Automotive News - February 22, 2021 - 30

U.S. inventory as of Jan. 1

30 * FEBRUARY 22, 2021

INVENTORY

Analyst: Data may
be check on levels
continued from Page 1

Of course, there's a big difference between dealers starving for supply and
avoiding the chronic overproduction
that pushed the Detroit 3 into destructive price-slashing cycles. Automakers
say shortages of hot products will
eventually get worked out and that
they have the ability to keep stocks
trimmer than in the past, thanks to
better data and more efficient labor
contracts that don't force them to keep
plants running regardless of need.
But it might require some adjustment for dealers, who fear losing
business to a rival down the street if
they don't have the exact color and
configuration a customer wants.
According to Automotive News' 2021
Dealer Outlook Survey of 183 dealership executives in January, most dealers - 59 percent of respondents - expect inventory to meet demand by the
end of June, but 25 percent say that
won't happen until at least next year.
More than half of those surveyed said
the lower stock has increased their
new- and used-vehicle profit margins,
but 40 percent doubt the staying power of those profits after inventories
normalize.
Automakers and dealers " have a
taste of what happens with margins
and profitability when supply is constrained, and I believe that is likely to
factor into long-term production
planning, " said Jonathan Smoke, Cox
Automotive's chief economist.
Despite growing profits, dealers
still depend on selling a certain number of new vehicles, said Rick Ford,
CEO of RFJ Auto Partners Holdings in
Plano, Texas, a group with 28 dealerships in several states.
" We need that new-car volume for
the whole stratosphere to be successful in dealerships, " he said. In a

" perfect world, " Ford said, manufacturers would produce " just enough
or just slightly less than what the
public demand is. "
Having 20 percent less inventory
than in the past seems to be the
sweet spot for most dealers, said
Glenn Mercer, a consultant who
wrote a study for the National Automobile Dealers Association called
" The Dealership of Tomorrow. "
" A small reduction of inventory will
make a significant difference in [a
dealer's] bottom line, " Mercer said.
GM had a 49-day U.S. supply in
January, down from 73 days a year
earlier, according to Morgan Stanley
estimates, while Ford Motor Co.
dropped from 107 days' worth to 70,
and Stellantis went from 96 to 70.
That's a stark contrast to the way
the Detroit 3 have historically operated. For decades their dealers were
so overstuffed that even hot products often needed generous discounts, such as the employee-pricing frenzy that GM started in 2005.
A race for share meant they never
significantly reset production volume,
even as Japanese automakers ran with
much lower inventory levels and vehicle combination options. Meanwhile,
heavy legacy cost burdens dragged
down their finances even more, contributing to GM's loss of $88 billion
from 2005 until its 2009 bankruptcy
wiped much of the slate clean.
" We've got this great base to start
from right now, which is we don't
have enough inventory. If we build it
the right way, we don't have to get
back to those levels, " said Tyson
Jominy, vice president of data and
analytics at J.D. Power. " The real win
is producing the right configurations
that consumers want. "

Data-driven approach
Automakers should be able to exercise more discipline post-pandemic,
in part because of enhanced technology that shows which vehicles are in
high demand, Mercer said.

ACQUISITIONS

Lithia, Asbury growth
may spur others to act
continued from Page 1

AutoNation's last sizable acquisitions were in
2016, a year that included deals such as the
purchase of the 12-store Allen Samuels Auto
Group in Texas. The company made some single-store deals in 2017 and 2018.
After a dry spell, Jackson said AutoNation is
looking for stores that fit " our strategy and our
footprint. "
Penske, the second-largest new-vehicle retailer in the country, last acquired U.S. dealerships in 2018 when it bought two Lexus stores
in Texas. This month, Penske said it expects to
add $600 million in annual revenue through
three new franchised dealerships and what it
described in a statement as " identified acquisition targets. "
Penske spokesman Anthony Pordon said
$450 million of that $600 million is expected to
represent acquisitions that could include U.S.
franchised stores, used-only stores or commercial trucking operations. Penske prefers
buying in or near markets in which the company already operates.
The change in mindset on buying franchised
dealerships came after Penske turned " the
lights off " on acquisitions last year to build its
balance sheet and focus on improving store
performance and selling underperformers,
CEO Roger Penske said this month. Penske
sold two Honda stores in metro Houston
during the fourth quarter.

P030_AN_20210222.indd 30

Fallen on their feet?

Plant shutdowns during the pandemic and a shortage of microchips have caused inventories to fall, but automakers
hope to avoid returning to levels that forced heavy discounting. Chart shows U.S. inventories as of Jan 1.

Source: Automotive News Research & Data Center, company reports, Cox Automotive

Steve Hill, vice president of Chevrolet, said stock levels don't need to
be as high as before the pandemic
with the help of tools such as VIN
View, vehicle tracking software that
GM began using last year.
" Excess inventory - whether it's
sitting on the dealers' books or sitting on our books - in the enterprise, it's waste. You've got to have
the right car, right place, right time, "
Hill said. " The closer we can match
demand and supply and eliminate
that waste, that's a competitive advantage for the whole - not just for
GM, for the dealers enterprise-wide. "
Too often, said Chevy dealer Mike
Bowsher, vehicles languished for
months.
" I'd rather be in the environment
I'm in now where stuff sells as fast as
it does, " said Bowsher, owner of Carl
Black Automotive Group in Kennesaw, Ga. " And I think GM has the
data to make that happen. "
Last year, Dave Kelleher, owner of
David Dodge-Chrysler-Jeep-Ram in
Glen Mills, Pa., sold a record number
of vehicles before they reached the

Buying boomerang

Some public dealership groups have
been more active in buying franchised
stores than others. Here are the last
times they bought a franchised
dealership in the U.S.
Asbury Automotive Group:
8 Park Place Dealerships stores in
Texas in August 2020
AutoNation: A BMW store in
California in mid-2018
Group 1 Automotive: 2 Lexus stores
in New Mexico in late 2019
Lithia Motors: Land Rover and
Chrysler-Dodge-Jeep-Ram stores in
Florida in February 2021
Penske Automotive Group: 2 Lexus
stores in Texas in late 2018
Sonic Automotive: A Land Rover
store in Colorado in November 2014
Source: Automotive News research, companies

Group 1 CEO Earl Hesterberg said this month
that the nation's fourth-largest new-vehicle retailer planned to be more " aggressive in growing externally " this year. The company has financial capability to add $1 billion or more in
annual revenue through acquisitions and has
deals in the pipeline, executives said. Group 1
last purchased stores in late 2019 when it
bought two Lexus stores in New Mexico.
Sonic President Jeff Dyke told Automotive
News last week that he expects the nation's
sixth-largest new-vehicle retailer will buy some
franchised dealerships this year.

showroom. Customers were comfortable with waiting a few weeks for their
vehicles, and the dealership saved
money on floorplan interest, he said.
He doesn't want to go back to selling
190 vehicles a month while 700 linger.
" It's valuable capital that's being bled
out there, " Kelleher said.
Last week, Kelleher had 238 new
vehicles on hand, which he said is
too few to run his business long
term. His ideal range is 350 to 450.

No build-to-order
The U.S. is unlikely to adopt the
made-to-order model that's used in
Europe, analysts said. Such a model
may be more efficient for automakers, but consumers expect instant
gratification.
Judy Wheeler, Nissan division vice
president of sales and regional operations in the U.S., said Nissan plans
to match supply to demand so the
automaker won't have to rely on incentives to move inventory.
" However, in the U.S., customers still
generally prefer buying from dealer inventory, rather than placing an order

and waiting weeks for it to arrive, " she
said. " We don't see that changing dramatically over the near term. "
Dealers - scarred from shortages
caused by the pandemic, GM's 2019
UAW strike and the global microchip
shortage - may fear a day when
supply is too depleted, said Jeff
Schuster, president of global forecasting at LMC Automotive.
" You don't want to be caught without vehicles customers want when
they want them, " he said.
Still, the industry has learned that
it can run with tighter supply, so asking customers to wait patiently for
their desired vehicle could become
common, Schuster said.
For the industry to maintain slimmer stocks, every automaker would
need to follow suit, Smoke said. " If you
don't have all players behaving that
way, eventually, from economic theory, it becomes unsustainable, but we'll
have to see how things progress. " n
Melissa Burden, Vince Bond Jr., Amy
Wilson and Urvaksh Karkaria
contributed to this report.

Sonic last bought franchised stores in 2014 agreements for stores with more than $3 biland for several years has been selling stores lion in revenue are slated to close early this
and focusing on expanding its used-only Echo- year.
In January, Automotive News reported that
Park unit. Now, largely done with divestitures
and having improved company liquidity, Sonic Lithia plans to acquire Michigan's Suburban
again is looking for franchised stores that are a Collection, a large, privately owned dealership
group. That deal could close this spring or
good culture fit, Dyke said.
" We've got several new-car dealers on the ra- summer. Lithia also picked up two stores in
dar screen now, " Dyke said. " It's the first time Florida this month.
CEO Bryan DeBoer said this month on an
we've had that in a long time. "
Several buy-sell experts have said that they earnings call that Lithia has been eyeing three
expect the publics to be active in the market large groups that would fill its network geothis year, with some of the quieter companies graphically. One analyst asked whether a tiereturning to purchase again.
up with another public group would be a plau " This growth, this expansion from
sible way for Lithia to scale across the
Lithia and Asbury, will likely create
U.S., and DeBoer didn't shoot down
an urge in those [other public] comthat idea.
Two public retailers, however, did
panies to grow again, " Alan Haig,
so last week.
president of Haig Partners, a buy-sell
Sonic's Dyke said the Charlotte,
firm in Fort Lauderdale, Fla., said late
N.C., company has no interest in selllast year.
Asbury, the seventh-largest U.S.
ing its 84 franchised stores. He said
new-vehicle retailer, last summer
while it may make sense for Lithia,
spent $735 million to buy eight luxury DeBoer: Eyeing
given its footprint, to merge with anstores in the Dallas area that were three groups
other public, " you couldn't put an
part of Park Place Dealerships.
AutoNation and Sonic, or an AutoNaCEO David Hult this month called Asbury's tion to Asbury, or AutoNation-Group 1 or Sonacquisition pipeline " active " and said conver- ic-Group 1 together because you'd have to sell
off so many stores it wouldn't make sense. "
sations " dramatically picked up in January. "
AutoNation's Jackson also sees too many isLithia, the third-largest U.S. dealership
group, purchased about 30 stores last year that sues in bringing two publics together, as it likeare expected to generate annual revenue of ly would require significant divestitures of
$3.5 billion. It also sold a handful of stores. dealerships " you just bought. "
" So overlap [and] too much density in a given
Lithia aims to expand annual revenue to $50
billion in 2025, up from $13.1 billion in 2020. market is a real, genuine issue for us, and so we
The company has said it has the ability to add will not be acquiring another publicly traded
$7 billion in annual revenue through dealer- company, " Jackson said. " I don't see a path to
ship acquisitions this year and that purchase the finish line. " a

2/19/21 6:45 PM

Automotive News - February 22, 2021

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