How to Prevent Revenue Loss Due to Lot Rot of Unsold New Cars

Lot rot is dealership jargon for the deterioration and damage done to vehicles that are exposed to the elements for a prolonged period. All dealers have seen it at some point. A reconditioned vehicle is in perfect condition when it’s driven onto the lot. But slowly the sun, rain, dust and debris take a toll. Within a month or two it looks like the vehicle was never reconditioned at all.

The longer unsold cars sit out in the elements the worse the lot rot gets and the lower the gross will be. Just how low is the question.

How Does Lot Rot Impact Sales?

U.S. auto dealers are in a somewhat precarious situation. Vehicles are extremely high-priced inventory to hold on to, and Americans prefer to buy new unsold cars off the lot. Dealerships have to have hundreds of thousands, if not millions, worth of inventory stocked on the lot at any given time.

How much does it cost a dealer to keep a car on the lot?

It’s a very costly business model, in large part because of lot rot. Dealers invest thousands into a vehicle long before a sale is made. On average, reconditioning and pack is about 12 percent of the sale price.

The automotive distribution research group ICDP estimates that lot rot affects $100 billion in inventory every month. Virtually every vehicle on the lot is susceptible to it. The fact that they’re spec vehicles means there’s more risk of inventory waning away until the right buyer comes around.

People buy with their eyes so it’s only natural that lot rot will have an effect on the sale price. If the car looks like it has been sitting out in the elements rather than rolling right off the assembly line buyers will question the condition. Once the condition is called into question it’s hard to convince a buyer to settle for the sticker price.

The test drive is another critical component of a car sale that can be negatively impacted by lot rot. Non-use can cause varying degrees of deterioration that affect the drive. Right from the start the vehicle’s cold battery may not turn over immediately. Once underway the brakes may not apply smoothly and the engine may not hum like it used to. Every little glitch is going to be felt by the buyer.

Just the fact that a vehicle has been on the lot for a while without selling has an effect on buyers. It’s the same thing that happens in real estate when a home sits on the market for months without an offer. Buyers automatically wonder what’s wrong with the home, or in this case, the vehicle. They question why it hasn’t sold and whether there’s cause for concern. Even if the vehicle is in perfect condition the time on lot will create doubt in the minds of buyers.

Buyers now have resources to know exactly how long a vehicle has been for sale. They understand that aged inventory is taking up valuable space at a lot and that can be used to negotiate the price down. Some savvy buyers will wait until a vehicle has been on the lot 90+ days and is close to being wholesaled. At this point, many dealers are happy to simply break even on the sale.

Since 2000, U.S. automakers like Ford and GM have tried to change the buying mindset and move things toward the build-to-order model that’s big in Europe. Custom ordered vehicles are ultimately much less costly than spec vehicles that sit on lots. Despite their efforts to deliver custom ordered vehicles, the early dealer-direct order programs didn’t pan out as hoped.

It would seem that buyers would be open to the idea of getting a new vehicle custom made with all of the features they want, but we’re an impatient culture of car buyers. Once the decision is made to buy, many people want the vehicle right then not weeks or months down the road.

Inventory on the lot is a huge factor for the few models that are custom ordered. That’s the perspective of Tim Kuniskis, the head of passenger vehicles at Fiat Chrysler Automobiles North American division. When there are a number of new vehicles for a particular model on the lot for a buyer to choose from the idea of custom ordering isn’t as appealing. But if there aren’t any available for purchase same day, buyers are open to the idea of ordering a vehicle. Kuniskis has seen this scenario play out with the Hellcat, which has a custom order rate of 30-40 percent. Kuniskis believes Fiat Chrysler Automotive dealers stand to save money by limiting inventory and encouraging the build-to-order system.

Lot rot also impacts used vehicles, and there’s no custom order solution. Researchers at vAuto, an automobile inventory software company, have noted that cost-to-market increases the longer a used vehicle wastes away on the lot. And the lot rot timeframe is tightening. The cost-to-market hits 90 percent around 30-45 days. Just a few years ago it took roughly 60 days to hit 90 percent.

The general takeaway is the sooner a vehicle sells the better chance there is for minimizing the lot rot effect and turning a profit.

Understanding Lot Rot to Prevent It

The first step to preventing lot rot at your dealership is understanding why it happens. As noted above, a glut of inventory is one contributing factor, but it isn’t the only thing that has to be taken into account.

Vehicle Age is Not a Factor

Some people mistakenly think age equals higher likelihood of lot rot. A number of variables affect how long a car stays on the lot, but vehicle age isn’t usually one of them. Any vehicle, new or used, can suffer from lot rot. Exposure and non-use tend to cause the same problems in every vehicle. You’ll need to keep just as close an eye on new vehicles as older used vehicles.

Degree of Rot

There are varying degrees of lot rot due to environment, amount of time on the lot, the vehicle’s build materials, etc. For example, brakes are one of the first things that show the signs of lot rot because they rarely have protective coating. The problem can be minor and work itself out or a major issue that requires repair. You’ll want to catch lot rot early to circumvent the major issues and profit loss.

Lot Rot Vehicles Become Invisible

A curious thing happens to vehicles affected by lot rot. They’re seen so much they become invisible to salespeople. It’s as if they fade into the background or a stigma surrounds them. The longer the lot rot sets in the more salespeople will avoid showing the vehicle to customers.

It’s an unfortunate circumstance that perpetuates the lot rot and decreases the chance someone will buy unsold cars that aren’t moving.

How to Prevent Lot Rot

Lot rot doesn’t have to be inevitable. Dealers can prevent it from happening and solve issues to protect their investment starting with efficient inventory management. Lot rot is innately tied to inventory management. When the inventory is appropriate, dealers will be turning vehicles not sitting on them. Not surprisingly, some of the most effective tactics to prevent lot rot involve managing inventory.

Invest in a Good Inventory Management System

Smart inventory management helps dealers avoid lot rot altogether. Dealerships that carefully track past performance and base inventory on local demand are less likely to have an oversupply of a particular model or vehicles that fail to generate interest.

Invest in a good inventory management system that can tell you how quickly each model sells and the corresponding months supply compared to what’s currently on the lot. This will tell you which models to purchase and which ones to bypass.

Make Good Projections That Are Updated

As a part of your inventory management, make projections based on historical sales numbers and market demand for the next 12 months and use that as a buying guideline. Then once a month revisit the projections to update it using the latest sales information.

Exit Strategy Planning

Even with tight inventory management you may find a few vehicles that are dangerously close to succumbing to lot rot. When that occurs action needs to be taken. It helps to have an exit strategy already in place. The strategy should lay out directives for making the reconditioning process as quick as possible and how to get rid of unsold cars that have reached a certain age.

Proactive Inventory Aging

vAuto’s research suggests that somewhere between 30-45 days should be the maximum life cycle for a vehicle on the lot. Most experts will agree that by 60 days you should decide what to do with unsold new cars. Before getting to that point the vehicle should start going through an exit process to help get a sale.

  • At the 10 day mark, have the vehicle reconditioned, marketed and available for purchase.
  • At the 30 day mark, move the vehicle to a new location on the lot, preferably where it can be easily seen.
  • At the 45 day mark, give the vehicle a good detailing, consider lowering the price or adding an incentive and move it to the front of the lot.
  • At the 60 day mark, incentivize salespeople for one more push to sell the vehicle before enacting a predetermined exit strategy.

Incentivize your Salespeople

Salespeople are less likely to overlook vehicles with lot rot if they have a reason to make them a priority. There are a few strategies proven to get salespeople focused on moving aged inventory.

  • No Haggle Blowout Sale Price With Bonuses - After two months offer a no haggle discount price and give salespeople a bonus for making the sale based on the age of the vehicle.
  • Trade-In Salesperson Responsibility - If trade-ins consistently age out, tie the salesperson who made the trade to the vehicle. Add their name to the stock sticker and give them a bonus or commission bump if they sell the trade-in. This idea is effective because it holds the salesperson accountable and gives them an incentive to sell.
  • Assign Listing Agents to Aged Vehicles - Put the name of all aged units on separate slips of paper. Then have salespeople draw the slips out of a hat until they’re all gone. The salespeople become the “listing agent” for the vehicles they draw. When the vehicle is sold the listing agent splits a bonus with the salesperson who makes the sale.
  • Color-Coded Aged Inventory Bonuses - Use the color spectrum to encourage salespeople to move aged inventory. Put a colored sticker on the back of the window starting with red (the first color in the ROY G BIV spectrum). Each week change the sticker color and increase the sell bonus by $25.
  • Saturday Hidden Spiffs - On Saturdays add a hidden spiff on a unit that’s 60+ days old that’s given to the salesperson who gets it sold or test driven. Since no one knows which vehicle has the hidden spiff all aged inventory will get extra attention.
  • Inventory Manager Salary Incentive - Tie the inventory manager’s salary to aged inventory. Give the manager a base salary along with a monthly payment that’s based on the number of aged units left on the lot at the end of the month.
  • Increasing Commission - A simple way to keep aging inventory at the forefront of salespeople’s minds is an ongoing commission increase. For every day after 30 or 45 days increase the commission by a certain dollar amount.

Add Appealing Accessories

Getting the attention of buyers may require tactics that aren’t monetary. The secret could be accessories that counteract lot rot. But you can’t just add any accessory and expect inventory to move. You have to know what appeals to your local market or for a specific model.

One report from a major OE suggests accessories that visually enhance the vehicle can significantly reduce lot time. Accessories and upgrades that protect the vehicle can also help dealers sell vehicles and avoid lot rot.

What to do With Unsold Cars

What do dealerships do with unsold new cars? There’s no doubt about it. Every dealer would rather have customers buy unsold new cars and used cars than unload them another way. The desire is so strong, many dealers will hold vehicles well past 60 days even though they know there’s probably no profit in it.

Eventually, the lot rot is undeniable and has to be addressed. What happens to unsold cars depends on whether the car is new or used, how long it’s been on the lot, if a dealership has connections with colleagues and a number of other factors. Here are three of the most common scenarios.

Auctions

A vehicle that’s succumbed to lot rot doesn’t have to be a total loss. Auctions are a viable way to quickly sell unsold cars before lot rot becomes an issue.

There are plenty of people who will buy unsold cars at auction if the price is right, but that doesn’t mean it has to be at the dealership’s expense. ACV Auctions is a reliable solution for many dealerships because the costs are minimized. The online auction model lowers fees, reduces time to sale and ACV experts come out to the lot to do condition reports that are backed by the company.

You can get rid of unsold cars and reclaim the cash you have tied up in these older vehicles. See the auction features that separate ACV from a typical wholesale situation.

Of course, auctions are where dealers source inventory as well. If you’re looking for inventory, you need to know how to buy unsold cars without lot rot. A few things to look for include the manufacturing date, battery leakage, tire flat spots, rust, brake noise and uneven paint.

Ship Unsold Cars to a Different Market

It could be time to tap into your local dealer network. One way to get rid of unsold cars is to ship them to a different market where a specific model might be in higher demand.

Unsold Cars Storage Lots

What happens to new unsold cars may come as a surprise to buyers. During the recession a few news outlets highlighted unsold cars storage lots where thousands of new vehicles ended up sitting. This isn’t as common today and typically occurs when there’s overproduction of a new model. Sitting in storage lots is meant to be a temporary situation before being shipped out to a dealership.