Three Principles to Fuel Your Fourth Quarter in Used Vehicles

My phone’s been buzzing with dealers asking for input on how they should manage and stock their used vehicle inventories as 2020 comes to close.

The questions come from a confluence of factors that have dealers wondering, if not worrying, about what we might expect in the weeks and months ahead.

First, we’re on the eve of a presidential election where it appears the country won’t be united around whoever’s elected president, and we’ll see challenges to the legitimacy of the election in courtrooms and the streets.

Second, the COVID-19 pandemic continues. Local and state governments that had lifted restrictions on business, family gatherings and travel during the summer are putting them back in place.

Third, we still don’t have any clarity on whether we’ll see another round of federal stimulus money to help households hurt by the job and wage losses.

A fourth factor, declining consumer sentiment and softening of vehicle credit application volume, is likely a product of the first three.

Despite all this, dealers have fared pretty well. Consumers are still buying new and used vehicles at rates that remain surprisingly strong overall. Meanwhile, dealership profitability is higher than it’s been in a very long time.

But as we’ve all learned in 2020, the current situation could turn on a dime, for better or worse. As a result, I’ve been sharing a few broad operational principles I believe will help dealers navigate whatever comes next:

Keep a close eye on your retail pricing. We’re seeing the days in inventory increase for vehicles that rank as Bronze and Silver investments—units that, because of how they were acquired, often have higher Cost to Market percentages than other inventory investment segments. From my conversations, the days in inventory is creeping up because dealers aren’t paying close attention to where the vehicles stand in their respective competitive sets. In many cases, the Bronze and Silver cars dealers thought they priced competitively have moved farther back in their competitive sets (thanks, in part, to other dealers bringing lower cost competing cars to the market). The inattention seems to be a hold-over from the red-hot summer months, where everything sold almost irrespective of its retail price. If dealers hope to realize any profit from these distressed investments, they need to price them to sell faster, before they become retail net profit losses.

Tie your inventory levels to your rolling 30-day total of retail sales. Through October, we’ve seen the days supply of retail inventories creep up, even as retail sales remained steady or softened, depending on the market. Today, the days supply of retail inventory runs close to 45 days, essentially the same level dealers maintained on average through 2019. I’m encouraging dealers to maintain a 30-day supply, based on their rolling 30-day total of retail sales, as a hedge against any downturn in the weeks ahead.

Tighten up your appraisal/trade-in process. While the retail tailwind dealers enjoyed through the summer and early fall helped nearly every dealer sell more used vehicles and make money, some dealers did better than their peers. The difference? These dealers did a better job of acquiring inventory directly from customers, through trade-ins or off-street purchases. In turn, the dealers retailed these vehicles for better returns on investment than competitors who relied more heavily on higher-cost auction vehicles to feed their used vehicle inventories. This strategy proved to be a winner for private and public dealers alike. Looking ahead, it’s important for dealers to recognize that if their Look to Book ratios are less than 50 percent on a consistent basis, they’re missing profit-making opportunities.

As a final point, I would add that no matter how much the market changes in the days and weeks ahead, one thing will remain true this year as it does this time every year: The decisions you make today in used vehicles will set the stage for whether you start the new year off right, or you need to scramble to fix what went wrong.