My phone’s been buzzing this past week with dealers and others asking for my take on how Hurricane Harvey will affect the used vehicle market.

For one thing, I suspect dealers everywhere will feel or see some of Harvey’s after-effects. After all, the storm claimed an estimated half-million new and used vehicles, and more dealers purchase vehicles well outside their local markets.

The sheer size of the loss will spike demand for replacement vehicles, and cause a commensurate rise in wholesale values, as dealers scour the country to replace and replenish inventory.

But perhaps the bigger concern is how current conditions also give rise to an age-old temptation—where dealers become speculators rather than rational retailers.

The speculator dealers are those who step outside the bounds of their otherwise rational retailing. They tend to ditch metrics like Market Days Supply, Cost to Market and Price to Market as they acquire inventory.

Instead, they play hunches and hope. They’ll head out and load up on additional inventory based solely on the fact that they believe there will be a future opportunity.

In such instances, the end results aren’t typically that good. The opportunistic hunches about imminent retail demand don’t emerge, or the demand is less robust than anticipated. The great deals they thought they acquired at auction become, instead, problematic, low-profit aged inventory.

This isn’t to say there isn’t opportunity. There are people who need used vehicles in very short order to get on with their lives.

But I tell dealers it’s wise to recognize the opportunity for exactly what it is—a short-term bubble that will go away fairly quickly. With such a tight window, you have to ask if it’s reasonable for a dealer to expect they can acquire additional inventory and retail it while it’s still profitable.

Put another way, if you’re not consistently maintaining at least 55 percent of your inventory under 30 days, and turning your inventory at least 12 times a year, chances are pretty good any speculative bet will end badly.

The better approach, I think, is to carefully heed the current market.

Mind the metrics, particularly Market Days Supply, on every vehicle, and your inventory as a whole. These key indicators will give you a clearer picture of retail opportunities and risks than you’d see looking through a speculator’s rose-colored glasses.

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Old beliefs and habits definitely die hard.

Take the way many dealers still think about their new and used vehicle prices:

Dealers control vehicle prices. I’m not talking about the obvious point that dealers do, in fact, largely set the asking prices for their vehicles. My point relates to the ever-more powerful influence the market has on a dealer’s latitude to price vehicles the way they really want to. Some dealers have let this one go entirely. They’ll price their vehicles based on what the market data tells them—no more, no less. They recognize they can’t control or make the market for a vehicle. They understand the market dictates if the car’s a winner or loser, or lies somewhere in between, and they should price accordingly.

A higher price is a better price. Some dealers still believe that higher prices lead to higher front-end gross profits. This belief used to be true, before the Internet and pricing transparency gave the market more influence on vehicle prices. Back then, dealers could set their retail asking price as high as they wanted, and negotiate to keep every last bit of gross profit from a customer. Unfortunately, it doesn’t work that way as much or as well today. Vehicle buyers hunt hard for a fair price, and don’t respond well to dealers with new and used vehicles priced 10 percent to 20 percent higher (or more) than the same/similar cars in their markets for no apparent reason.

Price and age aren’t related. This thinking isn’t as prevalent as it used to be in used vehicles. Generally, dealers recognize that the longer a used vehicle sits in inventory, the less money it makes, due to depreciation, competing units and opportunity costs. As a result, many dealers make the effort to adjust prices as vehicles age to facilitate a timely retail exit. But these same dealers often do not apply the time-is-money principle in new vehicles. The prices these dealers place on new vehicles on Day 1 often don’t change for months. Other dealers, however, have recognized that age- and market-related adjustments result in faster retail sales, which affords them the right to earn additional inventory from their factory partners.

When you re-price, you lower your price. Dealers affirm that the vast majority of re-pricing decisions result in a lower price. But the most market-astute dealers know this isn’t always true. That’s why they assess each vehicle’s online performance. They ask these and other questions: Is the vehicle’s online listing getting a sufficient number of Vehicle Details Page (VDP) views? Is the online activity increasing or on the wane? Are there more or fewer competing cars in the current market? How do the prices and Market Days Supply metrics on these cars compare with mine? Most of the time, the answers lead to price reductions. But there are times, in both new and used vehicles, where dealers are well-justified to raise a vehicle price, or hold off on a price reduction, because their vehicle stands taller in the market than others.

I’m sharing these misunderstandings because I’ve seen, time and time again, how they impede a dealer’s ability to fully maximize new and used vehicle sales velocity and profitability.

In today’s market, margins are too thin, and time is too precious, to allow these common misunderstandings about new and used vehicle prices to get in the way of tomorrow’s retail sales.

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I had an old rule of thumb when I was a dealer: You could get a bead on new vehicle inventory imbalances by the number of full-page ads in the Chicago Tribune on Sundays..

If the paper’s automotive section was chock-full of full-pagers, you could reasonably bet that dealers were sitting on, and therefore more desperate to sell, more vehicles than the local market apparently wanted or needed.

The converse was also true: If the section was relatively light on full-page ads, you could reasonably believe that dealer inventories, and local market demand, seemed in balance.

I thought of this old rule after a colleague says he’s noticed the Tribune’s published larger automotive sections the past few weekends than he’s seen in a long time. He says the ads came mostly from General Motors and Chrysler Dodge Jeep dealers.

The advertising affirms what many of us know: Dealers have a lot of new cars on their hands. An Automotive News story last week notes that the currently nearly 4.2 million new vehicles in dealer inventories is the highest it’s been in 13 years, despite record-setting incentives. The article says dealers currently have a 74-day supply of new vehicles—a tally that might be even higher if not for the proliferation of factory-encouraged rental car programs.

None of this is news to many dealers, particularly those who are renting space to house the additional inventory or doubling-down on their full-page newspaper advertising.

But here’s what is new: The problem’s not universal. Some dealers are blessed to have OEM partners who do a better job of aligning supply and demand. Their inventories aren’t nearly as heavy as their less-efficient competitors. Meanwhile, there are sharp inventory size disparities among dealers who share less market-efficient factory partners—differences that indicate some dealers are doing a better job managing current inventory conditions.

These dealers tend to do the following things to minimize the profitability drag that results when you’re sitting on too many vehicles:

  • Align prices to market conditions. Today, you have the option to apply competitive Market Days Supply, Days in Inventory and online effectiveness metrics to price your new vehicles. Dealers who attune their prices to local market conditions—rather than their own standardized pricing scheme—tend to attract more online and showroom shoppers.
  • Set and stick to a new vehicle age policy. Some dealers care about the age of their new vehicle inventory; others don’t. I’ve seen age policies might limit the number of 90-day and older new vehicles to 10 percent of a dealer’s inventory. Typically, dealers who manage new vehicle age stand the best chance of consistently earning floorplan credits and accompanying profits.
  • Don’t make the problem worse. As my colleague, Brian Finkelmeyer, director of business development for vAuto’s Conquest system, says: “If you or your market don’t need the car, you’re not doing yourself any favors by trading for it.” The same is true with your factory orders. The key here, of course, is knowing the cars and combinations that sell the best for you, and your competitors, in your market as you make stocking decisions.

Perhaps the best news about the growth in new vehicle inventories is that it doesn’t have to continue unabated. The key question is whether factories will do the right thing and trim production, or carry on the current path and make an increasingly difficult situation for their dealers even worse.

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