A Root Cause for Two Troubling Used Vehicle Trends

There are two troubling trends underway in used vehicle departments across the country that deserve dealers’ attention right now.

From here, it seems as if the trends and their singular root cause reflect a reality of life: Sometimes, when you make a bad decision, it begets more bad decisions.

Let’s dive into the particulars.

Across the country, I’m seeing the share of Bronze vehicles—the ones the ProfitTime GPS solution identifies as investments with the highest risk and lowest potential for return—are on a steady rise. This past week, the average share of Bronze vehicles hit 46 percent, the highest level I’ve seen in the past nearly two years.

The ever-larger share of Bronze vehicles, in and of itself, isn’t necessarily troubling. It’s rare to find a dealer who doesn’t have at least some Bronze vehicles in inventory. There’s nothing inherently wrong with Bronze vehicles, either. They just happen to possess a combination of characteristics—their Cost to Market and like-mine Market Days Supply are both high, and their retail sales volume is low—that make them vehicles with higher risk and lower ROI potential compared to others.

That’s why I say an increasing number of Bronze vehicles isn’t necessarily troubling. But the increase all too frequently gives rise to a second, far more troubling trend. That is, as the share of Bronze vehicles goes up, the level of alignment to ProfitTime GPS’ price recommendations for these vehicles goes down. This past week, the overall pricing alignment for Bronze vehicles fell to 26 percent—the lowest level I’ve seen in recent memory.

This percentage is disturbing because it signals that roughly 75 percent of the time, dealers and their managers are rejecting ProfitTime GPS’ data science-backed recommendations that would, by and large, help them retail these distressed investments faster. In effect, the dealers are saying, “I believe that if I price these vehicles higher, and hold onto them longer, I’ll make more gross profit than if I accepted the recommendations and the poorer grosses and occasional losses they’d bring.”

We see this mindset in the pricing alignment data from ProfitTime GPS. It shows that, on average, dealers are pricing their Bronze vehicles about $1,000 higher than the system recommends.

It’s entirely possible the dealers might know something I don’t. But we should all at least be aware that in the current market, where depreciation has accelerated and retail demand isn’t as strong as it used to be, a distressed used vehicle investment isn’t likely to get better over time. In fact, it’ll get worse, with steeper losses that dealers will eventually need to take, probably in the form of a year-end write-down.

After seeing the trends rise and sharpen in recent weeks, I began looking for a root cause. I wondered if compensation plans, which effectively penalize a used vehicle manager’s paycheck and standing if they price vehicles for poor grosses and losses, might cause some to ignore pricing recommendations for Bronze cars. But I realized that while comp plans play a role in pricing alignment, they don’t fully explain why the share of Bronze vehicles keeps rising.

That’s when I looked at inventory levels. I started comparing the dealers’ balance between their rolling 30-day total of retail sales and the number of vehicles in their inventories. Then, I found the root cause: In almost every case, at almost every dealership, the dealers with rising shares of Bronze vehicles have more vehicles in stock than they’re selling in a 30-day period. Their inventory levels are out of balance with their retail sales.

To validate the theory, I looked at inventories of dealers who consistently balance the cars they stock with the rolling 30-day total of cars they sell. Guess what? You don’t see Bronze vehicles on the rise at these dealerships, and the alignment of their Bronze vehicles to ProfitTime GPS pricing recommendations is much higher.

Furthermore, it’s clear that the willingness to follow the Bronze vehicle price recommendations, and accept the poor grosses and losses that may come, owes to the fact that these dealers also have higher percentages of Platinum and Gold vehicles in their inventories. That is, the dealers make peace with the ROI from their Bronze vehicles because they’ve got more Platinum and Gold vehicles to effectively cover or offset the grosses they’ll realize on the Bronze vehicles.

The dynamic reminds me of the “Spoonful of Sugar” song from Mary Poppins: “A spoonful of sugar helps the medicine go down!”

It’s an apt message for dealers caught in the current trends. For you, it’s time to balance your inventory to your rolling 30-day total of retail sales and take the medicine on the Bronze cars currently in stock and as they arrive. With these strategic imperatives in place, you’ll reverse the trend of rising numbers of Bronze vehicles and start seeing more sugar in your inventory.