Buy Car Directly From Manufacturer – Even people who have been in the car business for decades and know how the industry works are sometimes amazed at the number of brand new cars, trucks and SUVs sitting on the lot of a typical new car dealership. Anyone who represents $30,000 or more in retail, the average dealer has a lot of inventory and a large investment in that inventory. So it’s natural for the consumer to ask, “What happens to the new cars that don’t sell?”
The answer is both simple and specific to the auto business unlike any other in the United States. However, to understand the simple answer, you need a short lesson on how the industry works.
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First, it’s helpful to know that car manufacturers have traditionally not sold vehicles directly to consumers. In fact, in many states, car companies are prohibited by law from doing this. Instead of selling directly to consumers, manufacturers sell cars to licensed dealers, who in turn sell cars to the general public. Thus, the direct paying customers of the manufacturers are the car dealers, and the direct paying customers of the car dealers are the consumers. Automakers get their money from their dealers for cars that the dealers move into inventory and then sell to the public.
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In practice, this means that unsold cars, perhaps better expressed as “slow-selling cars”, are the problems of individual dealers. Dealers cannot return vehicles to the manufacturer. Their only solution is to “move the iron”. Dealers must somehow sell every car they buy from the manufacturers whose products they represent.
Two factors are putting pressure on dealers to sell cars quickly and, in retailer parlance, to “turn over their inventory.” One factor is the physical space they have on their trading lots. An unsold car takes up space for a car that can be sold quickly and profitably. Grocers don’t want to fill their shelves with products that just sit there, and retailers don’t want to do that with a sale lot.
But there is another factor that is no less important. Most dealers don’t buy the cars they sell outright with cash. They finance them. So every car sitting on their lot costs them interest on those loans, which is called “floor planning” in the industry. Time is literally money in this scenario. The longer a car sits unsold, the higher the value of owning that car.
What it tells you, the consumer, is that the longer a particular car sits on the lot, the more motivated the dealer is to sell that car. It costs money to be there and prevents a potentially more profitable car from sitting there, selling quickly and making the dealer a decent profit.
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Many dealers will try to encourage the sale of slow-selling older stock by offering their dealers special cash incentives (“spiffs”) if they sell such a vehicle. This is why some dealers will direct you to a car that has nothing to do with what you told them you were looking for. Also, the dealer often offers bigger discounts for slow sellers than for fast moving cars. The manufacturer also gets in on the action because it’s in the dealers’ interest to sell the cars they have so they can buy more. That’s why manufacturers offer incentive programs like cash-back offers, special subsidized lease deals, and zero- or low-interest financing deals.
Another phenomenon for dealers is the use of a slow seller as a “loaner car” to be used by service department customers or as a “demonstrator” to be used as daily transportation by dealer staff. In this way, the dealer turns a slow-selling new car into a near-new used car, which is then usually sold at a significant discount from the manufacturer’s suggested retail price.
Under certain circumstances, dealers may exchange vehicles with other dealers in different locations where their slow moving vehicle may be more popular with buyers in that region. The flavor of cars is more regional than you might imagine. For example, four-wheel-drive and four-wheel-drive vehicles are much less common in the Southeast than in the Upper Midwest and New England.
A last resort for dealers who have vehicles that are not for sale at the dealership is to sell them at a car auction. Most areas have car auctions attended by new and used car dealers. Auctions serve as marketplaces that allow dealers to “unload” vehicles that they can’t seem to sell to their retail customers. At auction, they will sell the former slow-moving “dog” that haunted their lot every day, even if they do so at a loss.
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As my lifelong retailer grandfather told me. “You can sell anything, it all depends on the price.”
So, as we said at the beginning, the simple answer to the question of what happens to new cars that don’t sell is: Cars that don’t sell to retail buyers within the timeframe they’re used to go down a different path to sale but sold. Eventually.
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The F-Series Super Duty trucks got what they needed for the 2023 model year. Ford announced a more powerful line of heavy-duty trucks with available new technologies, great standard safety features and unique equipment to make the trucks better suited for specific industries.
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The fourth-generation 2023 Honda Pilot is about to go on sale, and Honda has updated it significantly over the popular third-generation model it replaces. Honda will offer the redesigned 2023 Pilot in Sport, EX-L, TrailSport, Touring and Elite trim levels in December 2022.
Ram is using the 2022 Texas State Fair to showcase its new 2500 Heavy Duty Rebel, a rugged off-road truck that retains its work truck capabilities. It brings off-road enhancements such as an electronic locking rear differential and a rear limited slip differential. As you know, United States federal law protects car buyers in the form of car sales regulations such as: car sales lemon laws, used car rules, and car sales contract law. However, sometimes these protections are broken and end up doing more harm than good to the user.
For example, according to state laws and the Federal Trade Commission (FTC), it is illegal for a consumer to buy a car directly from the manufacturer. This rulebook was written with the best of intentions and worked well for a while. However, these days it allows car dealers to charge higher prices and make worse deals for individuals buying either new cars or used cars.
When these regulations were created, they solved a very real problem. As auto manufacturers were the only way to purchase vehicles, and these manufacturers consolidated into less and less massive corporations, they were able to raise prices as they saw fit and put pressure on dealers. In response, states passed laws protecting new and used car dealers from predatory practices by manufacturers.
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These protections have taken many forms, including prohibiting manufacturers from selling vehicles themselves, limiting harassment by dealers affiliated with the manufacturer, and other vehicle sales regulations.
Unfortunately, these protections only exacerbated the problem of lack of competition. States allowed franchisees of dealerships to keep entire premises unencroachable. Initially, this protected small dealers and prevented manufacturers from exerting their power over these dealers. As car dealerships grew, however, their market power also became part of the problem. Since there was no competition, these car dealers were able to raise prices to ensure their own profits.
That’s how we got into the modern dealer environment (and we haven’t even touched on things like OFAC, dealer compliance, and other consumer protection stuff). Car dealers in many states have much less competition, allowing them to negotiate higher car prices with car buyers because there are few other places to go. For example, a 2015 study found that a distance of 30 miles between similar dealers increased prices by $500.
Of course, regulations and public policy are part of a healthy economy and strong auto industry. The situation would probably be worse if the car manufacturers were allowed to continue to merge and monopolize both production and distribution. However, it is important that the new regulations are thought through and work with the needs of the consumer in mind, not the manufacturer or distributor.
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