Dealers scramble to deal with growing new-car inventories

Abandoned factories, forgotten shopping malls, and undeveloped parcels of land have become parking lots full of new cars as dealers try to figure out what to do with mounting inventories of unsold vehicles.

As of April 1, dealerships in the U.S. had 4.2 million unsold new cars waiting to find buyers, Automotive News reported Tuesday. Although the excess inventory situation isn't as dire as when the economy crashed a decade ago, it's only 114,000 fewer vehicles fewer than the modern-day inventory record set in May 2004. However, should a downturn hit the auto industry, dealers may find themselves overstocked.

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The loans dealers take out to finance their inventories could put the squeeze on new-car dealers. For around eight years, interest rates remained low, which allowed dealers to carry vast inventories with little cost. With interest rates on the continuous rise, the same dealers stuffed to the max with more cars, trucks, crossovers, and SUVs, rates have eroded profits despite some incentives from automakers themselves. Add in extra costs to store vehicles at off-site locations, and the situation becomes worse.

To put the problem into greater perspective, floorplan rates have risen from a low of 1.5 percent to more than 5 percent now. The problem is worse since the market continues to prefer pricier pickup trucks and SUVs, which cost more to hold in inventory for dealers. The more expensive the vehicle is, the more it costs the dealer to keep it in inventory. One dealership group reported its floorplan expenses jumped 55 percent from $6.6 million in the first quarter of 2018 to $10.2 million in 2019.

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Although new-car demand remains steady, the first quarter of 2019 showed the boom days are likely over for this cycle. The auto industry experienced incredible gains during the last decade, but sales dropped 3.2 percent in the first quarter of this year. Per the report, 2019 will likely be the first year since 2014 that sales figures fall under 17 million new cars sold.

Some dealers say part of the problem are the automakers themselves, which continue to push dealers to take more cars. One anonymous dealership accused Fiat Chrysler Automobiles of promising but not delivering incentives to stock certain slow-selling models.