of Asbury Automotive Group, a publicly traded dealership chain based in Georgia. "Brand loyalty isn't what it used to be, and when someone else has a product available that you don't, you could actually lose sales."

Mr. Hill said he believes GM will continue to run on lower dealer stocks long-term, but he doesn't think that means significantly more customers will be preordering cars. He said GM has started using more-precise analytics to fine-tune dealers' inventory so that customers can find what they want on the lot or online.

Andrew Coles scoured dealerships in his area for a new Chevrolet Tahoe recently but couldn't locate the exact model he wanted. Eventually, a dealer found Mr. Cole's preferred model en route from the factory -- he just had to wait six weeks for it to arrive.

The 34-year-old Larchmont, N.Y., resident said he grew impatient but in the end was happy to get the vehicle he wanted at the right price.

"It's not like we needed it that day," he said.

Write to Mike Colias at Mike.Colias@wsj.com

(END) Dow Jones Newswires

11-22-20 1314ET

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