What Dealers Do With Unsold Cars

Ever wonder what happens to those shiny new cars that don't find a home on the dealership lot? It's not a simple case of driving them off into the sunset. A complex system is in place to manage unsold inventory, ensuring dealerships minimize losses and manufacturers maintain brand integrity. This article dives into the process, providing a behind-the-scenes look at what dealers do with unsold vehicles. We'll cover the logistics, economic factors, and even some less-known strategies employed to move inventory.

The Inventory Management Puzzle

Dealers face a constant balancing act. They need to stock enough cars to meet demand, but holding too much inventory ties up capital and incurs costs. Unsold cars, often referred to as "aged inventory", represent a significant financial burden. These vehicles depreciate the moment they roll off the truck, accumulating carrying costs like insurance, storage, and interest on the loans used to finance their purchase from the manufacturer. This is why managing unsold cars effectively is crucial for a dealership's profitability.

Key Strategies for Moving Unsold Inventory

Several strategies are employed to address the issue of unsold cars. These strategies range from simple price adjustments to more complex logistical maneuvers involving auctions and even manufacturer buybacks.

Price Adjustments and Incentives: This is the most common and immediate approach. Dealers will reduce the price of unsold cars, often offering significant discounts and incentives like low-interest financing or rebates. They may also bundle features or accessories to make the deal more attractive. The goal is to stimulate demand and move the vehicles quickly, even if it means a lower profit margin.
Dealer Trades: If one dealership has a car that another dealership needs, a dealer trade can occur. For instance, a Ford dealer in rural Iowa might trade a slow-selling Mustang GT to a Ford dealer in Miami for a fast-selling F-150 pickup. This allows both dealerships to better meet the needs of their respective customer bases.
Auctions: When cars remain unsold for an extended period, they are often sent to auction. These auctions are typically closed to the public and attended by other dealers, wholesalers, and exporters. The price received at auction is usually significantly lower than the original invoice price, but it's a way to recoup some of the investment and free up space on the lot. Manheim and Adesa are two of the largest automotive auction companies.
Manufacturer Buybacks: In some cases, manufacturers will offer to buy back unsold cars from dealers. This is more common with specific models or during periods of economic downturn. The terms of the buyback agreement vary, but it generally involves the manufacturer paying a discounted price for the vehicles.
Export: Depending on the model and demand in other markets, unsold cars may be exported to foreign countries. This is more likely to occur with vehicles that meet specific emission standards or have a strong global following.
Fleet Sales: Dealerships may also sell unsold cars to fleet buyers, such as rental car companies or government agencies. These sales often involve bulk discounts and can help clear out large numbers of vehicles quickly.
Repurposing/Modification: Although less common, some dealerships may modify unsold cars to make them more appealing. This could involve adding aftermarket accessories, customizing the paint job, or even converting them into demo vehicles for marketing purposes.

The Role of Incentives and Market Analysis

Manufacturers often offer incentives to dealers to encourage them to move unsold inventory. These incentives can take various forms, such as bonus payments for reaching sales targets or financial assistance for marketing campaigns. Dealers also conduct market analysis to understand local demand and adjust their inventory accordingly. This involves tracking sales trends, monitoring competitor pricing, and identifying customer preferences. This is also where market segmentation comes into play – dealers try to understand the different demographics and needs of buyers in their area to better target their marketing and pricing strategies.

The Financial Implications

Holding unsold inventory has significant financial implications for dealerships. The longer a car sits on the lot, the more it depreciates, reducing its value. Depreciation is the decrease in value of an asset over time. In the case of vehicles, depreciation is most rapid in the first year. Dealerships also incur carrying costs, such as interest on loans, insurance premiums, and storage fees. These costs can quickly add up, eroding profit margins. This is why dealerships are highly motivated to sell cars as quickly as possible, even if it means accepting a lower profit margin. The concept of days-to-turn, the average number of days it takes a dealer to sell a vehicle, is a key metric used to measure inventory efficiency.

Dealer Reserve and Holdback

Two terms often misunderstood are dealer reserve and holdback. Dealer reserve is the profit a dealer makes on financing a car, essentially the difference between the interest rate they get from the bank and the rate they charge the customer. Holdback, on the other hand, is an amount of money the manufacturer pays the dealer after the sale of a vehicle. It's essentially a hidden rebate that helps improve dealer profitability and provides a cushion for discounting prices.

Beyond the Dealership: The Life Cycle of an Unsold Car

Understanding the life cycle of an unsold car requires looking beyond the dealership lot. Once a vehicle leaves the dealership, whether through auction, export, or fleet sale, its fate becomes less predictable. It may end up on another dealer's lot, be sold to a private individual, or even be scrapped for parts. The manufacturer's involvement typically ends once the vehicle is sold, although they may provide warranties or service support. The goal is to minimize the number of vehicles reaching the scrapping stage, maximizing the return on the initial investment.

The Impact of Economic Conditions

Economic conditions play a significant role in the management of unsold cars. During periods of economic downturn, demand for new cars typically declines, leading to an increase in unsold inventory. Conversely, during periods of economic growth, demand increases, reducing the number of unsold cars. Interest rates also affect demand, as higher rates make it more expensive for consumers to finance car purchases. Automakers and dealerships closely monitor economic indicators to anticipate changes in demand and adjust their production and inventory levels accordingly. For example, rising unemployment often signals a softening in the automotive market.

Conclusion

Managing unsold cars is a complex and challenging task for dealerships. It requires a combination of strategic pricing, effective marketing, and efficient inventory management. By understanding the various strategies employed to move unsold inventory, car owners can gain a better appreciation for the dynamics of the automotive market. This information can also be useful when negotiating the purchase of a new car, as you may be able to leverage the dealership's desire to clear out unsold inventory to your advantage.

We've covered the high-level concepts. Understanding the intricate details of dealer inventory management is like understanding the vacuum system in your car – it's complex, but grasping the fundamentals helps you appreciate the system as a whole. We have a detailed diagram illustrating the flow of unsold cars from the dealership to various outlets. This diagram outlines the key decision points and financial implications at each stage. We can provide this file upon request.