A Time To Get Your Inventory Balance Right—Or Else

I’ve been talking with dealers lately about right-sizing their inventories before the pain of too many vehicles in stock fully arrives.

The conversations owe to three factors in the current market:

1. Retail demand for used vehicles appears to be softening. Cox Automotive estimates that dealers sold fewer used vehicles last month compared to September—an assessment that squares with the “Seems like demand just dropped off” comments I’ve heard from dealers.

2. Used vehicle depreciation has increased. October brought above-average declines in used vehicle values at Manheim auctions, according to Cox. Demand for wholesale vehicles also diminished last month, a likely reflection of dealers’ sense that now’s not the time to be acquiring vehicles from auctions.

3. Consumer confidence declined in October for the third consecutive month. Cox reports that consumers’ plans to purchase a new or used vehicle declined to the lowest level since April. Analysts suggest inflation and interest rates offset consumers’ perception that vehicle buying conditions are currently more favorable than they have been in the recent past.

All this manifested last month as dealers had a roughly 50-days supply of vehicles on the ground and retail asking prices for used vehicles declined by .7 percent. The change in retail asking prices isn’t surprising given retail demand and wholesale values have softened.

This mix of current market conditions serves as the backdrop for conversations with dealers encouraging them to right-size their inventories before it’s too painful. I believe dealers operate most optimally when their used vehicle inventory’s balanced to their rolling 30-day total of retail sales. If you’ve got upwards of a 50-days supply on the ground, you’ve got some work to do.

The good news is that some dealers have the benefit of knowing exactly where this right-sizing work should start. It’s with the vehicles that pose the most risk to your profitability—the ones ProfitTime GPS classifies as “Bronze.”

But here’s the problem: I’ve seen several instances of dealers who have purposely held on to their Bronze vehicles of late, pricing them above the recommendations ProfitTime GPS gives them. Why? Because dealers don’t want to face the music of repricing the vehicles to sell and taking little or no gross (or a retail loss) on units they view as perfect fits for the right customers. Some dealers have also been holding late-model Bronze units at above-market prices because they believed the United Auto Workers’ strike would last longer, spurring demand for near-new vehicles and enabling dealers to get all the money.

Whatever the case, I don’t see any signs in the current market that holding on to Bronze vehicles and carrying more vehicles than you’ve retailed in the past 30 days, will produce the positive outcomes some dealers have been expecting. More to the point, the return on Investment potential for these vehicles is not getting better over time.