By Jeff Bennett and Christina Rogers
U.S. new-car dealers are telling auto makers to limit production of passenger cars in the face of overwhelming demand for trucks and sport-utility vehicles that is forcing them to offer deep discounts on small cars, coupes and luxury sedans.
A continuing shift among American buyers to more capable vehicles has driven up dealer inventories even as there are shortages of certain pickups, SUVs and small crossovers.
The mismatch in supply and demand is forcing some dealers to offer as much as $5,000 off slow-selling compact cars, cutting into profits.
With gasoline nationwide averaging less than $2 a gallon and heading lower, demand for pickups and SUVs ranging from the tiny Honda HR-V to the hulking Cadillac Escalade SUV has upended the normal split between cars and trucks. At the same time, ballooning passenger-car inventories, especially for luxury brands like Audi AG and BMW AG are triggering discounts that are cutting into dealer margins.
Earl Hesterberg, chief executive of Group 1 Automotive Inc., the nation's third-largest new-car chain by vehicle sales, on Thursday warned auto makers need to adjust their production mix or both risk profit deterioration.
"We're at the point now where we're in discussions with most [auto makers] that we just can't take any more inventories at the moment," he said after reporting fourth quarter profit fell 12% despite a 5% increase in revenue. "I think virtually all retailers such as ourselves have been communicating that 'you know, we don't have enough trucks and SUVs,' he said.
AutoNation Inc., the largest U.S. new-car retailer, said its December sales would have been flat were it not for "significant" discounts and extra sales days compared a year-earlier. It also said it would reduce its orders for passenger cars this year.
Historically, trucks have typically cost more than cars and required higher sales incentives to move off dealer lots. But the pattern has changed with cheap gasoline: incentive spending of $3,062 per passenger car sold in January was 4% higher than the discount needed to sell a truck or SUV, according to market researcher Autodata Corp. Overall incentive spending increased 15.6% last month compared with the year before.
The backlog of unsold cars pushed the industry's inventory to 78 days of supply in January from 61 days in December, according to data provider WardsAuto.com.
Luxury car makers have been among the hardest hit: BMW said its stocks rose to 76 days of supply and Audi's climbed to 88 days. Generally, dealers like to have about 60 days of sales on their lots.
"We estimate that the industry ended January 14% overstocked on cars," Credit Suisse auto analyst Dan Galves wrote in a note to investors this week.
WardsAuto.com estimates total U.S. new-car inventory increased 4% to 3.7 million automobiles at the end of January. It says the glut should help the nation's total sales go higher this year. It projected February's seasonally adjusted selling rate sales pace will top 17.6 million vehicles.
Chewing through that inventory could force production cuts at the Detroit Three, which book revenue when vehicles ship to dealers. Credit Suisse's Mr. Galves expects a 6% cut in 2016 car production, which could drag overall light-vehicle output down slightly.
The No. 3 U.S. car maker, Fiat Chrysler Automobiles NV, recently idled a Sterling Heights, Mich., assembly plant where it builds midsize sedans. It won't restart production until March 11. Fiat Chrysler's days' supply was nearly 3 1/2 months in January.
Vince Sheehy, president of Sheehy Auto Stores, said, "there is very intense pricing on passenger cars." His company, which has dealerships in Maryland and Virginia, is running a Presidents Day sale that includes a $4,800 discount on a $13,185 Nissan Versa compact car, $6,000 off a $20,975 Hyundai Elantra hatchback, and $7,000 off a $22,985 Ford Fusion sedan.
Doug Moreland, owner of Dealin Doug Dealerships, the largest closely held dealer group in Colorado, said business at his Kia Motors Corp. stores has slowed because the auto maker's lineup is heavy on sedans and economy cars. "We might have a couple of weeks supply" more than needed, he said.
John D. Stoll contributed to this article.