Managing inventory risk is not just about avoiding losses but also about optimizing profitability.

For auto retailers, maintaining an ideal balance between supply and demand is critical. Too much inventory can lead to increased holding costs, while too little can result in missed sales opportunities.

The latest Q2 inventory risk report sheds light on how auto retailers are currently navigating these challenges and provides insights into the broader economic and industry trends impacting inventory strategies.

Vehicle inventory risk refers to the potential for financial loss that auto retailers face due to fluctuations in the market value of their inventory. This risk can be influenced by several factors, including changes in consumer demand, economic conditions, market saturation, and the depreciation of vehicles over time. Essentially, vehicle inventory risk is the likelihood that the value of a dealer’s stock will decline before it is sold, resulting in losses.

Let’s take a look at important trends that shaped vehicle inventory risk in the second quarter.

Impact of the CDK Global cyber incident

The CDK Global cyber-attack created significant disruption across the automotive industry, particularly affecting sales opportunities in June. Despite this, the Q2 inventory risk data reveals that new vehicle sales increased by 10% compared with the first quarter, while used vehicle sales remained stable. This resilience highlights the automotive market’s capacity to adapt, though it also underscores the need for dealerships to refine their inventory risk strategies in response to such disruptions.

New-vehicle inventory trends

The Q2 inventory risk data shows a continued upward trend in new vehicle inventory levels. Day supply for new vehicles increased by four days compared with the previous quarter and 29 days compared with the same time previous year, reaching a total of 72 days. This rising day supply metric indicates a potential oversupply in the new vehicle market, coupled with softening demand. Listing prices for new vehicles remained steady quarter-over-quarter but saw a 10% decrease year-over-year, reflecting the need for strategic pricing adjustments in light of shifting market dynamics.

Brand-specific performance shows significant variability. For example, Ram experienced the largest increase in days’ supply, up by 39 days quarter-over-quarter, suggesting potential issues with oversupply or demand misalignment.

In contrast, Dodge saw a substantial reduction in days’ supply, dropping by 78 days. These variations highlight the importance of implementing brand-specific inventory management strategies that cater to the unique performance and demand patterns of each brand with local market dynamics in play.

Used-vehicle inventory insights

In the used-vehicle category, inventory metrics remained relatively stable quarter-over-quarter, with days’ supply increasing by just one day over the previous quarter and also same time previous year.

However, the report notes a 9% decrease in carryover inventory as the quarter began and a 7% increase in aged inventory. This suggests that while overall inventory stability is maintained, there is a growing concern with aged stock that needs to be addressed.

Markdown magnitude and coverage showed minimal changes quarter-over-quarter, indicating stable pricing strategies. However, dealerships should remain vigilant in reviewing and adjusting their markdown strategies to stay competitive. Effective markdown management is crucial for optimizing sales and ensuring timely inventory turnover.

Electric-vehicle market trends

Electric vehicles have shown a significant 25% increase in sales volume quarter-over-quarter. Despite having a higher days’ supply, EVs’ lower volume has had a minimal impact on the overall day supply metrics. New EVs maintained a steady days’ supply of 113 days, while used EVs saw a reduction to 47 days, down by six days quarter-over-quarter.

The minor increase in aged inventory for both new and used EVs reflects the continued interest and demand for this segment and underscores the need for targeted inventory management strategies to capitalize on this trend.

Recommended strategies for dealerships

To effectively manage inventory risk in the current market, retailers should adopt the following strategies:

  1. Daily and weekly inventory reviews: Conduct rigorous daily assessments and weekly recaps of inventory levels. This practice will help dealerships stay aligned with market trends and make informed adjustments to their inventory risk management strategies.
  2. Strategic markdown planning: Develop and refine markdown strategies by analyzing local competitor pricing and market data. This approach will help dealerships make informed pricing decisions and maintain competitiveness in a dynamic market.
  3. Brand-specific inventory management: Implement tailored inventory strategies for different brands based on their unique performance metrics and day supply variations. This customization will optimize brand-specific outcomes and address individual inventory challenges.

Leveraging advanced data

Q2 data offers dealers unparalleled insights into inventory management. With access to over 24 billion data points, this data provides detailed real-time analytics at the VIN level, enabling dealers to make data-driven decisions and optimize their inventory strategies effectively.

Adapting to market changes

The insight from the data report reinforces the importance of leveraging advanced analytics to manage inventory risks and optimize pricing strategies. By embracing these insights, auto dealers can navigate market fluctuations more effectively, enhance their operational resilience, and secure a competitive edge in the ever-evolving automotive retail landscape.

Len Short is the executive chairman of Lotlinx, who offers an inventory platform that can enable dealers to automatically adapt to market dynamics, mitigating inventory risk through VIN-specific strategies. For more information, visit www.lotlinx.com.