A Post-Harvey Call For Rational Retailing

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.