Tags: cars

What Happens to New Cars That Don't Sell?

Lauren Fix By Friday, 12 February 2021 05:37 PM EST Current | Bio | Archive

If you've ever driven by a car dealership and seen the rows and rows of brand new cars, you've probably wondered what happens to the ones that never get sold.
Millions of cars are produced every year, not every car is sold. What happens to them? They don't give them away. If the price is reduced too much it reduces the sales volume of the newer more expensive models.
With each vehicle representing $30,000 or more in retail pricing, the typical dealer doesn't want to keep these vehicles in stock. Brand-new cars, trucks and SUVs that aren't sold can't just sit on the dealer lot forever; their investment in them is too high. It is natural for a consumer to ask the question, so what do they do with all those cars that sit and don't sell?
How the industry works
The quite interesting — the auto business, unlike any other has excess inventory that can't be sold at places like Big Lots or a liquidator. To answer this question, you'll need a quick lesson in how the industry works.
First, it is useful to know that car manufacturers traditionally do not sell vehicles directly to the public. In fact, in many states are prohibited from doing that by law, this is called franchise law.
Instead of selling direct to consumers, manufacturers sell vehicles to franchised dealers, who, in turn, sell vehicles to the general public. So, the manufacturers' direct paying customers are car dealers and the car dealers' direct paying customers are consumers. Carmakers get their money from their dealers in exchange for the vehicles the dealers carry in inventory and then sell to the public.
Simple right. There are some exceptions like Tesla.
What this means in practice is that unsold cars — perhaps a better way to put it is "slow-selling cars" are the problems of individual dealers. Dealers can't send the vehicles back to the manufacturer for a refund. The only recourse they have is "moving the iron." Dealers have to find some way, somehow, to sell every car they buy from the manufacturers whose products they represent. No dealer wants to sit on a car forever, they will take a loss.
Two factors put pressure on dealers to sell cars quickly, this is called "turn their inventory." A non-selling car takes up the space of a newer vehicle that might sell quickly and profitably. This is true for most industries, don't let it sit there — get rid of it.
But there is another factor that is equally important. Most dealers don't buy the cars they sell outright for cash. They finance them, this is called "floor planning" or loans. So each car that sits on their lot is costing them interest on those loans.
Time is literally money, the longer a vehicle sits without selling the larger the cost of having that vehicle around. This is why dealers are exciting to make a deal at the end of the month and not as negotiable the first week of the month after they pay the bank.

So how do dealers Sell the Unsold?

If the consumer is interested in a particular car has been sitting on the lot the more motivated the dealer is to sell that car. It is costing money every month so it makes sense to look for a vehicle that is last years model, to get the best price, because they are ready to negotiate but NOT give it away.
This is where the knowledge is power — Car Smarts comes in!
Many dealers will try to motivate the sales of slow-selling older inventory by offering their salespeople special cash incentives ("spiffs") if they can sell one of them. That's why some salespeople will steer you toward a vehicle that has nothing to do with what you told them you were looking for, because there is a "spiff" in it for them.
In addition, the dealer will frequently offer larger discounts on the slow-sellers than on the quick-moving vehicles. The manufacturer also gets into the act, because it is in their best interest for dealers to sell the vehicles they have so they can buy more new ones. That's why manufacturers offer incentive programs like cashback offers, special subsidized lease deals and zero-percent or other low-interest-rate financing deals.
Another option for dealers is putting a slow-seller into use as a "loaner car" to be used by customers of the service department or as a "demonstrator" and used as everyday transportation by dealer personnel. By doing this the dealer is transforming the slow-selling new car into a nearly-new used vehicle that will then typically be sold at a substantial discount from the manufacturer's suggested retail price.
In certain circumstances, dealers might trade vehicles with other dealers called a "dealer trade" in different cities where their slow-moving vehicle might be more popular with that region's buyers. This is true for some EVs, sportscars, AWD and convertibles based on the area of the country.
A final resort for the dealer with vehicles that don't sell at the dealership is to sell them at an auto auction company. National auto auctions sell new- and used-car dealers from dealer and lease trade-ins. The auctions are a marketplaces that enable dealers to "offload" vehicles they just can't seem to sell or trade. The buyer is another dealer or a used car lot.
The auction process, will sell the slow-moving "dog" that was haunting them on their lot each day even if they do so at a loss. There are also additional costs involved that cost the dealer money.
What happens to brand new cars that never get sold?
If they flood the auctions and cut prices too much it's harder to sell the new model coming in every week.
The final option for the manufacturer is slightly different than the dealer — the industry has huge outdoor parking lots that are designed for hundreds of cars that just don't have a buyer, so they need to take them off the market.
Manufacturers may help to sell these cars by offering them to employees of the brand. They want them to drive the cars they build. And the employees buy it at a lower price. Buyers may even get a break on payments or other perks.
These cars just sit and rust, like a car cemetery. They sit at abandoned airbases and parking lots. Manufacturers want to sell newer cars as it's more profitable, they don't want to flood the markets with last years model as they need to sell the newest products. If they did, the production of the current models would be slower and this could impact their employees with less work. Think of it like a domino effect.
Realize that this loss is figured into the cost of the vehicle. The same is true in the food business, they know they can't sell everything while its fresh and may need to be thrown away. That's called "shrinkage," and its figured into the cost and the bottom line.
Look at some of these car cemeteries. Some of these cars are ready to ship to dealers while others will never move again. Even Tesla has this same problem.
This is no joke, these cars sit and wait. Tons of unsold cars sit every day. Do they ever move? The market is about selling newer model, not older cars. Some companies ship them to other countries, some eventually are dismantled and destroyed. That costs the manufacturer and the dealer.
Bottom Line:
The dealer needs to sell the car or unit with incentives, even if they take a loss and it will sell. Keep lowering the price and someone will buy it! The dealer does find a buyer, eventually. For the manufacturer, it's the cost of doing business.
If you are looking for a great car deal, ask what is the oldest new car on the lot. If a car is on the lot more than 90 days, the dealer will be more interested in making a deal.
Don't forget to check out our all-new website: Car Coach Reports
Lauren Fix, The Car Coach® is a nationally recognized automotive expert, media guest, journalist, author, keynote speaker and television host. Post your comments on Twitter: @LaurenFix or on her Facebook Page.

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With each vehicle representing $30,000 or more in retail pricing, the typical dealer doesn't want to keep these vehicles in stock.
Friday, 12 February 2021 05:37 PM
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