A Marketplace segment on a local National Public Radio station caught my ear yesterday.

The segment featured an interview with Steve Sasson, the former engineer for Eastman Kodak Company who invented the first digital camera in 1975.

Sasson discusses how his work began as a “filler job” handed to him by a supervisor. He details how he stole parts from different departments to build his first prototype and, months later, managed to successfully capture the world’s first digitized images.

Three years later, with a fresh patent in hand, Sasson took the invention to Kodak executives.

“I thought they’d spend all their time asking me how did I get this to work,” he says in the segment. “They didn’t ask me any of the hows, they asked me, ‘Why? Why would anyone want to do this?’”

We all know how the story unfolds from there. Kodak executives shelved the idea, and focused their attention on their highly profitable film business. Many years later, the company is a shell of its former self.

I write about this “Kodak Moment” in my latest book, Like I See It. The chapter highlights how the car business is facing a fast-closing convergence of new technologies that could significantly disrupt the way dealers do business and make money. I included the chapter as a kind of warning that dealers and other industry stakeholders who dismiss, or disregard, this technology-driven evolution do so at their own peril.

The Marketplace segment offers a useful take-away, I think, as we all face the future: If you only ask ‘why?’ as you evaluate a new challenge, change or opportunity, you stand a greater chance of missing how it will actually affect your business.

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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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A Waymo Visit Brings Way More Future Mobility Insight

11.18.2017

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 […]

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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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