Of course there are those who would question this logic of producing less. What about market share? Porsche and Subaru have grown their market share more than most other brands despite having lower inventory levels. What about the need for domestic dealers to stock lots of pickups because of thousands of configurations? Domestic store profits have grown lately even with fewer versions of trucks to sell since their profits per truck are far higher than before. Scarcity creates value.
There also is ample evidence that overproduction leads to undesirable outcomes for dealers and automakers. Nissan and Infiniti are the best recent examples of this mistake. Nissan Motor Corp.’s former leadership pushed too many vehicles into the market, causing billions in losses for the automaker and significant erosion of franchise value for dealers.
Plus, millions of people who bought Nissans have suffered from weak residual values, costing consumers billions in lost value. Overabundance erodes value.
The members of our firm have been involved in the purchase or sale of almost 400 dealerships dating back to the formation of AutoNation. Each quarter we write the Haig Report, which monitors the buy-sell market to assess the value of various auto franchises. These reports clearly show that dealers place a higher value on dealerships that carry a lower days’ supply of new vehicles.
The average blue sky multiple for the five franchises with lowest days’ supply was 6.8X at the end of 2019, 78 percent higher than the average blue sky value of 3.8x for the five franchises with the highest days’ supply at that time.