It might surprise you to learn that in the automotive industry, the concept of a truly “unsold” new car is almost a myth. Every vehicle manufactured, regardless of its model, color, or features, eventually finds a buyer. In my extensive experience of over four decades in the car business, I’ve witnessed firsthand that every car, no matter how long it sits on the lot, ultimately gets sold.
But what actually happens to these vehicles as they wait for their turn to be purchased? When we talk about cars lingering on dealership lots, we’re really exploring the fascinating journey these new vehicles undertake before they reach their final owners. While the majority of cars are indeed sold directly to consumers relatively quickly, there are several interesting paths that unsold new cars can take. Good dealerships strive to maintain a healthy inventory turnover, ideally aiming to sell a car within 90 days of its arrival. This is a crucial benchmark for efficient operations.
During my time as a new car sales manager, I consistently motivated my sales team to prioritize selling the vehicles that had been on our lot the longest. This wasn’t just about clearing space; it was driven by a fundamental aspect of the car business: carrying costs. Understanding carrying costs is key to grasping why the idea of a permanently “unsold” new car is simply not a reality in the automotive world.
The Impact of Carrying Costs on Dealership Inventory
It’s essential to understand that car dealerships operate much like individual consumers when it comes to financing vehicle inventory. Just as most individuals don’t purchase a $40,000 car outright in cash, dealerships also typically don’t buy their entire stock of vehicles in cash from the manufacturer. Instead, they utilize financing options to acquire their inventory, similar to how a consumer takes out a car loan.
New cars are, by nature, depreciating assets. Their value decreases over time, starting the moment they leave the factory. This depreciation clock ticks for dealerships as well. Every day a car remains unsold on their lot is a day that eats into their potential profit margin because they are continuously accruing interest on the loan taken out to finance that vehicle.
Dealerships face a double whammy of carrying costs. They are responsible for paying interest on the loans for each vehicle in their inventory. Additionally, there’s the opportunity cost associated with each unsold car occupying valuable space on their lot. Dealership lots have limited capacity, and every car that sits unsold effectively prevents another potentially faster-selling vehicle from taking its place and generating revenue.
Ideally, from a dealership’s perspective, every car would be sold within days of arriving on the lot. This rapid turnover minimizes carrying costs and maximizes profitability. However, the reality of the car market is that not every car sells immediately.
Factors Leading to “Unsold” Cars
In my experience, some dealerships have held onto cars for extended periods, even exceeding a year, jokingly referred to as “birthday cars.” The reasons behind this often seem rooted in ego rather than sound business strategy. While most dealerships are acutely aware of carrying costs and prioritize inventory turnover, particularly larger, publicly traded dealerships that are closely scrutinized by investors, some dealerships, especially those with an “old-school” mentality, are resistant to discounting vehicles to expedite sales.
I recall working at a dealership where the management firmly believed in maintaining sticker prices and avoided discounting, leading to a significant number of cars languishing on the lot for well over a year. Generally, a car sitting unsold for more than 365 days is unlikely to generate profit for the dealership due to accumulated carrying costs. However, in certain niche situations, dealerships can still find profitability even with aged inventory.
Often, cars that remain unsold for extended periods are those with unique configurations – specific trim levels, equipment packages, or colors that are not widely available. Throughout my career, I have sold “new” cars that were over a year old, and the dealership realized a healthy profit simply because they were the only ones in the country possessing the exact vehicle specifications a particular buyer was seeking. At a dealership in Maryland, we frequently sold these unique, older vehicles to customers from distant states like California or New York who were specifically searching for that particular combination of features.
For larger dealership groups, especially those publicly traded, the concept of truly “unsold” cars is almost unacceptable because it negatively impacts shareholder expectations. These dealerships are under constant pressure to maintain a rapid inventory turnover. However, in smaller, family-owned “mom and pop” dealerships, the phenomenon of cars remaining “unsold” for longer durations is somewhat more common.
The Fate of Unsold New Cars
So, what are the typical pathways for these “unsold” new cars? While direct sale to a retail consumer is the primary route, there are several other destinations for vehicles that don’t sell immediately.
Direct Sale to Consumers
Selling a unique or less popular car to a consumer who specifically desires that particular vehicle remains a viable option, even if it takes time. For buyers seeking a specific configuration or a rare model, patience can sometimes lead to finding the exact car they want, even if it’s been on a lot for a while.
Service Loaners and Staff Demo Vehicles
Dealerships often utilize older new cars to bolster their service loaner fleets or as demonstrator vehicles for staff. Service loaners are provided to customers while their own cars are undergoing maintenance or repairs. Staff demo vehicles are offered as a perk to dealership employees. After a period of service in these roles, these vehicles are then transitioned into the pre-owned inventory and typically offered for sale at discounted prices.
Purchasing a service loaner or staff demo vehicle can be an excellent strategy for budget-conscious car buyers seeking a “like-new” car at a reduced price. These vehicles are generally well-maintained and have accumulated relatively low mileage, as they are not typically used for long road trips.
Automobile Auctions
If a car remains unsold even after being reclassified as pre-owned, the next common destination is the automobile auction. Car auctions are a specialized market primarily accessible to licensed dealers. This industry represents a multi-billion dollar market where thousands of vehicle transactions occur daily.
Dealerships frequently send vehicles to auction that they have been unable to sell through their retail channels. While sending a car to auction often entails accepting a financial loss, it is often a more pragmatic approach than continuing to incur carrying costs by keeping the vehicle on the lot. It’s a calculated trade-off where a smaller loss at auction is deemed preferable to the mounting costs of unsold inventory.
Manufacturers play a crucial role in helping dealerships maintain an optimal inventory mix. By providing dealerships with the right selection of vehicles that align with market demand, manufacturers aim to support rapid sales and minimize unsold inventory. However, when inventory imbalances occur, and dealerships struggle to sell certain vehicles, auctions become a vital outlet.
Automobile auctions are broadly categorized into open and closed auctions. Open auctions are accessible to any licensed dealer, regardless of brand affiliation or whether they specialize in new or used cars. Closed auctions, on the other hand, are restricted to dealerships franchised to represent a specific brand. For instance, a manufacturer like Honda might conduct closed auctions exclusively for Honda dealerships. These closed auctions are often used to sell off lease returns and factory executive demo vehicles, maintaining higher resale values because Honda dealers are willing to pay a premium for quality pre-owned Hondas for their inventory.
Open auctions are often the destination for trade-in vehicles that dealerships don’t intend to retail themselves. Used car dealerships frequently source their inventory from these open auctions, and it’s also where many “unsold” new cars eventually find their way. Major players in the automotive auction market include Manheim, owned by Cox Automotive, which is the largest auction marketplace. If a car is deemed “unsold,” it is highly likely to end up at a regional Manheim auction, where it will almost certainly be purchased by another dealership somewhere.
If you’re interested in delving deeper into the financial dynamics of dealerships buying cars at auction and how they generate profit from this process, please let me know in the comments. I’d be happy to elaborate on this aspect of the car business.
The Myth of the Truly Unsold Car
In conclusion, the notion of a new car remaining permanently unsold is largely a misconception. Whether a dealership patiently waits for the right buyer, converts the vehicle into a service loaner or demo, or sends it to auction, every car ultimately finds a home.
Throughout my 42 years in the automotive industry, I have never encountered a single car, regardless of its perceived unattractiveness, lackluster performance, or any other perceived drawback, that did not eventually find a buyer. Based on my extensive experience, I am confident that this trend will persist for many years to come.
