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How Inventory Shortages Affect Aftermarket Profitability

Here’s a look at what dealers can do to conquer inventory shortage woes.

Mark Barnes is the Senior Vice President of Sales & Revenue for Portfolio

When New & Used Units Are in Short Supply, Dealers Must Take Action to Protect F&I & Reinsurance Earnings

The old adage that says, “You can’t sell what you can’t get,” is truer than ever today. Even as I write this, the economic landscape for automobile dealers — as well as the rest of the country — is shifting.

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Inventory shortages lead to higher prices, which can lead to inflation, which can lead to higher interest rates. This increases the transaction cost for buyers, who suddenly find they may not be able to purchase the vehicles they intended. 

I’m not an economist, but I know there’s a tipping point where it all becomes too much for consumers. When that happens, they don’t buy anything. No trade-ins means fewer units going to dealer lots and auctions, which fuels the need for pre-owned inventory. It is a tiger chasing its tail. 

New vehicles were already scarce due to idle plants during the pandemic. Then, just when it was starting to come back, a microchip shortage put a hole in that plan. Here’s how it happened:
• More people working from home needed more computers, causing chipmakers to switch production from auto to electronics. 
• In March 2020, a factory fire halted production at Renesas, one of Japan’s largest semiconductor producers and one of the few that supplies the auto industry. 
• Automakers could not deliver hundreds of thousands of vehicles to dealers without the necessary electronics.
• The economy’s resurgence, fueled in part by government stimulus money, accelerated demand from car buyers, which quickly depleted existing new vehicle inventory.

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Since we’re all together on this merry-go-round, we might look at what we can do now. 

1. Expand Your Search

Access capital through loans from your reinsurance company to purchase additional used inventory. Use these funds to become a car scavenger. Go deeper on trades. Work with your finance sources to buy out lease returns early. Let everyone in the dealership know you want their friends’ and families’ second and third vehicles. 

2. Become a Pre-Owned Supercenter, and Certify Everything

Customers’ choices are no longer between buying new or paying less for a similar pre-owned model. Today, they’re buying used — from you or somebody else. Make them feel like new-car buyers. Button up your reconditioning process. Maximize your certified pre-owned (CPO) program by expanding eligibility. Make sure every certified vehicle has a “wrap” service contract available to round out the customer’s coverage. 

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3. Evaluate F&I Pay Plans

A scarcity of new vehicles has allowed dealers to sell over sticker price. F&I will get hit hardest, since a customer’s payment comfort level has not changed. Evaluate pay plans to ensure aftermarket penetration remains at pre-shortage levels in your dealership. Keep in mind that a service contract sold at a smaller gross is better than no sale at all. Follow the money trail from F&I through your reinsurance or participation program. Make sure you’re making up for the lost F&I income through reserves in your company outside the dealership — but don’t forget who got you there. 

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4. Consider Your Options

Reevaluate everything your provider currently does for you — both in the dealership and with your participation program. This may be a time for change, so take advantage while you have the time to make careful choices when it comes to your future profitability and post-dealership lifestyle. 

5. Think About the Future

Prepare for the day when chip shortages and COVID-19-related plant closings are behind us. Consumer demand has been high since the middle of 2020, with nothing to buy. Pent-up demand is still out there. The buyers will come. Be ready.

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Make sure you have everything in the store working toward the goal of treating every customer like gold. They deserve the break after what they’ve been through. And so do you.

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