By Lauren Fix, The Car Coach
If you’ve ever driven by a car dealership and seen the rows and rows of brand new cars, you’ve probably wondered what happens to the ones that never get sold.
Millions of cars are produced every year, and not every car is sold. What happens to them? They don’t give them away. If the price is reduced too much, it reduces the sales volume of the newer, more expensive models.
With each vehicle representing $30,000 or more in retail pricing, the typical dealer doesn’t want to keep these vehicles in stock. Brand-new cars, trucks, and SUVs that aren’t sold can’t just sit on the dealer lot forever; their investment in them is too high.
What Happens to New Cars that Don’t Sell?
The answer is quite interesting. Unlike any other, the auto business has excess inventory that can’t be sold at places like Big Lots or some other liquidator. To answer this question, you’ll need a quick lesson on how the industry works.
First, it’s helpful to know that automakers traditionally do not sell vehicles directly to the public.
In fact, in many states, automakers are prohibited from doing that by law, something called franchise law. Instead of selling directly 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 dealers in exchange for the vehicles the dealers carry in inventory and then sell to the public.
Simple, right. There are some exceptions, though, such as Tesla.
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. No dealer wants to sit on a car forever, so they will take a loss if there is no other way.
Two factors put pressure on dealers to sell cars quickly. A non-selling car takes up the space of a newer vehicle that might sell quickly and profitably. Valid for most industries, sellers don’t let it sit there—they get rid of it. This is called ‘turning the inventory.’
There is another equally important factor. Most dealers don’t buy the cars they sell outright for cash. They finance them—this is called “floor planning” or loans. Each car that sits on their lot is costing them interest on those loans. Time is literally money. The longer a vehicle sits without selling, the larger the cost of having that vehicle around. This is why dealers are excited to make a deal at the end of the month and not as negotiable the first week of the month after paying the bank.
So How do Dealers Sell the Unsold?
If a consumer is interested in a particular car that has been sitting on the lot for a while, the dealer is likely more motivated to sell that car. It costs the dealer money every month. It makes sense for a buyer to look for a vehicle that is last year’s model to get the best price because dealers are ready to negotiate but will NOT give it away.
This is where the knowledge is power—Car Smarts comes in!
Many dealers will try to motivate the sales of slow-selling older inventory by offering their salespeople special cash incentives (“spiffs”) to sell them. 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 because there is a “spiff” in it for them.
In addition, the dealer will frequently offer more significant 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 new ones. 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 option 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” and 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 cities. This is called a “dealer trade.” Dealers do this because that slow-moving vehicle might be more popular with that region’s buyers. This is true for some EVs, sports cars, AWD, and convertibles based on the area of the country.
A final resort for the dealer with vehicles that don’t sell at the dealership is to sell them at an auto auction company. National auto auctions sell new and used cars from dealers and lease trade-ins. The auctions are marketplaces that enable dealers to “offload” vehicles they just can’t seem to sell or trade. The buyer is another dealer or a used car lot. The auction process will sell the slow-moving “dog” that was haunting them on their lot each day, even if they do so at a loss. There are also additional costs involved that cost the dealer money.
What Happens to Brand New Cars that Never Get Sold?
If these new cars that don’t sell flood the auctions and cut prices too much, it’s harder to sell the new model coming in every week.
The manufacturer’s final option is slightly different from the dealer. The industry has enormous outdoor parking lots designed for 100’s of cars that don’t have a buyer, so they take them off the market and let them rest.
Manufacturers may help sell these cars by offering them to employees of the brand. They want them to drive the cars they build. And the employees buy it at a lower price. Buyers may even get a break on payments or other perks.
These unsold cars sit and rust, kind of like a car cemetery. They sit at abandoned airbases and parking lots. Manufacturers want to sell newer cars as it’s more profitable. They don’t want to flood the markets with last year’s model as they need to sell the newest products. If they did, the production of current models would be slower, which could impact their employees with less work. Think of it like a domino effect.
Realize that this loss is figured into the cost of the vehicle. The same is true in the food business. They know they can’t sell everything while it’s fresh, and it may need to be thrown away. That’s called ‘shrinkage,’ and it’s figured into the cost and the bottom line.
Look at some of these car cemeteries. Some of these cars are ready to ship to dealers, while others will never move again. Even Tesla has this problem.
This is no joke—these cars sit and wait. Tons of unsold cars sit every day. Do they ever move? The market is about selling newer models, not older cars. Some companies ship them to other countries. Others are eventually dismantled and destroyed—the cost of doing business for both the manufacturer and the dealer.
The dealer needs to sell the car or unit with incentives, even if they take a loss. They figure if they keep lowering the price, someone will buy it! The dealer does find a buyer, eventually. For the manufacturer, it’s the cost of doing business.
If you are looking for a great car deal, ask about the oldest new car on the lot. If a car is on the lot for more than 90 days, the dealer will be more interested in making a deal.
Lauren Fix, The Car Coach®, is a nationally recognized automotive expert, analyst, author, and television host. A trusted car expert, Lauren provides an insider’s perspective on a wide range of automotive topics and aspects, energy, industry, consumer news, and safety issues.
Lauren is the CEO of Automotive Aspects and the Editor-in-Chief of Car Coach Reports, a global automotive news outlet. She is an automotive contributor to national and local television news shows, including Fox News, Fox Business, CNN International, The Weather Channel, Inside Edition, Local Now News, Community Digital News, and more. Lauren also co-hosts a regular show on ABC.com with Paul Brian called “His Turn – Her Turn” and hosts regular radio segments on USA Radio – DayBreak.
Lauren is honored to be inducted into the Women’s Transportation Hall of Fame and a Board Member of the Buffalo Motorcar Museum, and Juror / President for the North American Car, Utility & Truck of the Year Awards.
Check her out on Twitter and Instagram @LaurenFix.