Pray for Too Much Inventory

Last year our 2020 year-end issue highlighted that the threat to our industry didn’t come from Tesla or Uber, but rather our own OEMs. Fast forward a mere 12 months and the worst predictions of that article have come true.

Volvo announced that you can download performance packages from their online portal. Gone are the days when you would need to buy the GT package to have a faster car – now it’s just the click of a button. All that incremental gross will go straight to the OEM via either a one-time purchase or a recurring subscription.

GMC recently announced their “Shop. Click. Drive.” campaign whereby a customer can buy a GMC truck, a Sierra for example, online through the OEM website and have it delivered. Since the OEMs have been so successful in skirting franchise laws with online EV sales, they’re now trying it for their standard vehicle line-up. What does the dealership of the future look like if we become only delivery centers? We can look at the Ford Mustang Mach E to give us a little insight. Concerning the Mustang Mach E, the dealer receives a fixed gross amount (i.e., $500), no floor plan assistance, and no advertising assistance. The logic is that the car was ordered by a specific customer so no inventory carrying or sales costs will be incurred by the dealer. If more than a certain percentage of Mach Es are sold to customers other than those who placed the original orders online, the dealership is charged back their profit on the sale because the OEM is worried the dealer is trying to game the system. In that Ford arrangement, a dealer could, in theory, sell a car and have no opportunity to generate gross on the transaction.

There has been lots of talk about how long dealer profits will stay elevated and if the OEMs will learn that it’s better to maintain a certain level of vehicle scarcity. The OEMs are different than private cap dealers in that the corporate groupthink doesn’t allow them to “learn.” General Motors employs nearly 70,000 salaried workers who each have their incentives and agendas. The marketing department gets compensated on market share. The operations department gets compensated for efficiency and productivity. The union leaders get compensated for the number of vehicles coming off the line (and jobs maintained). The C suite gets compensated by news headlines and hot talking points like “#1 Automotive Brand in North America.” The only stakeholder who truly gets compensated by elevated profits are shareholders, and in today’s environment of frothy liquidity and lax corporate governance, the shareholders don’t have a voice. This perverse system of incentives is great for us!

The current initiatives being pushed by the OEMs are all about online ordering and minimal dealership inventories. As long as inventory is sitting in an online queue and not on our lots, we have no leverage with the OEMs. As the OEMs hunt for market share, someone just out of college in Detroit will come up with this crazy concept that more vehicle availability on dealer lots will translate to more sales. Once that pendulum swings back in our direction and the OEM wants dealers to accept masses of inventory, then dealers will have the ability to exercise influence over the OEMs by way of negotiations and controlling the customer experience. Some dealers are hoping that the OEMs learned their lesson and will reduce vehicle production, but we should all pray for too much inventory.

If these trends in the industry scare you, there is something you can do. Attorneys around the country are working to bolster franchise laws by defining what it means to be a dealer, but that window is closing fast. Reach out to your local dealer association and/or dealership legal counsel to see how you can contribute. Get involved in actively fighting for the protections that help us and the consumer by ensuring that the locally owned franchised dealership model continues to thrive and support our communities.