Changing Market Conditions Pose Used Vehicle Challenges—Again

This past February, I raised a cautionary yellow flag about dealers making speculative bets with their used vehicle inventory decisions.

I was concerned that dealers would have trouble resisting the urge to “stock up” in anticipation of a strong spring selling season—especially amid signs that incoming supplies of wholesale vehicles and other market variables might leave the more bullish dealers with too many cars they paid too much to acquire.

Industry reports this week suggest my concerns were well-founded.

On the wholesale side, industry analysts report an ongoing decline in prices as supplies of late-model vehicles increase. Some segments are more volatile than others, with off-fleet rental units pushing down prices for compact and mid-sized sedans. Analysts also report price-softening in late model luxury and sport-utility segments.

On the retail side, a report from Cars.com says the average retail asking price for 2010 to 2012 units has dropped 1.4 percent in June, marking the second consecutive month of pricing decline. Analysts suggest the pricing changes reflect the softening of wholesale prices as well as a slight, seasonal decrease in consumer demand.

I have a hunch that some of the pricing declines Cars.com reported owe to the speculative moves made by dealers to “stock up” on inventory a few months ago. Now, the additional units they acquired then are aged cars, and they need to reduce prices to get rid of them.

The following are three reminders to help dealers avoid the temptation to speculate in today’s environment of constantly changing market conditions:

1. Focus on a 45-day retail window. This is the new investment time horizon for used vehicles. Dealers who believe they can acquire vehicles today with the hope of making money in 60, 90 or 120 days are unnecessarily exposing their return on investment (ROI) potential to market volatility, such as the current rise in wholesale supplies, which creates more competing units and softens prices.

2. Mind your inventory metrics. In the current environment, it’s especially critical to monitor the Market Days Supply of each unit (as well as your inventory overall) to identify and adjust to changing supply/demand dynamics. Likewise, constant attention to the Price to Market metric for individual units ensures your asking prices remain competitive in the current market.

3. . I recommend that dealers maintain at least 50 percent of their used vehicle inventory under 30 days of age. This operational standard ensures everyone’s focused on retailing cars fast, when their front-end gross profit potential is greatest. In addition, this emphasis on fresh, front-loaded inventories helps dealers quickly adjust to fast-changing market conditions and steer clear of speculative decisions today that often turn into trouble tomorrow.