A Remarkable–and Familiar–Time for Used Vehicle Retailing

This is normally the time of year when I caution dealers about their high hopes for a strong spring selling season in used vehicles. The caution relates to the tendency of dealers to speculate about the future of retail sales, and stock up on cars in anticipation of selling them as customers come out of their winter mode, often with tax refund checks in hand, and start buying used vehicles.

This year, I must say, the situation is dramatically different. In fact, for some dealers, the situation probably seems like “déjà vu all over again,” as baseball great Yogi Berra once quipped.

Here’s why:

The days supply of inventory on dealer lots has dropped to roughly 32 days–the same level it reached in July 2020, when dealer inventories were at their lowest the entire year.

Retail sales have been steady and strong in recent weeks, a surge that has thinned dealer inventories. This week, dealers achieved a remarkable milestone. The daily total of retail sales across the country topped 32,000 vehicles this week–a tally that’s higher than any single day of sales in 2020.

Federal stimulus money is propelling retail sales, just as it did when checks arrived from the federal government last year. It seems certain that we’ll see additional stimulus payments, on top of federal and state tax refunds, fueling additional interest in used vehicle purchases.

Interest in used vehicles has been driven, at least in part, by an affordability gap with new vehicles. New cars are more expensive and demand is strong. Factories aren’t plying the market with incentives the way they have in years past. Such factors put new vehicles out of reach financially for some consumers, who then turn to used vehicles if they need a different or newer vehicle.

To top it off, supplies of vehicles in the wholesale market are lower than they’ve been in decades. The dearth of inventory might usher in something I have never seen in 40-plus years in the car business–an actual, not imagined, shortage of used vehicle inventory.

When you consider these circumstances, it appears that we may be seeing the hottest market for used vehicles in decades, possibly even the entire history of the used vehicle business.

These days, when dealers ask me if they should be stocking up on inventory to take advantage of the strong run in retail demand and the spring selling season, I don’t talk about the necessity of maintaining a balance between your rolling 30-day total of retail sales and your current inventory. I talk about risk, and a dealer’s tolerance for it.

For example, I’ve been telling dealers that the unprecedented nature of the current retail and wholesale used vehicle markets suggests that it’s OK to stock as much as 30 percent to 50 percent ahead of your rolling 30-day total of retail sales. I’ll add that while such decisions are speculative in nature, all the evidence points to an ongoing run of strong retail sales, barring some as-yet unforeseen circumstances.

Some dealers, who are less risk-averse, are going even further. They are striving to double their inventories right now in anticipation of being able to sell the vehicles at retail prices that will cover historically high acquisition costs and still provide healthy front-end gross profits.

It’s a remarkable time to be retailing used vehicles. It’s also especially rewarding for dealers who have the benefit of knowing the investment value of every vehicle in their inventories. Lately, my e-mail inbox has seen a steady stream of stories from ProfitTime 2.0 dealers who relish the opportunity to raise used vehicle prices as the market gains additional steam, just like they did for a time last year.

In fact, the only cautionary points I’m sharing with dealers in this unprecedented moment relates to their days to sale metrics. I’ll counsel dealers that they need to closely watch days to sale data for each investment class of used vehicles. If the days to sale drops off too fast, it’s often an opportunity to raise prices and slow sales throughput in favor of maximizing front-end gross. This scenario is particularly true with Platinum and Gold vehicles, which are more difficult to acquire in the current market. Conversely, if the days to sale metrics start to increase, particularly with lower-tier Silver and Bronze investments, it can be a sign that a go-go retail market is losing momentum.

To date, the most-prevalent days to sale dynamic relates to cars selling too fast, which affords dealers the opportunity to improve profitability. This is a good problem for dealers to address and it’s a reminder of another classic Yogi Berra quote–“it ain’t over ‘til it’s over.”