Brett Parham wants to get rid of as many cars as he can now and replenish his supply with fresh inventory. It’s easier said than done.
“We’re doing our best to stimulate sales and to try to sell through all the inventory we can right now, because I want to go out and buy that lower-cost inventory and take advantage of the market conditions,” said Parham, CEO of AutoSource Motors, a used-vehicle retailer with stores in Utah, Nevada, Arizona, Colorado, Nebraska and Idaho. “But it’s kind of hard to see going and buying fresh cars when everybody’s sales got cut in half. And the inventory you have today is far more than you need.”
Most dealers entered the spring selling season with high hopes, after a strong 2019 and, in some cases, record sales in January and February. Many stocked up on vehicles in anticipation of the tax-return-fueled sales that typically are a linchpin of the spring market.
But around mid-March, the coronavirus pandemic brought sales to a near stop as consumers were told to stay home as much as possible and governors in some states ordered showrooms to close.
Even as vehicle stock mounts on dealership lots, wholesale inventory has been piling up, thanks to the total or partial shutdown in March of most auctions. KAR Global, which owns auction giant ADESA, estimates retail used-vehicle lots have an average of 100 days of inventory vs. an average of 42 days at the same time last year.
Inventories are up at auction rival Manheim, too. Jonathan Smoke, chief economist at Manheim parent Cox Automotive, noted April 7 that “sellable commercial inventory, which is the thing that tends to build and then takes time to sell off,” was up 33 percent compared with the same time in 2019.
The situation is expected to get more complicated as the year wears on.
Cox Automotive Executive Vice President Dale Pollak this month penned a letter to dealers noting that the expected arrival of 2021 models six months from now will put pressure on 1- to 3-year-old used vehicles. Ironically, those were highly sought vehicles before the pandemic took hold.
“What was the hot merchandise 45 days ago is now perhaps the greatest-risk merchandise the dealer holds,” Pollak told Automotive News.
And surplus wholesale supply is still expected to be a challenge six months down the road.
Many dealers are hoping for pent-up demand to ease some of the buildup.
While Pollak allows there might be some of that, he said staggering unemployment figures likely will make it difficult for many consumers to make large purchases for the foreseeable future. Many Americans who filed for unemployment since the novel coronavirus broke out — more than 26 million as of Thursday, April 23 — could still be out of a job in six months, he said.
More immediately, as vehicles have stacked up at auctions, wholesale values are dropping. Pollak estimates they are down between 10 and 12 percent.
“The change in value that has occurred over the last three weeks would have typically taken 90 days,” Pollak said. “…Guys got wrong in their inventory in a matter of three weeks.”
During the same period, retail prices have held steady, down only about 1 percent, he added. Given that, he has advised dealers to do what they can to sell off their current inventory for cash to take care of immediate business needs. Then, if possible, they should head to the wholesale market.
“They can go into the used-car marketplace and essentially replace every car they own today for thousands less,” Pollak said.
Of course, dealerships will have different needs and outcomes based on their location, Pollak noted.
In central Pennsylvania, dealer Luke Lake did not sell a car between March 20, the day after a state order shut down showrooms, and mid-April.
“It’s almost like things are just frozen in time when I look at our inventory,” he said, adding that no dealerships within a 100-mile radius of his Lewistown, Pa., Lake Dealerships group had changed their prices. “It’s just really strange.”
Pennsylvania has had some of the strictest COVID-19 safety orders in the country and had prohibited dealers from selling vehicles — even online. Gov. Tom Wolf on Monday, April 20, loosened that restriction to allow for online sales though a ban on in-person sales remained in effect.
Lake’s stores, which represent the Chevrolet, Ford and Lincoln brands, were taking deposits on vehicles during the no-sales period and delivered a couple of vehicles to customers last week after the restriction was eased.
Lake, general manager of the group, also has been monitoring wholesale activity but said there has been very little of that. The stores were light on used inventory heading into the crisis.
“I was getting in a position to buy, actually,” Lake said. “And so fortunately, we’re about 40 cars light from our normal inventory right now, which was a blessing, looking back on it.”