Low vehicle supply worrying to public retailers

This unusual stretch of high demand and low supply has pushed car dealers to soaring profits. But with new-vehicle inventories falling to new depths, how close are retailers to the tipping point where per-vehicle profitability no longer makes up for declining volume?

Some of the largest dealership groups in the country dropped last month to a scant 20-something new vehicles on average at each of their franchised stores compared with the hundreds per lot they'd normally have.

It has dealers examining how low inventory can go before the bottom line suffers even as consumer demand remains strong. While the microchip shortage is expected to last into next year and perhaps beyond, retailers are anxiously watching production schedules and waiting for proof from auto makers that the worst of the crisis is over.

"Inventories are about as low, in my opinion, as we can physically take them," AutoNation Inc.'s outgoing CEO Mike Jackson, who retires Monday, Nov. 1, told analysts last month.

AutoNation, as of Oct. 21, carried about 25 new vehicles per franchised store, according to an Automotive News estimate.

Several other public dealership groups were right there with them at various points during the last month: Group 1 Automotive Inc. with an estimated 23 new vehicles per U.S. dealership; Penske Automotive Group Inc. with an estimated 26 per store; and Sonic Automotive Inc. with an estimated 28 per store.

And they aren't alone. It's not unusual to visit dealerships without a single new vehicle in stock, Paul Walser, chairman of the National Automobile Dealers Association, said last week at the Association of International Certified Professional Accountants Dealership Conference.

"This correction has in many ways been good — but it can go too far," said Walser, partner in Walser Automotive Group in Edina, Minn. "It was really, really great in the first half of the year. Now the inventory thing is starting to get too low. Dealers are still doing well, but now, all of a sudden, there's nothing to sell."

Some retailers estimate the supply situation has hit its low point and will start turning up from here.

"We only know as much as what the OEMs provide us in terms of information flow on inventory, and that's a bit unpredictable right now," Daryl Kenningham, Group 1's president of U.S. and Brazil operations, told Automotive News. "But based on what we see, we think we're in a trough."

Kenningham added that Group 1 expects supply will get better in 2022 as supply chain issues are addressed. Group 1 had 2,700 new vehicles on hand in the U.S., or an 11-day supply, as of Sept. 30. It was far stronger on the used side with 10,000 used vehicles, a 25-day supply.

Lithia Motors Inc. CEO Bryan DeBoer told analysts last month that the retailer had reached the bottom on inventory levels with at least half of the auto makers Lithia represents, with the rest expected to hit their low within a month.

Lithia COO Chris Holzshu called the line of sight on inventories "still a bit murky. We're kind of day-by-day, manufacturer-by-manufacturer," he said.

Sonic President Jeff Dyke last week said the retailer's new-vehicle supply, down to 10 days at the end of September, had "sort of bottomed out." He said that Sonic's supply had improved to 11 days by Oct. 28.

Even if the worst is over or close to it, dealers also recognize that shortages are likely to persist for the long term.

Penske CEO Roger Penske said he expects them to last "at least the next 12 months." Penske dropped to a 12-day supply of new vehicles in the U.S. at the end of September. For some brands, inventory was even tighter.

"We're running in the single digits on volume foreign, which is our Toyota, Honda, Nissan, Hyundai-type businesses," Penske spokesman Anthony Pordon said. "That is something that we are working with the manufacturers to manage every single day."

AutoNation's Jackson said he doesn't expect consumer demand to lessen anytime soon and that the supply-demand imbalance will last into 2022 or "maybe even 2023." Production increases won't show up in inventory right away, said Jackson, whose successor, former Fiat Chrysler Automobiles CEO Mike Manley, begins Nov. 1.

AutoNation, the largest U.S. new- vehicle retailer, was down to a lean 10-day supply of new vehicles as of Sept. 30, with just 8,041 cars and trucks on hand. That figure was five times higher at the same point in 2020, according to a regulatory filing.

Jackson told analysts that inventory had dropped even lower to a range of 5,000 to 6,000 vehicles by late October and that AutoNation was booking sales on vehicles well into its order pipeline.

Asbury Automotive Group Inc., which had a 12-day supply of new vehicles at September's end and into October, expects inventory constraints to remain "well into 2022," Senior Vice President of Operations Dan Clara told analysts last week. The company's new-vehicle supply target is 70 to 75 days, according to a regulatory filing.

While it's unclear how long it will continue, record profitability is making up for the shortage for now.

J.D. Power last week said total profit per new vehicle, including finance¬-and-insurance proceeds, was on pace to hit a record $5,129 in October, more than double the $2,192 recorded in October 2020. More than half of new vehicles were selling within 10 days of arriving at dealerships, the firm estimated.

While a lot of vehicles are being built and delivered, there is the risk that further supply-chain disruption could hurt the supply-demand equation for dealers, said Thomas King, president of the data and analytics division at J.D. Power.

"But certainly right now, taking October as an example, an increase in per-unit profitability is overpowering the drop in volume," King said.

Many leaders at the public groups estimate their new-vehicle profit margins will continue to be strong for at least the next few quarters. And they have boosted used-vehicle sales to help compensate for losses in new-vehicle sales. Still, they all eagerly await breathing room on the supply side.

NADA CEO Mike Stanton said at the CPA industry conference that tight supply will be a reality for the next 12 to 18 months — maybe even two years. "But if we can get back to more like the first half of [2021], it's going to certainly feel a heck of a lot better," Stanton said.

John Huetter and Jack Walsworth contributed to this report.