September 18, 2012
Even after Hyundai’s best August ever, its dealers are painfully aware they could sell many more vehicles if the automaker could provide them. Aside from that annoying reality, Hyundai dealers and the factory are thriving with lean inventories.
Dealers are selling vehicles rapidly, mainly to keep their precious vehicle allocations. Transaction prices are rising modestly despite the pressure to sell vehicles quickly, while floor-plan and incentive costs are low.
“Years ago, I remember, if we wanted cars, especially domestically made cars, there were tens of thousands of cars on the ground in Alabama. Now, there’s none,” said Scott Fink, chairman of the Hyundai National Dealer Council. His flagship Hyundai store in New Port Richey, FL, sold 555 new vehicles last month. “We don’t have enough cars, the manufacturer doesn’t have enough cars, and we have consumers standing in line to buy our cars. It’s a far better situation.”
A few numbers explain the demanding sales environment that Hyundai dealers are battling. On Sept. 1, Hyundai had a 29-day supply of vehicles. For comparison, the Ford brand had a 56-day supply, and Toyota was at 40 days, according to the Automotive News Data Center.
Bob Lisy, general manager of Ganley Westside Imports (Hyundai-Volkswagen-Subaru) near Cleveland, said he doesn’t have a single Sonata GLS in stock. The GLS is the Sonata’s base trim level. In addition, Hyundai just reported its best August ever in the United States. The brand sold 61,099 vehicles last month, up 4% from August 2011. But the U.S. industry rose 20% in August, suggesting Hyundai could have sold more.
A big reason for the brand’s banner month is the speed at which Hyundai dealers are selling vehicles. During the first eight months of the year, the average Hyundai vehicle sold after 27 days on a dealer’s lot compared with 34 days in the same period last year, said John Krafcik, CEO of Hyundai Motor America.
Inventories have been tight since April 2011. In only two months since then have dealers stocked more than a 30-day supply. A 60-day supply is considered ideal by the industry. Krafcik said help is on the way. The company’s production schedule for the final four months of the year is up 19% from the same period in 2011.
The company’s product renaissance boosted demand, starting with the redesigned 2010 Tucson crossover. Now, analysts give Hyundai good marks for eye-catching design and high quality, and there aren’t enough vehicles to go around.
Holding for gross?
Despite low supply and high demand, transaction prices haven’t soared, dealers say. “Dealers can hold out for better grosses, but not for too long,” said Mike DeSilva, general manager of Liberty Hyundai in Mahwah, NJ.
“The pressure to quickly turn every vehicle is high as every dealer is competing for inventory. We still know that we need to move them as soon as they land to make sure we keep getting cars,” said DeSilva, whose dealership sold 112 new Hyundais in August and had about 40 in stock as of Sept. 1.
Fink said dealers are most concerned with quickly turning inventory, not making the maximum profit. “You might think that holding out for that extra $300 is benefiting you, but in the long run it’s not,” he said. “The guys with the fastest turn rate are going to get more cars.”
Krafcik agreed. “I don’t think it’s in the vocabulary of the typical Hyundai dealer to just hold for gross. If they have an opportunity to sell a car to a consumer at a fair price, they’re going to do it.”
Through the first eight months of the year, Hyundai says the average transaction price for the Elantra compact rose $700 from the same period last year, while Sonata prices have remained flat. The mixed results suggest Hyundai’s inventory woes have not been a windfall for dealer grosses.
“When you’ve got a car that’s in relatively high demand with limited supply, people are going to pay more,” Fink said. “At the same time, your good dealers are worried about continuing to build an owner base rather than protecting their gross profits.”
Dealers stress efficiency
Dave Cantin, vice president of Brad Benson Hyundai in South Brunswick, NJ, a high-volume dealership, said he’s comfortable with his 30-day supply of new vehicles.
But he has made sure his staff knows that the cars must keep moving fast to ensure the allocations remain healthy. “Your sales staff has to understand the value of the product that you have on the ground, and they have to sell that product,” Cantin said.
Andrew DiFeo, dealer principal of Hyundai of St. Augustine in Florida, said the most efficient Hyundai dealers have an advantage. “The pressure is to make sure you’re grabbing your fair share of your market, which will then lead to your fair share of allocation,” he said. “It’s really on the dealers to be operationally efficient.”
That means quickly reporting sold cars, making sure dealer trades go through, watching inventory daily and stocking a good mix of color and equipment packages, DiFeo said. “If you are taking a car on a dealer trade, and you have two black Sonatas on the lot, make sure you don’t take another black Sonata,” he said.
Krafcik said Hyundai’s U.S. assembly plants, which build about 50% of the Hyundais sold in the United States, also are efficient. The plants’ production mix matches customer orders “almost 100%” of the time, he said. “We’re getting much closer to a situation where we’re matching customer orders to what’s in the pipeline.”
Still, many Hyundai dealers find it difficult to keep certain cars in stock, and dealer trades are hard to come by because vehicles are in short supply. Fink, for example, said he hasn’t had a Genesis Coupe since July.
DeSilva said in late August that Korea-made Elantras, Velosters, Accents, Azeras and Genesis Coupes have had single-digit-day supplies for “quite some time.” And other dealers lament they’re losing sales to competitors with more plentiful stocks. “For me, it happens fairly often,” Fink said. “We’re absolutely missing opportunities.”
Nevertheless, DiFeo said, the benefits of lean inventories are considerable. For example, his floor-plan costs are less than half of what he paid in 2011 because of how little time inventory stays on his lot. Hyundai also discounts its cars much less than most competitors, which DiFeo said is fueled partly by lean inventories.
The combination of low incentives, low fleet sales and improved products has helped raise Hyundai residual values. Using Hyundai-brand residual values from ALG—the TrueCar subsidiary that in effect sets residual prices for the auto industry—a Hyundai costing $25,000 today will be worth $12,475 after a 36-month lease. The same $25,000 vehicle sold in 2008 was pegged at $10,050 after 36 months.
The strong residuals have helped leasing, which now accounts for about 25% of Hyundai’s sales vs. almost none in 2008. So while inventories are short, for dealers, the glass is definitely half-full.
“We keep looking forward, which is good from a business sense,” Cantin said, “but sometimes you’ve got to look back at where we were and remember how we got to where we are today.”
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