In a typical year, Matt Koning likes to have up to 210 vehicles listed and ready to sell across his four used car lots. Right now, his inventory is sitting at 110 — and he still feels fortunate to have that robust of a supply.
“We can’t keep up with demand right now — getting them fixed and repaired quick enough with the people and the resources we have,” said Koning, president and owner of Broadmoor Motors. “They’re just selling faster.”
Koning and his dealership — which maintains stores in Caledonia, Middleville, Hastings and Wayland — are emblematic of the entire industry right now as it faces a problematic intersection of high demand for vehicles and a worldwide slowdown in production because of material shortages, primarily microchips.
Dealerships of all sizes are facing bare lots and showrooms while used cars are going for retail prices at auction. The dynamic is forcing these businesses to make crucial adjustments and get creative in order to navigate the turbulent industry.
“I’m a little surprised more places haven’t gone out of business or at least cut their workforce,” Koning said. “You look at some of these dealerships that are used to having 100 cars for sale and they only have 40 or 50. I don’t know how they pay all their salespeople and buyers and other overhead they normally have.
“I suspect we’ll see more dealerships close or combine over the next few months.”
Disruptions in the industry’s supply chain have hampered new vehicle production in North America. News of the global microchip shortage has dominated headlines, painted as the primary culprit of the production slowdown. Microchips are required for many different vehicle components, from power windows to dashboards to transmissions.
Ford Motor Co. recently estimated that it would have to slash production by 50 percent in the second quarter because of the microchip shortage.
“Automakers and suppliers that were requesting (microchips) weren’t sure initially what demand would be like” early in the COVID-19 pandemic, said Mike Wall, director of automotive analysis at IHS Markit. “They were maybe scared to ramp up. But by July or August, we knew demand was coming back with gusto.”
However, Wall noted that the industry faces more issues than just a shortage of semiconductors. This includes shortages, increased lead times and high prices for materials like rolled steel, rubber, resin and seat foam in addition to disruptions at many of the nation’s ports.
“Were it not for microchips, we’d still be in a pickle,” Wall said. “Maybe not as severe of one. That’s the interesting thing in all this. There are a number of commodities that are causing all sorts of problems.”
In its latest forecast, IHS Markit projected that the industry will see 15.7 million units of North American light vehicle production for 2021. If not for the shortage of materials, the industry would likely be on par with pre-COVID levels, which were at 17 million units in 2018 and 16.3 million in 2019, which included the General Motors labor strike at the end of the year. Production plummeted to 13 million units in 2020 during the pandemic.
The industry is currently sitting on 2.4 million units of inventory and could use an additional 700,000 to 1 million to return to “normal” market conditions, Wall said.
These supply chain kinks are amplified by the fact that demand has snapped back to pre-pandemic levels. Wall was fairly surprised by this trend since the pandemic caused such widespread unemployment and disruption to the nation’s GDP. Based on those metrics, he would have expected a slower return of demand.
“This is very much a supply situation and not demand,” he said. “That’s the good news in all of this — people are ready and willing to buy cars. That’s saying something considering when you look back on 2008 and 2009, it took a lot longer to get back to par. Here, retail sales are back to pre-COVID levels.
“If we could get the stock, we’d be selling even more.”
Finding a niche
Dealerships — fishing out of a smaller pond of available vehicles — find themselves getting creative when it comes to sourcing vehicles to sell.
For Broadmoor Motors, which employs 36 full-time and five part-time employees, that niche is loading up on vehicles with branded titles. These vehicles come with a history — whether they are theft vehicles or have a salvaged title.
Koning said that most dealerships and buyers shy away from these vehicles. However, Broadmoor Motors has seen success by providing comprehensive disclosure of each vehicle’s history and standing behind all of the vehicles they sell.
“We feel like we’ve done something and scaled it that no other dealers are really looking to do,” Koning said. “Most dealers have to have clean titles, accident-free vehicles. We’re not afraid of something with a history. We’ll just disclose everything and show before pictures and we won’t get as much money for it but we’ll still make a customer.”
Broadmoor Motors has also invested heavily in commercial vehicle sales. In fact, the business started in the late 1980s by dealing with cargo trucks.
When the pandemic hit, Broadmoor Motors loaded up on commercial vehicles that were more readily available, and it has paid off so far.
“I think that’s with any business — you have to have an edge or niche, something that you can specialize in and focus on that’s different from everyone else, whether that’s the way you treat people or your product or both.” Koning said. “I would look at our business and say we have kind of a unique product — we’re not afraid of anything. What sets us apart, though, is how we treat people. I would say that’s our main focus.”
Inventories are just as light for DP Fox Ventures LLC, parent company of Fox Motors, which operates 50 dealerships that are mainly concentrated in West Michigan but also extend to the Upper Peninsula.
Fox typically maintains a 90 or 100-day supply of vehicles. Right now its supply is down to about 30 days for domestic vehicles and between 30 and 60 days for imports, or roughly one-third of the company’s typical inventory, according to Fox DP President and Chief Operating Officer Diane Maher.
Fox has increased efforts to source private sellers looking to unload their vehicles. The company introduced the Fox Cash Offer promotion about a year ago, in which Fox provides an instant cash offer for any used vehicle. Maher said she has been pleased with the response.
“It’s a little tougher to do it when you don’t have anything to put (vehicle sellers) in, like a new car,” she said. “That’s a little challenging right now but it’s been a successful promotion, for sure.”
Fox dealerships will also scour Craigslist and similar websites while also networking with the vehicle owners that frequent Fox’s service centers. The company is constantly on the lookout for vehicles, but the auctions — where prices are expected to continue rising — are not always a viable route.
“Auctions are the last resort because those prices are just way too high right now,” Maher said. “It’s just an unusual market condition that you don’t want to hurt yourself too much in or get too crazy with.”
Fox enjoys the advantage of operating a larger group dealership, but not necessarily for the purchasing power.
“I think having a big group is helpful especially when you have multiple franchises in your group and you’re able to move cars around,” Maher said.
Aaron Zeigler, president and CEO of Kalamazoo-based Zeigler Auto Group, has found a similar luxury as a company with 30 dealerships throughout Michigan, Indiana and Illinois. Not only can he move cars around, but as part of Zeigler’s aggressive efforts to buy up cars, the company has also had luck buying in bulk.
Zeigler, who normally stocks 12,000 vehicles but is down to 6,300 right now, said it wouldn’t be uncommon for his company to approach a seller to purchase 500 vehicles at a time that just came off lease.
Zeigler also recently added to its portfolio by purchasing its first Subaru dealership, located in Merrillville, Ind. The acquisition highlights the potential for consolidation in the market.
“There is a tremendous amount of M&A activity right now,” Zeigler said. “And I think part of it is driven by (the fact that) times have been pretty good.”
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