Visualizing The Train Wreck Of Auto Inventories

Authored by Daniel Ruiz via Blinders Off blog,

On May 10, 2017, there were 145,763 new 2016 vehicles unsold.

Today, 2016 new car inventory stands at 112,310.

At the current rate of sale, we will not sell through the new 2016 inventory till the last week of August.

Why this matters

Dealers always focus on selling their oldest vehicles first. This is because the majority of dealers floor plan their inventory.

As a vehicle gets older, the interest expense grows larger. Because of this, the oldest inventory always gets the prime real estate at a retail dealer location for maximum visibility. Newer arrivals are usually staged in lower customer traffic areas and not discounted as much in efforts to sell the oldest vehicles first. This method of inventory control works great as long as supply doesn't overwhelm demand.

More Supply Than Demand Is Our Current Reality

Here's a visual representation of this in action. On the way to a local park, I passed a dirt lot previously used as farm land now filled with cars.  I looked at my wife and asked, "Did we just see that?" I quickly turned around to capture the image below.

I could not believe new vehicles were being stored at a farm down the road from a new car dealer.

For two days I thought about it and could not get the image out of my head. I had to go back and see how many vehicles were being stored.

This overflow lot is now home to millions of dollars worth of inventory that customers do not see.

The topic of surplus dealer supply was also brought to light in a 2017 Bloomberg article by Gabriella Coppola where she cited a New Jersey Honda dealership renting additional space to store excess inventory for the first time in 37 years. The inventory problem today is a metaphoric train wreck as the engine (2016 unsold inventory) has been derailed, with the freight (2017/18 new inventory) still traveling behind at a high speed.

You might wonder, How far into 2018 will we have to go to sell the 2017's?

As we noted previously, so far in 2017, Ford has proved to be right on the conversation of “plateauing” auto sales, but fails to mention what happens next.. That is an interesting question, if you believe in gravity of what goes up must come down. The Auto Inventory/Sales Ratio breached new high in March 2017 alluding to more building pressures in inventory.

This signals a weak demand pull from US consumers.

The Longer It Takes, The Greater The Pain

The only solution is to slow or halt production of new cars. The longer the manufacturers wait, the longer the production stop will be. Manufacturing is extremely important to our economy as well as the associated jobs.

It's time to take the blinders off.