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Chairman’s Corner

Low Inventory, High profits: The New Normal?

By: Roger Elswick, Community Honda, Toyota and Kia

In my last column, I saw positive signs that we were returning to normalcy, at least in terms of the growing vaccine rollout that reduced the threat of the coronavirus pandemic. People showed they were ready to get out and enjoy events like the successful Houston Summer Auto Show last May.

What has not returned to normal is a severe inventory shortage of new vehicles affecting automakers and dealers nationwide.  Dealers are significantly short of inventory as shortages of semiconductors crimps production worldwide. We are living in an environment where demand is far outpacing production.

However, I believe we have hit bottom.  I don’t think it could get much worse. Hopefully, the manufacturers will start building inventory a little bit in November and December, but it won’t be like anything we’ve been used to. My guess is the shortage is going to continue for at least a year, and probably at inventory levels about two-thirds of what we are used to.

On a positive note; reduced expenses, higher grosses and extremely positive used car evaluations have resulted in higher profits for dealerships—even better than a year ago. So dealers should continue doing what they have been doing to get through this inventory shortage and the Covid pandemic.

For consumers, low inventory has obviously affected the model selection process—you wanted a silver model but you might have to take a gray one and, maybe, wait a week or two for delivery. But demand and consumer confidence remain strong.

As more people are vaccinated and less concerned about covid threats, customer visits to dealerships are definitely up. We still take precautions but we address it from the customer’s request. If the customer wants us to wear a mask then we wear a mask.

Covid numbers appear to be dropping, but I do think the pandemic will still impact the supply chain. Vehicle production will continue to be impacted by the transportation of vehicles and container ships anchored offshore.

Will this permanently change the industry? I think some of the manufacturers would like to see more of a pull-through method versus a push-through method that they are used to doing business. That’s probably short-sighted because it’s all dictated on market share. When they start seeing their market share drop then you will start seeing them make more vehicles and being more aggressive and push them through the system.

Although inventory shortages have affected sales in my other franchises, I recently opened a new Honda store, which has been beneficial to us because I have cars available. A new facility gets you facility cars, so my timing could not have been better. And, yes, you could say I am very much bullish on the business to make this kind of investment.

I’m also very positive about our upcoming Houston Auto Show in January. I think, even more so than in May, people are ready to get out and are excited for these shows to come back. I anticipate a full-featured, successful show, as well as a good kick-start for the New Year.

This is important because the show is HADA’s number-one moneymaker. It allows the association to continue to fund our community programs. Thanks to this year’s show, our scholarship program will again be taking applications in November.

Looking ahead to the 4th quarter, I think new vehicle issues are still going to be a challenge due to the significant shortage of inbound inventory, and possible used car shortages. But I think overall the market is still very strong. There is still strong consumer demand and I think, from a profitability standpoint, it is still a very favorable market for new car dealers.

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