Three Ways To Work Around And Through The Used Vehicle Donut Hole

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.