New-vehicle dealers seem to be playing a game of roulette right now, with about half of them betting on red and the other half on black.

 

The wager is on whether dealers should continue taking additional new-vehicle inventory into stock.

 

Many dealers understandably have been unnerved by this pandemic and have voluntarily placed themselves on finance hold to halt any additional vehicles from being delivered.

 

Most OEMs have tried to combat this fear by offering additional wholesale incentives or by providing deferred floor plan terms.

 

A recent inventory analysis by vAuto found that 60% fewer new vehicles were delivered to dealership lots early April vs. the same week a year ago. Clearly, there is a fair amount of pessimism at the inventory roulette table. 
 
But which is the better bet, black or red?

 

The pure retail new-car seasonally adjusted annual rate dropped from 13.4 million in Feb to 8.7 million in March. Ouch. This drove the days’ supply numbers 53% higher, to 116 days.  
 
The April sales forecast puts retail sales volume at 558,000 units for the month.  If that sales volume is applied to the ending March inventories, the industry days’ supply climbs from 116 days to 143 days, nearly a six-month supply.
 
Based on the math, it’s hard to fault the dealers who are betting on red, or against taking more new-vehicle deliveries.

For those inclined to bet on black (taking more inventory), consider:

 

• OEM production has essentially halted globally, and it likely will be six months before normal production and inventory volumes begin flowing again. What dealers have on their lots today is likely what they will have to sell from for the next four to six months. Most dealers will need what they have on the ground just to get through this downturn in manufacturing. 

 

• The auto industry is simply "too big to fail." There are strong indications the government will launch another "cash for clunkers"-type program to spur demand sometime this summer, once there is more certainty around the health crisis. Morgan Stanley auto analyst Adam Jonas is reporting a new program would be in the $10 billion range vs. the 2009 "cash for clunkers" program, which was $3 billion.

 

• Unlike independent dealers, franchised retailers have a motivated partner in their OEM to help drive demand. The domestic makes already have shown a willingness to be aggressive with programs, like 0% APR financing for 84 months. In March, average incentive spend was 10.5% of average transaction price. According to the latest Cox Automotive 2020 COVID-19 Impact Study, one-third of shoppers are delaying their vehicle purchase, but almost half of those could be spurred into action if they find the right deal.

 

• Necessity vs. emotional purchases. Dealers say that about 50% of their new-car sales are "necessity" purchases: lease turn-ins, life-changing events, totaled vehicles and the like. There will continue to be these purchases, some of which are likely being postponed until summer.

 

• The financial cost of holding new vehicle inventory is quite low because interest rates have plummeted.

 

• Cash flow. New-car deliveries bring with them holdbacks, floor plans, ad assistance dollars and pre-delivery inspection money for the technicians. At a time when dealers are conscious about their cash on hand, new-car deliveries do create more cash.
 
This economic downturn is having a massive impact on consumer demand and their ability to buy new vehicles. Consequently, dealer days’ supply at most stores has more than doubled since February, which no doubt has raised some eyebrows and caution around the inventory roulette wheel.
 
However, with 2020 being an election year, there will be huge political motivation to get the economy and the American consumer back on track.
 
The potential Cash for Clunkers II could drive nearly 4 million units of sales volume. Brian Finkelmeyer, senior director of new-car strategies at vAuto, said the OEMs are going to be more concerned about their own cash flow and less focused on margins, which means bigger consumer incentives.

 

All of these elements combined could create some big winners at the inventory roulette wheel.

 

Last week, a dealer from North Carolina said: "Dealers are optimists by nature. We always find a way to figure it out." 

 

"If I were placing my bet at the new-vehicle inventory roulette wheel," Finkelmeyer said, "I’d be betting with the optimists on black because I believe in three things: the American consumer’s resilience, American politicians’ willingness to spend money, and in the American car dealer’s ability to always figure it out."