Part One: A Troubling Tradition-Minded Trend To Avoid

by dpollak on 02/27/2018 · 8 comments

In the past few weeks, I’ve noticed a troubling trend in dealers’ used vehicle inventories.

The inventory turn rates at these dealers is slowing down. Last year, the dealers consistently maintained an annualized turn rate of 12 times or better. Today, I’m seeing the same dealers post turn rates closer to 10 or even less.

Time and again, after I ask the dealers about their slower sales pace, I get essentially the same answer: “Yeah, I know. We’re trying to get more gross on these cars.”

I’ll dig a little deeper to see what methods the dealers are using to get more gross.

Time and again, they’re taking the same play from the traditional used vehicle retailing playbook. They are raising asking prices, and making price adjustments less frequently, with the hope of gaining better front-end grosses.

These findings lead to two important points:

  1. Hope is not a strategy in today’s used vehicle market. The market’s too efficient and transparent. Customers know if your prices seem too high compared to everyone else. Some might investigate further. Maybe they’re missing something. Maybe there’s a good reason you’re asking more for essentially the same vehicle as the dealer across town. Inevitably, these customers will all end up in the same place. They’ll be interested in your vehicles unless and until your pricing makes more sense to them, compared to what they see in the market.
  2. Slower-turning inventory brings future trouble. Dealers sometimes justify the decision to allow a slower inventory turn rate by noting that their retail sales volumes haven’t suffered, and they may even be making slightly better grosses. But I’ll counter by showing how the slower turn is causing a harmful undertow. It often pulls a higher percentage of vehicles past 30 days of age, and sets up a higher likelihood of retail or wholesale losses in the not-too-distant future. In my experience, these losses often erase any front-end gross gains that may have come allowing your inventory turn to slow down.

Ultimately, I tell dealers that while the instinct to raise prices to improve your front-end gross profit may have worked in the past, it’s out of step with today’s more efficient and transparent market.

In my next post, I’ll dig into ways dealers can mitigate margin compression beyond pricing that won’t compromise the need for the inventory turn speed today’s market requires.

And for dealers who are contemplating additional price increases to get more gross, I’d submit that it’s a little like driving a vehicle with one foot on the accelerator, and the other on the brake.

  • How does the slower turn rate cause future issues. Is it because the increased time your cars are sitting on the lot compounds over time? Would it be ok to do this on and off on a monthly basis maybe?

  • Chris Hanna

    Ryan, I believe the slower turn will cause you to have a higher average age across the inventory, this will generally result in a higher average age of vehicles when sold resulting in reduced gross and even wholesale loss on vehicles not retailed if you are on a strict age policy. If you measure the time to sale you will find that when your time to sale rises you will see a corresponding reduction in margin. The best policy is to set a benchmark for your store’s turn or average age and implement a pricing strategy that achieves that goal. I believe that it is just as important to measure your sale across age buckets as it is to maintain 55% of your inventory under 30 days. If implement a process to get vehicles digital front line ready with a pricing strategy that keeps your average age of sale in line with your average age of inventory you will maximize both volume and gross.

  • Paul J Daly

    I love the “undertow” metaphor. The surface looks good, but just below its deadly.

    The slower turn rate doesn’t only cause future issues, it is usually indicative of other deficiencies in your system. Initial appraisal, overspending (or underspending) on reconditioning, time to market issues and on and on. A good reference is Chapter 12 in Dale’s new book “Like I See It”. Everyone who follows this blog should read it!

    It impacted me so much, I decided to produce a video and podcast series just to propagate Dale’s message. If you are interested, its http://www.dealerscompressed.com

    https://uploads.disquscdn.com/images/fe01201706301cef06b4ab3f99fb9367de3fd7f433fadb675703a128067b1ad9.png

  • Yes, Chris I see what you’re saying, which is probably where Dale plans to take Part II. Essentially, get your sights off of the per-unit gross and focus on the overall metrics of the business that you know lead to better better profits.

  • Jasen Rice

    And I would add to Chris’s point, not only to have 55% or more of your inventory fresh, dealerships that get both gross and volume tend to sell 50,60 and even 70% of their sales in the first 30 days

  • Ryan,

    Thank you very much for your question, and Chris, Paul and Jasen, very well said. Ryan, yet another way of thinking about it is that a used vehicle always has been like a block of ice to the extent that it dissipates in value over time. The difference today, however, in this very margin compressed environment, is that the block of ice is in a 100 degree temperature room and getting hotter all the time. In other words, the toll that depreciation takes on your investment is profound, and consequently a vehicle’s ability to make a meaningful marginal contribution evaporates somewhere between 30-45 days.

    Much thanks to all for your question and responses.

  • Shea Brennan

    Hi Dale, what tools are good dealers using to track reconditioning time for used cars going through detail, service and body?
    Are they using something sophisticated or just a simple spreadsheet?
    Can you so any examples? Thanks!

  • DB

    Great analogy Dale!

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