Group 1 says Chrysler must cut inventory

Earl Hesterberg

Reuters / September 12, 2006 - 9:00 am | DETROIT -- The Chrysler group needs to take steps to reduce its inventory of unsold vehicles to keep dealerships from throttling back on orders for the new 2007 models, the head of a major dealer group said.

"I wouldn't pick the tactic for them but the need exists," said Earl Hesterberg, CEO of Houston-based Group 1 Automotive Inc., at the Reuters Autos Summit on Monday, Sept. 11.

The Chrysler group offered its dealers some subsidies over the summer to offset the cost of carrying the oldest vehicles in their inventory but needs to go further, Hesterberg said.

"There's a Chrysler inventory issue. There has been this summer and I don't believe it's been resolved yet," he said.

Hesterberg said Group 1, which owns 98 dealerships, ended its second quarter with too many unsold vehicles from the Detroit 3. This was in part because it had expected the automakers to offer more aggressive discounts of the kind that drove 2005 sales in the summer months to record levels.

Group 1 ended June with inventory equal to 74 days of sales for vehicles made by General Motors, 90 days for Ford Motor Co. and 103 for the Chrysler group, he said.

"It's one of our bigger issues," Hesterberg said, adding that the company had targeted a reduction in its inventory of cars from the Detroit 3 to 75 days of sales on a combined basis and would ideally cut that to 60 days.

By contrast, Group 1's inventories for Toyota Motor Corp.'s Lexus luxury brand are equivalent to just eight days, Hesterberg said.

Higher U.S. interest rates have made it more costly for dealers to cover the cost of carrying inventories, typically one of the largest costs for auto retailers.

Hesterberg said Ford's move to offer zero-percent financing and subsidies to reduce costs for less creditworthy borrowers over the last weekend in August had been a "very aggressive action" to reduce its overhang of unsold 2006 models.

But he said Group 1 had been forced to order fewer new vehicles from the Chrysler group for its 13 dealers who represent the company's Jeep, Dodge and Chrysler brands.

"I think the issue with them has been oversupply. I think they've been making too many cars out of alignment with their demand since late last calendar year," he said. "Their new products like the Dodge Caliber, a fuel efficient vehicle, are going very well. But they too had a lot of eggs in the large vehicle basket."

DaimlerChrysler U.S. sales, including Mercedes-Benz, have slipped 8 percent so far this year. The company is relying on the launch of eight new models, slated to arrive in showrooms in the third and fourth quarters for a rebound.

The Chrysler group's major marketing campaign over the summer starred DaimlerChrysler Chairman Dieter Zetsche in ads intended to focus consumer attention on the American and German engineering behind the company's cars.

But critics said the ads had distracted attention from the automaker's summer sales effort, which included employee-level pricing.

Hesterberg said the "Ask Dr. Z" advertising campaign had not lifted sales at his dealerships. "We've seen no uptick in traffic," he said.

The Chrysler group said earlier this month it ended August with an unsold inventory of 502,946 vehicles, equal to a 76-day supply and down by 60,000 units from a month earlier.