Dealers Tell Auto Makers: Send Trucks and SUVs, Not Cars
12 February 2016 - 12:03PM
Dow Jones News
By Jeff Bennett and Christina Rogers
U.S. new-car dealers are telling auto makers to limit production
of passenger cars in the face of overwhelming demand for trucks and
sport-utility vehicles that is forcing them to offer deep discounts
on small cars, coupes and luxury sedans.
A continuing shift among American buyers to more capable
vehicles has driven up dealer inventories even as there are
shortages of certain pickups, SUVs and small crossovers.
The mismatch in supply and demand is forcing some dealers to
offer as much as $5,000 off slow-selling compact cars, cutting into
profits.
With gasoline nationwide averaging less than $2 a gallon and
heading lower, demand for pickups and SUVs ranging from the tiny
Honda HR-V to the hulking Cadillac Escalade SUV has upended the
normal split between cars and trucks. At the same time, ballooning
passenger-car inventories, especially for luxury brands like Audi
AG and BMW AG are triggering discounts that are cutting into dealer
margins.
Earl Hesterberg, chief executive of Group 1 Automotive Inc., the
nation's third-largest new-car chain by vehicle sales, on Thursday
warned auto makers need to adjust their production mix or both risk
profit deterioration.
"We're at the point now where we're in discussions with most
[auto makers] that we just can't take any more inventories at the
moment," he said after reporting fourth quarter profit fell 12%
despite a 5% increase in revenue. "I think virtually all retailers
such as ourselves have been communicating that 'you know, we don't
have enough trucks and SUVs,' he said.
AutoNation Inc., the largest U.S. new-car retailer, said its
December sales would have been flat were it not for "significant"
discounts and extra sales days compared a year-earlier. It also
said it would reduce its orders for passenger cars this year.
Historically, trucks have typically cost more than cars and
required higher sales incentives to move off dealer lots. But the
pattern has changed with cheap gasoline: incentive spending of
$3,062 per passenger car sold in January was 4% higher than the
discount needed to sell a truck or SUV, according to market
researcher Autodata Corp. Overall incentive spending increased
15.6% last month compared with the year before.
The backlog of unsold cars pushed the industry's inventory to 78
days of supply in January from 61 days in December, according to
data provider WardsAuto.com.
Luxury car makers have been among the hardest hit: BMW said its
stocks rose to 76 days of supply and Audi's climbed to 88 days.
Generally, dealers like to have about 60 days of sales on their
lots.
"We estimate that the industry ended January 14% overstocked on
cars," Credit Suisse auto analyst Dan Galves wrote in a note to
investors this week.
WardsAuto.com estimates total U.S. new-car inventory increased
4% to 3.7 million automobiles at the end of January. It says the
glut should help the nation's total sales go higher this year. It
projected February's seasonally adjusted selling rate sales pace
will top 17.6 million vehicles.
Chewing through that inventory could force production cuts at
the Detroit Three, which book revenue when vehicles ship to
dealers. Credit Suisse's Mr. Galves expects a 6% cut in 2016 car
production, which could drag overall light-vehicle output down
slightly.
The No. 3 U.S. car maker, Fiat Chrysler Automobiles NV, recently
idled a Sterling Heights, Mich., assembly plant where it builds
midsize sedans. It won't restart production until March 11. Fiat
Chrysler's days' supply was nearly 3 1/2 months in January.
Vince Sheehy, president of Sheehy Auto Stores, said, "there is
very intense pricing on passenger cars." His company, which has
dealerships in Maryland and Virginia, is running a Presidents Day
sale that includes a $4,800 discount on a $13,185 Nissan Versa
compact car, $6,000 off a $20,975 Hyundai Elantra hatchback, and
$7,000 off a $22,985 Ford Fusion sedan.
Doug Moreland, owner of Dealin Doug Dealerships, the largest
closely held dealer group in Colorado, said business at his Kia
Motors Corp. stores has slowed because the auto maker's lineup is
heavy on sedans and economy cars. "We might have a couple of weeks
supply" more than needed, he said.
John D. Stoll contributed to this article.
(END) Dow Jones Newswires
February 11, 2016 19:48 ET (00:48 GMT)
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