“Many dealers still think they can clear lots with price drops but it isn’t clearing lots, it’s shifting in-store behaviours.”
Len Short, the founder in 2012 and CEO of LotLinx, says managing stock using targeted data helps dealers maintain margins and drive sales in a highly price-transparent market.
He will be speaking at AutosBuzz.com (upcoming in London 17-18 Sep) about how AI-powered solutions can combat margin compression by reducing supply-chain inefficiencies.
“I’ll be showing the big picture of what is going on in the market place and what we have engineered a solution for,” Short told the AIM Group.
“Automotive manufacturers build more cars than they sell, so over time, they start to have supply issues. They have a simple business: they make and sell cars through the dealers; they have no other market for them.
“The problem they have is you can’t tell the dealers what to sell. If the dealers can’t sell what’s sitting on their lot, manufacturers can’t sell new autos fresh off the production line.
“So, when things bunch up, that’s when you hear of $10,000 cashback offers. The manufacturer wants to drive incremental demand — the price elasticity of demand.
“Dealers do too, through scheduled price drops. So, at day six, they may drop the price by $2,000 on new inventory. If they have 100 Silverados — some of them just came in; some have been sitting around for 250 days. They all have finance, were built in 2019, and are all the same car and build.
“There’s no difference for the customer, but there is a big difference for the dealer because it costs money each day to hold the car and antiquated price drop strategies no longer work.
“The problem is: with more price transparency now through the internet, price elasticity of demand has evaporated. It doesn’t drive incremental demand anymore. We’ve got all the data to prove it, dealers are feeling it too.
“Many dealers still think they can clear lots with price drops but it isn’t clearing lots, it’s shifting in-store behaviors. A customer comes in and wants to buy a Silverado but [are faced] with more than one option. They look like the same car, same color, same build, but one of them is marked down $4000: ‘What’s the difference?’
“Well, it’s been on the lot for longer. Is it different for the consumer? No. So the consumer will buy the cheaper one, which means dealers potentially lose the sale for the brand new car.
“If the dealer drops the price on one car, they’re likely to drop the price on everything. The consumer says, “I like this one,” but I want $4,000 off. What does the dealer do? He gives them a discount.
“It’s not driving incremental shopping, it’s just shifting around what is being sold. The more a dealer tries to clear out old inventory the more new inventory is starved from customers. It becomes a vicious cycle.
“I will show this affects a $30 billion per quarter market in new cars in the U.S. alone. It’s a big problem; being able to create the ability to push the demand lever.
“At LotLinx, we have built a platform that manages stock and demand smartly with machine technology. It allows marketing factors to impact outcomes and enables our business to hold significant margins while increasing the pace and volume of sales and eliminating ageing cars normally associated with that.
“Essentially, now, dealers spend money hoping it will align with what they need to sell through a trickle-down strategy. We’ve created specific campaigns that respond to market factors for every vehicle on a dealer’s lot.
“Some cars sell themselves and don’t need marketing, so the trickle-down strategy is a waste and starves the inventory that needs extra help.
“We use AI to predict aged-out inventory and then advance target for demand early to those units. This compensates for the disadvantages at that end of the market and improves our average days on lot ratio.
“It’s a similar concept to ABS braking. You don’t just slam on the brakes and put all the power to all wheels at once. Instead, braking is dynamically applied to the right wheel at the right moment.
“This creates healthy margins. Dealer margins are under pressure and have been eroded very quickly — largely driven by the overuse of these marketing strategies. By reversing them, you can recapture thousands of dollars in margins.
“The impact on dealers is game-changing. We can pinpoint marketing on individual cars, using an AI dynamic. This has been adopted by OEM’s. We do half our business with them so they can help manage the supply chains and with the largest dealers across the country. The smart dealer groups have adopted new processes early.”
What developments are happening in the U.S.?
“In the U.S.,total transactions have increased. People are buying larger, more expensive cars, but the loss of dealer margin, the oversupply of used units in the marketplace, lease returns and a robust but complicated used car business, means the No.1 issue for U.S. car dealers is how to perfect their business processes; because that’s where they can make a profit.
“In the automotive sector, a lot of what happens in the U.S. is a precursor to what happens elsewhere.”
Len Short is the latest in a series of interviews with speakers at the AutosBuzz.com conference in London on September 17 – 18. Len is chairman and CEO of LotLinx. He is a well-respected leader, multi-award winner in the auto industry, and has held numerous other high-profile positions.