You've heard about it, read about it, and probably experienced it. Q1 for the auto industry was a pretty rough one. Experts are diving into what the problems may be, and evaluating what industry professionals can do moving forward to change the course of 2017.
I chatted with Jason Knight, the co-founder and COO of LotLinx, to see what he had to say about the Q1 inventory glut. This topic was much discussed at the recent NY Automotive Forum, and Jason discussed his insights there as well.
Maddy: In your opinion, what are some of the reasons for the inventory glut in Q1?
Jason: With declining sales, manufacturers are offering high levels of incentives to prospective car buyers. The pressure is on, as we're not only seeing record (and increasing!) levels of lease returns but continued new vehicle production is contributing to rising inventory pressures. The industry is going through a shift right now, and overproduction, especially of specific models, is certainly a problem automakers need to address.
Maddy: How is this affecting everyday Joe at a car dealership?
Jason: Most dealers have the ability to pass through most of the lease returns, but are feeling pressure to move the new vehicles. However, their ability to do this IS impacted by increasing used vehicle inventory, the corollary negative impact on vehicle pricing and increasing new vehicle incentives (currently near/at record levels).
Additionally, many OEMs are smartly increasing their focus on CPO programs as a way to keep more lease-returns in the franchise, retain ownership share AND protect residual values. OEMs that have retained equity ownership in the “paper,” on lease returns, have additional downside risk because of that ownership; this translates to additional pressure to NOT send the vehicles to auction.
Maddy: What can dealers do today to combat this problem?
Jason: Dealers have the opportunity to be very opportunistic on pre-owned vehicles and focus on dominating new vehicle share. With the trends in this market, it is critical that dealers leverage quality data, especially around shopper distribution and cost, to drive efficiencies in all facets of their business. Getting smarter with big expense items like advertising, will not only make them more profitable, but better prepared to weather any market corrections.
Maddy: Talk about sales numbers in Q1 and how they are connected to inventory, why they are low, etc.
Jason: While the situation is very complex, between continued production of vehicles, increasing lease returns, downward pricing pressure on used vehicles, more restrictive credit and interest rates, etc., the math is very simple: Flat to down sales numbers + growing lease returns results + addition of newly produced vehicles is swelling inventories at most dealerships. The interesting reality is that the average age of the American fleet continues to increase, so there is significant potential demand, but existing product, sales programs and incentives have not moved the sales needle as much as hoped.
Maddy: Will we see these low numbers in Q2?
Jason: There is no predicted jump in vehicle sales in Q2 of this year. The projections from Q2 2016 were starkly different than what we're seeing now, and they mostly held true. Incentive levels are already incredibly high, on average, so increasing them may not have the positive sales effect hoped. I believe that getting the programs and product in front of consumers, where they are shopping, when they are “ready,” is a critical strategy that will help move the needle. Aside from offering thousands of dollars worth of incentives, today's dealers can combat this slowdown by being smarter in regards to marketing their under engaged inventory.
Jason Knight, LotLinx Co-Founder and COO
A reformed engineer and Detroit native with auto in his blood, Jason’s first job was conducting crash-test dummy research on safety restraints. Contrary to popular belief, he was NOT the dummy. After a successful executive career in Consumer Products, Adult Beverages and Manufacturing, Jason co-founded LotLinx to help dealers more effectively and efficiently connect to in-market car shoppers. Through patented technology, the LotLinx Shopper Targeting Platform matches in-market shoppers to VIN specific listings on hundreds of online sites. During his tenure at LotLinx, Jason has held nearly every role from CEO to cold-call salesman to night janitor, sometimes at the same time.