Reader’s thoughts on current wholesale pricing

I recently sent the following email to about 3,500 vAuto subscribers asking for their comments. Below the original email are some thoughtful responses I received.

Lately I have seen letters, comments and editorials circulating suggesting that, in anticipation of future vehicle shortages, dealers should hoard inventory and relax age limit policies. It is my firm belief that these suggestions are wrong and extremely dangerous.

It is important to understand the appeal of this message. First, it is always easier to remove disciplines than to enforce them. Further, the suggestion to hoard vehicles and relax aging policies is particularly attractive to those that paid extremely high prices for vehicles in the recent weeks. Their only salvation is to hold on and hope that their recent purchases appreciate in value as a result of an anticipated future shortage.

What is missing, however, is the understanding that by holding on to merchandise, dealers miss the opportunity to make current sales and keep their investment dollars turning. Essentially they are foregoing sales today in the hopes of making a sale in the future. This strategy completely ignores the cost of capital, opportunity costs and essentially puts those used vehicle operators in the business of speculation.

I strongly urge you to resist the temptation to pay extraordinarily high prices for vehicles just because the herd is doing so. Rather, purchase vehicles for amounts that will allow you to put a respectable profit on top of your acquisition price and still be able to price the vehicle competitively in your market. If this means that you can’t buy a vehicle that way, then let it go. Otherwise you will be forced to adopt the hold and hope approach described above. It is a far better problem to be light on inventory that is owned right and current than to be heavy and long on inventory waiting for the market to come around.

I am very interested in receiving your thoughts and ideas. Please feel free to share this with your management team, fellow 20 group members and industry friends.

From John in Belvedere, Illinois:

Dale,

I would agree with your assessment of the market and its moves both up and down currently. Especially right now with both sport utilities and midsize vans, we have seen some wide fluctuations in these market values on the wholesale level. Where vAuto has especially helped us is specifically the larger SUV (Tahoe, Yukon, Suburban, etc) within 2-3-4 model years of new. We are finding that the supply is very limited on the retail side, so wholesale values have definitely escalated. However, with the limited retail availability showing thru vAuto, we have been able price our inventory at or close to the market, but realizing were only competing with 15 vehicles is better than larger numbers (Trailblazers for example) in dealers inventories.

We have encountered another problem you didn’t address in your email, this being that the guide books (Black Book, NADA, etc.) have not kept pace with the changing market, therefore the financial book out will not match the selling price or the finance amount to fund a finance contract with the escalating values. The Manheim guides have helped us “talk thru” a purchase with some lenders, but several will only accept NADA with the contract.

We are reducing our inventory to match both our sales and our traffic, but I do worry about loosing sales to a shopper finding what they want with a “buy it now” mentality (which we as a society have brought on ourselves). We are making better use of SmartAuction, AutoTrader, Cars.com, and other dealers’ inventories when customers will be patient with us. We are not seeing new vehicle sales improve much, and therein lies one of our traditional best sources of pre-owned vehicles. And the under $7500 retail vehicle is tough to keep in stock, but using vAuto, we are trying daily to react to the market and keep turning over vehicles to not be as impacted by market swings as in the past by holding vehicles too long.

Good to hear from you and have a great day.

From Bill in Chippewa, Wisconsin

Dale,

I can’t tell you how many times I have had to walk away from vehicles in the last 60 days. I think the approach that our group has taken is the right answer. We have become even stricter at our location in order to move inventory in and out. I feel making the right buy even if there are less to be had is better than making the wrong buys and putting your entire inventory at risk. It does require a huge effort to find the right buys, but they are worth it. I have taken the approach of looking at close to 500 vehicles in order to make one good buy. I think the wave will break very soon, and fortunately our house should be far enough inland that we won’t get hit by it. Thanks for your continued feedback and support.

From Chris in LaGrange, Georgia

From Steve in Danbury, Connecticut

Make all the fair deals you can, price them right and sell them fast. This market is like quicksand. Cars sitting on your lot will be sucked into the deep dark muck known as loserville.

From Jack in Buffalo, New York

We are doing just as you suggest. We are not giving in to the prices. We have had our best December and January ever in used cars, and my inventory levels are almost 200 units lower than I would like them to be, however I refuse to buy cars at prices that do not make retail sense. I currently have a buying freeze on our group. This means that no one can buy cars without my permission. They have to send me a list of what they want to buy and at what price they are willing to pay. If the list makes retail sense, I will approve it.

Thanks Dale.

From Fabian in Burnsville, Minnesota

I believe there are NO conditions to accept aged inventory as being acceptable Dale, with the possible exception of a Corvette in Minnesota in the winter! We currently have an average age of 25 days and would like to get to 18-20 in the spring market. The only frustration regarding the current market is we are not seeing the retail pricing becoming commensurate with wholesale prices. Undoubtedly, the dealers buying merchandise at prices where they are unable to make a reasonable profit will find themselves at a severe disadvantage when and if prices relax.

From Mike in LaGrange, Georgia

Hello Dale, great to hear from you as always. The following is my response to your note. Please understand that I submit this response from the perspective of a veteran car guy that has never seen a market like this before so here goes:

The “IF” factor: The notion of holding vehicles based on future availability is so volatile that I would never consider it based on what I will call the “IF’s” that are affecting our industry today, here are just a few:
If gas goes back up to $$ (values will change drastically as we have seen from the opposite set of circumstances)
If the stimulus package works and the industry kicks in (more business more trades more cars)
If the banking industry frees up lending (more business more trades more cars)
If the economy contracts more (less buyers, more repo’s tighter lending requiring more equity values become critical to financing)
If unemployment continues to deepen (see above)
If one of the Big 3 isn’t anymore (values will plummet)

My point is that if we have learned one thing over the past year it should be that there is no historical reference for the “Perfect Storm” that we are currently in. What I do know to be true is that there is a bubble developing of pent up demand that will reach critical mass at some point and the market will begin to recover. I know that I do not want to be sitting on aged inventory when that happens.

From Yury in Denver, Colorado

Dale,

Thank you for your insight. I am in 100% agreement with you. I believe the current situation is temporary not to mention seasonal and geographical. The dealers who are hoarding and overpaying right now will be conducting fire sales when (not if) this frenzy subsides as it invariably will. I hope to be there when this time comes to pick up the pieces.

Extreme demand and supply instances can create short term price hikes but can not be sustained over a significant time period. We will wait for the new car business to come back and provide a renewed flow of trade-ins.

Meanwhile we will do business as usual (Dale’s way). It is proven to provide ROI.

From Bill in North Kingston, Rhode Island

I agree totally with you. I know for a fact in the Chrysler situation, that the vehicles in the lanes now are 6-8 months old. I cannot imagine anyone holding inventory for 6-8 months letting the fresh stuff go through. My gut from the current financial situation is the Manufacturers are contriving this whole situation and are in cahoots with the auctions. A) They just do not have the Capital available to take the hit in the lanes B) There is no greater way to keep prices up than by working with the auctions which have a vested interest with this perceived shortage. If prices plunge there will be no consignment activity to speak of. Look at the “perceived” oil shortage that led to $4 gas as an example of market manipulation.

Chrysler was probably 40% plus No Sale today at Southern. Ford prices were down as well. There are beginning to be some deals especially in the Repo/Bank lanes. I think a lot of guys reloaded totally for the “Spring” market and are starting to see the reality that buying inventory is one thing, selling them for well over “Clean Trade” and getting them bought is another.

I will continue to stock light on this end.