What Happens To New Cars That Don't Sell?

Jack R. Nerad | Sep 11, 2020

Even people who have been in the car business for decades and know how the industry works sometimes marvel at the number of brand-new cars, trucks, and SUVs that sit on a typical new-car dealer's lot. With each one representing $30,000 or more at retail, the typical dealer has a lot of stock on hand — and a big investment in that stock. So it is natural for a consumer to ask the question, "What happens to new cars that don't sell?"

what happens to new cars that don't sell

The answer is both simple and peculiar to the auto business, a business unlike any other in the United States. However, in order to understand the simple answer, you’ll need a quick lesson in how the industry works.

How Car Sales Work

First, it is useful to know that car manufacturers traditionally do not sell vehicles directly to the consumer public. In fact, in many states, auto companies are prohibited from doing that by law. Instead of selling direct to consumers, manufacturers sell vehicles to franchised dealers, who, in turn, sell vehicles to the general public. So, the manufacturers' direct paying customers are car dealers, and the car dealers’ direct paying customers are consumers. Carmakers get their money from their dealers in exchange for the vehicles the dealers carry in inventory and then sell to the public. 

What this means in practice is that unsold cars — perhaps a better way to put it is "slow-selling cars" — are the problems of individual dealers. Dealers can't send the vehicles back to the manufacturer for a refund. The only recourse they have is "moving the iron." Dealers have to find some way, somehow, to sell every car they buy from the manufacturers whose products they represent.

Two factors put pressure on dealers to sell cars quickly and, in retailing parlance, "turn their inventory." One factor is the physical area they have on their sales lots. A non-selling car takes up the space of a vehicle that might sell quickly and profitably. Grocery stores don't want to fill their shelves with products that just sit there, and dealers don't want to do that with the sales lot. 

But there is another factor that is equally important. Most dealers don't buy the cars they sell outright for cash. They finance them. So each car that sits on their lot is costing them interest on those loans, which are called "floor planning" in the industry. Time is literally money in this scenario. The longer a vehicle sits without selling the larger the cost of having that vehicle around.

Selling the Unsold

What this tells you, the consumer, is the longer a particular car has been sitting on the lot the more motivated the dealer is to sell that car. It is costing money for it to be there and it is preventing a potentially more profitable vehicle from sitting in its place, selling quickly, and making the dealer a decent return. 

Many dealers will try to motivate the sales of slow-selling older inventory by offering their salespeople special cash incentives ("spiffs") if they peddle such a vehicle. That's why some salespeople will steer you toward a vehicle that has nothing to do with what you told them you were looking for. In addition, the dealer will frequently offer larger discounts on the slow-sellers than on the quick-moving vehicles. The manufacturer also gets into the act, because it is in their best interest for dealers to sell the vehicles they have so they can buy more. That's why manufacturers offer incentive programs like cashback offers, special subsidized lease deals, and zero-percent or other low-interest-rate financing deals. 

Another gambit for dealers is putting a slow-seller into use as a "loaner car" to be used by customers of the service department or as a "demonstrator" to be used as everyday transportation by dealer personnel. By doing this the dealer is transforming the slow-selling new car into a nearly-new used vehicle that will then typically be sold at a substantial discount from the manufacturer's suggested retail price.

In certain circumstances, dealers might trade vehicles with other dealers in different locales where their slow-moving vehicle might be more popular with that region's buyers. Vehicle tastes are more regionally oriented than you might guess. For instance, all-wheel-drive and 4-wheel-drive vehicles are much less popular in the Southeast than they are in the Upper Midwest and New England.

A final resort for the dealer with vehicles that don't sell at the dealership is to sell them at an auto auction. Most areas have auto auctions that are frequented by new- and used-car dealers. The auctions serve as marketplaces that enable dealers to "offload" vehicles they just can't seem to sell to their retail customers. Through the auction process, they will sell the former slow-moving "dog" that was haunting them on their lot each day even if they do so at a loss.

All New Cars Sell…Eventually

As my grandfather, a lifelong retailer 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: there really aren't any cars that ultimately don’t sell. Cars that don't sell to retail buyers in the accustomed timeframe take a different route to be sold, but they are sold. Eventually.

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