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2022 ECONOMY AND FIXED OPS (PART 3) - INVENTORY ISSUES

We continue our series with Robert Morris, a TVI MarketPro3 agent that’s been in the automotive industry for more than three decades.  Morris was the Dealer Principal for Morris Cadillac Buick GMC before joining TVI.

Inventory issues have a trickle-down effect all the way to the service department.  Morris explains how some of this has had both a positive and, in some ways, a negative impact on fixed ops.  Check out what Morris had to say on the matter.

Economy and Fixed Ops Inventory Issues

QUESTION:  What are some of the major inventory issues fixed ops leaders have faced over the past two years?

ANSWER:

Over the past few years, there have been numerous challenges faced by fixed ops directors as well as entire dealerships, and that all stems from the inventory shortage.  And the inventory shortage is creating a cascading effect in the service department, and what I mean by that is obviously there are much fewer new vehicles on the lot.  That means there are fewer vehicles coming in which means there are fewer vehicles to do a pre-delivery inspection or PDI on. So, that adversely affects revenue in the service department.

Then as fewer new cars come in and become available, there are fewer trade-ins.  So, the used car department also suffers, and that affects service because there are not as many vehicles to perform reconditioning on.  

And then lastly, and this is more tangentially related really, but there are no courtesy cars.  So in terms of a service department, not having courtesy cars, or loaner cars, available to cover the customers, this exacerbates the problem and results in a lot of dissatisfied customers.  Now granted, some customers obviously understand the situation, but other customers, it’s a legitimate problem trying to get work done on their car when they can’t get another one to use in the meantime.

QUESTION:   How is the current state of the economy affecting these issues?

ANSWER:

Well, the inventory issues obviously fall in line because of the economy.  And the economy right now is red hot.  I’m not an economist, it’s not for me to say why it’s red hot, but at the end of the day, it is.  Customers are demanding more and more new vehicles, and when they can’t find those, they’re buying late-model used vehicles.  So there’s a cascading effect in terms of the pricing.  New vehicles become more and more expensive with less and fewer rebates offered by the manufacturer.  

That in turn, drives up the price of used cars, so as long as the consumer demand remains this hot, the manufacturers have a hard time keeping pace.  So what happens is a dealer may have 40 cars on the ground when they would normally have 200.  They get another 50 cars in, so they sell 90 for the month, and at the end of the day, they still have 40 cars in stock when the month is over.  So, it’s a challenge.  Without inventory growing on the lot, things are going to remain like this for a while.

QUESTION:  List some occurrences in 2022 and their cause/effect relationship to inventory levels.

ANSWER:

The entire inventory issue right now is created from the pandemic.  In the early days of the pandemic with cities and economies and businesses shutting down, so to speak, and everybody working from home, that drove the demand for items like personal computers, new cell phones, all the technical aspects that people have brought home over the last year and a half.  

At the same time, automobile manufacturers, not knowing what was going to happen as everybody was sequestered at home, cut way back on the chips that they ordered for their production.  Vehicles today require more than one computer chip in order to make everything work with the state of the technology that’s in the new vehicle.  

So, when the manufacturer scaled back their orders and canceled orders, the other industries like computers, cell phones, televisions, whatever the case, increased their orders which created a chip shortage for automobile manufacturers.  And it’s affected other industries as well.

But really within the last 12 months is when the auto industry has felt that pinch.  Until the manufacturing catches up with the demand, it’s going to stay like that, and the problem was made worse because I believe there was a manufacturing facility in Asia that had a fire and burned down some of their capacity in terms of being able to manufacture the chips, so it’s kind of hit with a double whammy. 

QUESTION:  Did you ever face similar issues in your time as an automotive leader?

ANSWER:

I’ve been in the automobile industry for over 30 years.  I’ve seen strikes by manufacturers, GM strikes.  I’ve been through manufacturer bankruptcies.  I thought I had seen it all up until the last year and a half.  I know when we had vehicle manufacturing strikes, inventory was depleted, and we spaced the cars out further.  Instead of having all the cars in a row, we’d space cars out 10-15 apart.  But when you only have 10 or 20 new vehicles in stock right now, you can’t space them out a hundred feet between each car and make the car lot look full.  There’s no way you can do that.  So no, I’ve not seen anything like this in my 30 plus years in the automobile industry.  It’s absolutely crazy!

QUESTION:  Are dealerships making more money now than they were prior to the inventory shortage?

ANSWER:

Oh yeah!  They’re making tons of money.  

QUESTION:  Do you think they’ll be eager to get back to the days of greater inventory?

ANSWER:

No, personally I don’t.  Dealership profit levels for the last year and a half are at record levels because the margins now are so good.  When you have a new vehicle that’s selling for $5-$10 thousand over list price compared to it being sold at $3, $4, or $5 grand below list price before.  

One vehicle sale now is making up for 4 or 5 vehicle sales in the old dynamic.  Dealers aren’t going to be anxious to return to it.  The real question is going to be, at what point do the manufacturers adjust their manufacturing capacity because right now the manufacturers are pretty happy with it also.  Their incentive spend is down dramatically.  I guarantee you right now that manufacturers, they’re trying to figure out the sweet spot between having more cars than we do today, but also not having inventory issues as we’ve had in the past where it’s an inventory pressure sale and giving away more, and everybody is being too aggressive with their pricing.

QUESTION:  What is the direct effect inventory issues are having on Fixed Ops?

ANSWER:

All these inventory issues, and it’s not inventory pressure in the historical sense when there are simply too many cars on the ground.  Now it’s not enough cars on the ground, so what happens is that the dealership service department loses PDI (Pre-Delivery Inspection) income, and when the new vehicle comes in from the manufacturer, it goes through service to make sure it’s ready to sell before it’s put on the lot.  Now there are much fewer of those, and adversely, used car sales are down.

So right now, given the inventory pressures since there are so few new cars available, and they’re commanding a premium, and late-model used cars are almost as expensive as they were when they were brand new (which I’ve never seen before, many customers are opting to repair their car.  So, that creates a huge opportunity for service departments whereas a customer has an older car that needs a transmission or needs an engine or needs a substantial amount of work.  A lot of times now that customer is opting to get the work done because either there’s no car that they could buy that they would like, or the premium for the new car is so much more expensive that fixing the old one right now just makes sense. 

So, that creates a huge opportunity, but again fixed operations directors and service managers have to use every opportunity they get that comes through that service drive right now, whether it’s effective labor rate or hours per RO.  There are fewer built-in revenue streams from the service department in terms of PDI and used car recon, so now they have to make it up from the consumer, and not waste any opportunity or any at-bats that come through the lane.  And that’s where TVI MarketPro3 comes into play because we bring you those at-bats and bring you those customers that you haven’t seen before.

RELATED ARTICLES:

2022 ECONOMY AND THE EFFECT ON FIXED OPS (PART 1) – SUPPLY SHORTAGE ISSUES

2022 ECONOMY AND THE EFFECT ON FIXED OPS (PART 2) – LABOR ISSUES

2022 ECONOMY AND THE EFFECT ON FIXED OPS (PART 3) – INVENTORY ISSUES

2022 ECONOMY AND THE EFFECT ON FIXED OPS (PART 4) – CAR SALES TRICKLE-DOWN EFFECT TO FIXED OPS

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