I’ve been struck by three trends in the current used vehicle market.

First, late-model (three years and younger) vehicles account for almost 60 percent of retail sales, a fact affirmed in the latest Used Car Market Report from Edmunds. You can trace this development to the rise of off-lease supply, which many analysts expect to continue, albeit at a slower clip than recent years.

Second, the prevalence of late-model inventory is a bit tricky. Lower-mileage, near-new used vehicles are facing competition with heavily incentivized new vehicles. As a result, the near-new vehicles aren’t selling nearly as fast as similarly aged units with higher miles (e.g., > 50,000 miles).

The Edmunds report affirms this trend, too. It notes, “high levels of lease returns coupled with increasingly stringent mileage limits will feed an expanding pool of low-mileage used vehicle inventories that have proven to have a limited buying audience.”

Third, there’s strong demand and interest for older, higher-mileage vehicles, but they aren’t nearly as plentiful as the later model year inventory. The consumer demand for these vehicles isn’t surprising. There’s always strong demand for cheap, reliable transportation. Indeed, Edmunds notes that these vehicles are turning faster than most other used vehicle inventory.

In many ways, these trends force dealers to work around and through what might be described as a “donut hole” in today’s market. Here are three recommendations I’ve been sharing to help dealers to address these market conditions:

  • Re-assess your inventory strategy. The best Velocity dealers have been evaluating whether their inventory allocations for vehicle types (e.g., compact cars, mid-size SUVs, trucks, etc.) and cost segments (e.g., <$5,000, $5,000-$10,000, $10,000-$15,000, etc.) are truly correct and sufficiently precise for the current market. In some cases, dealers realize they’ve effectively given up on lower-cost vehicles (and their buyers) as they’ve placed a greater priority on higher-cost, late-model inventory. Inevitably, as dealers examine their allocations they find corrective opportunities to right-size segments they’ve overlooked, overstocked and understocked.
  • Examine your inventory age/days to sale by segment. This analysis can affirm and illuminate inventory strategy assessment take-aways. Which vehicle segments are moving faster or slower than they used to and why? How do the Market Days Supply and Price to Market metrics compare to those of your fastest sellers? Dealers who conduct this analysis often find one of two factors (and sometimes both) account for slower-movers—either the vehicle itself, or its merchandising/pricing, isn’t “right” for the market. Both suggest process change opportunities. Dealers who apply these lessons learned are more likely to achieve the goal of retailing at least 55 percent of your inventory in less than 30 days.
  • Address Cost to Market creep. I written before about the rise of inventory-level Cost to Market metrics climbing close to 90 percent, leaving only a maximum 10 percent spread for front-end gross profit. Dealers often know they should strive to maintain an inventory level Cost to Market ratio of 85 percent, but the creep occurs nonetheless. It’s true that the prevalence of near-new inventory contributes to the Cost to Market increase. But it’s also true that these vehicles are the easy pickings and perhaps reflect a lack of desire, discipline or interest in finding vehicles with more favorable Cost to Market ratios. I also recommend that dealers revisit their reconditioning costs, particularly those associated with outside vendors, to find additional savings to help reduce Cost to Market ratios.

The good news is that most forecasts call for a relatively robust used vehicle market in the months ahead—a suitable environment to make the inventory management adjustments that help you work more effectively around and through the donut hole in used vehicles.

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It seems margin compression is on the minds of a lot of dealers, judging from recent calls and conversations.

Given the interest, I thought it would be useful to share a recent webinar I conducted with the American International Automobile Dealers Association (AIADA). In the webinar, I highlight four areas of longstanding operational inefficiency that, if addressed, can help dealers minimize margin compression and improve their performance and profitability.

You can check out the webinar here.

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I did a little recon work prior to my visit this week to Google’s autonomous vehicle division, Waymo.

I wanted to get a sense of how driverless vehicle technologies might be underway and visible in California’s high-tech corridors.

Jay Seirmarco, an assistant general counsel for Cox Automotive who lives in San Francisco and works at Xtime’s offices in Redwood City, relayed that driverless vehicles are already common during typical commute times in his Noe Valley neighborhood.

“There are numerous autonomous vehicles coming into my neighborhood every morning,” he says. “The rumor mill in the neighborhood is that Apple workers are taking some of these to work. This happened recently and the volume is amazing. For me, it’s been an epiphany—this is the real deal and some people are commuting in these things.”

Lucy Smith, a Cox Automotive corporate counsel who lives in Redwood City, affirms that driverless vehicles are common during her daily commute. It’s also pretty common to see Teslas with drivers whose hands aren’t on the steering wheel.

“These vehicles are fantastic at handling traffic,” she says. “They actually drive better than some human drivers. They change lanes much more expertly.”

Those on-the-ground observations helped inform my meeting with Waymo CEO John Krafcik and COO Shaun Stewart. I had a rough sense that driverless vehicle adoption and use was gaining ground, and a hunch that it might be more profound than what I’ve read in industry and mainstream press.

The following are some of the big take-aways from my meeting with the Waymo executives and a drive in one of their vehicles—what I’ve come to call “My Trip to the Mountain”:

The technology is intense. Our vehicle arrived precisely at 9:30 a.m., exactly when it was supposed to. The vehicle, a Chrysler Pacifica, had two engineers in the front seat with laptops. They weren’t driving the vehicle as much as monitoring its performance and answering our questions. Between them, the dashboard featured a monitor showing a grid with images of color-coded objects ahead—other vehicles, street lights/signs, pedestrians, cyclists, etc.

The image colors changed to denote whether a specific vehicle sensor, a camera or laser radar, captured the object. The colors also changed based on movement and proximity to our vehicle.

At one point during the ride, a cyclist rode up beside our vehicle and passed us. I asked the engineers how the vehicle knew it was a cyclist and where he was going. “We calculate the probability of what the cyclist will do,” I was told. I asked the obvious follow-up—“how do you do that?”

The explanation was pretty incredible. The sensors track the cyclist’s position on the road, the angle of the rider/bike frame, and other factors to predict where it’s headed.

My mind spun as I thought about all of the data-crunching and programming necessary to produce such predictions.

Seirmarco shared a similar experience: He recently watched a driverless vehicle at a four-way intersection assess a cyclist, who was rolling backwards and forwards for balance while waiting for a vehicle to pass. The autonomous car appeared to stop and start in sync with the cyclist, and then proceed.

“The car figured it out,” Seirmarco says. “It blew my mind that the car knew what to do.”

Driverless vehicle critical mass will take about 10 years. Krafcik and Stewart helped me understand that some predictions, like one that says 100 percent of vehicles will have Level 5 autonomous technology by 2021, are a bit far-fetched. They also thought other predictions, like one that views 2030 as the point when autonomous vehicles will achieve critical mass, as about right. I came away thinking “10 years” is probably a viable timeframe when driverless vehicles will show up more commonly in places outside of California’s tech-heavy communities.

“Taxi” will mean something different to all of us. We discussed Waymo’s plans to commercialize its driverless vehicles with a “taxi” offering in Phoenix. The conversation helped me better understand Waymo’s intentions to operate fleets of autonomous vehicles, and offer them in a model that enables one vehicle to serve many different customers, sometimes at the same time. We didn’t dig into how consumers might pay for this type of transportation. But it’s likely the model will blend pay-per-use or pay-per-term principles. It seems like the idea of “calling a cab” may mean something entirely different in the not-too-distant future, and the Phoenix experiment bears watching.

OEMs will compete and partner with Waymo. We spent some time discussing the seeming arms race among OEMs around driverless vehicle technology. The dialogue helped me understand that Waymo and others will probably go head-to-head with larger OEMs, and partner with smaller OEMs that may find it difficult to develop driverless technologies on their own. The partnerships might take several forms, ranging from efforts to integrate the sensors and related technologies into vehicle designs and supply the vehicles Waymo and others will need.

Waymo shares our values. Both executives impressed me with their keen, shared sense of personal and social responsibility. They care about their people and their broader communities—just as we do at Cox Automotive. I also liked the way the company’s committed to innovation. Their mission talks about making “moonshots” (see image) and we are focused on “transforming the way the world buys, sells and owns cars.”

I would be remiss to not share how the discussion of shared purpose and values offered a positive outlook for Cox Automotive. The executives were sincere in saying they believed Cox Automotive would play an important role in the future of mobility and Waymo’s efforts to shape it.

I left the meeting thinking: “They know us. They understand what we do. They get why we do it. This is good.”

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3 Must-Dos To Combat Dealer Margin Declines

11.15.2017

How many dealers figured they’d make up for ever-smaller margins in new and used vehicles by selling more cars in 2017? If you asked the question in a room full of dealers, I suspect most, if not all, hands would be in the air. “You make up your gross in volume” is the age-old rule […]

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A New Way To Think About “Water” In Your Inventory

11.10.2017

Dealers have long understood that having water in their inventory is a bad thing. The conventional view holds that you determine the level of water in your inventory by comparing your costs to own the vehicle against the amount you could get if you wholesaled it right away. Hence, if you own a used vehicle […]

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AutoNation Makes A Play For Future Relevance

11.03.2017

I can’t help but regard AutoNation’s multi-year deal to service Waymo vehicles as a smart move for the company, and perhaps a telling sign for the rest of us. My job has me traveling the country, speaking at dealer groups and other events and, more and more of late, talking about the future of the […]

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Three Take-Aways From A One-Day Tour In Detroit

10.20.2017

My new book, Like I See It: Obstacles and Opportunities Shaping the Future of Retail Automotive had me on the road this week in Detroit. The visit sparked a lot of stimulating conversation as we met with editors from Automotive News, Ward’s Dealer Business, Reuters and Autoline. Like me, the automotive media is thinking hard […]

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My First-Ever Op-Ed in Automotive News

10.16.2017

I dialed up the digital edition of this week’s Automotive News a bit earlier this morning than usual. I was excited to see my first-ever op-ed piece, an excerpted chapter from my new book, Like I See It: Obstacles and Opportunities Shaping the Future of Retail Automotive. The chapter focuses on the idea of dealers […]

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A Sneak Peek At My Fourth Book—Like I See It

10.10.2017

I don’t normally use this blog for promotional purposes. But I hope you’ll forgive this one-time policy suspension to plug the upcoming publication of my fourth book, Like I See It: Obstacles and Opportunities Shaping the Future of Retail Automotive. Like any author, I’m awaiting the official release date of next Tuesday, Oct. 17, with […]

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3 Lessons From The Impending Sale of Rolling Stone

09.19.2017

When I was a teenage kid, if you wanted to keep up on music and politics, you read Rolling Stone. I credit my older brothers for introducing me to the magazine. Once I’d read it the first time, I was hooked. I especially remember the writing. For me, Rolling Stone was a way to be […]

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