It’s sometimes startling to see the disparity in the ways dealers manage their new and used vehicle inventories. As a dealer recently put it, “I have $1.4 million in used vehicle inventory, and we pay attention to it every day. We track VDPs (vehicle detail pages), our price position and our merchandising. But I’ve got $13 million in new vehicle inventory that I don’t look at much at all.” The dealer’s approach to new vehicle inventory management is fairly common—particularly in times when sales are strong. Traditionally, dealers don’t believe that new vehicles depreciate, and factory floor plan assistance can help ease the cost of carrying older-age units.
But here’s the question: How much better off would dealers be doing, in terms of new car sales and profitability, if they took a more proactive approach to managing their new vehicle inventories to sell more vehicles in less time?
To answer the question, let’s consider the following new car inventory data points:
- According to the National Automobile Dealers Association (NADA), the average dealer sells 87.5 new vehicles a month. AutoData reports the average days supply of dealers’ new car inventories runs near 70 days, which translates to roughly 200 units on the ground.
- Industry data also shows that nearly half (48 percent, or 96 units) of the average dealer’s new vehicle inventory is older than 90 days.
- NADA also reports the average dealer earned $143 in floor plan assistance per retail unit last year, or about $151,000.
To me, the most troubling data point above is the number of aged units. It suggests that dealers do a decent job retailing vehicles their customers want, and a less-than-acceptable job with less-desirable cars. Further, the aged units also underscore the cost of new vehicle inventory inattention—fewer sales, less gross profit, and less benefit from factory floor plan assistance and other below-the-line programs.
“Dealers should tackle the aged new cars head-on, aiming to reduce the percentage of aged units by 10 percent, if not more.”
Dealers should tackle the aged new cars head-on, aiming to reduce the percentage of aged units by 10 percent, if not more. For many dealers, this operational goal will require more astute, buyer- and market-minded management of their new vehicle inventories and pricing.
Here are three best practices to help you get there:
- Know each vehicle’s market “sweet spot.” A growing number of dealers are using technology and tools to fully understand how many in-/off-brand vehicles compete with their new cars, the prevailing asking prices in the market and buyer interest in their vehicles. Dealers who proactively apply these competitive insights to their new vehicle inventory and pricing decisions often find opportunities to ask for more gross, and to know the specific units they should price aggressively to increase turns and optimize their inventory mix.
- Price with greater transparency. Today’s buyers prefer to see new vehicles listed online with transaction-like prices that include all relevant incentives. They view listings with “call for price” or “Get Your Internet” price as signs of the traditional car-buying shell game. By contrast, dealers who adopt transparency-focused pricing strategies typically benefit from increased buyer interest, more showroom traffic and more profitable sales.
- Avoid the “lazy” mistakes. Dealers who adopt more proactive, market-focused new vehicle inventory management practices quickly identify two trouble spots. First, they discover that they often trade some of their best cars to other dealers. Second, they find a pattern of selling their freshest vehicles first, even though they’ve had the same car in stock for weeks or months. “I didn’t realize we had a problem,” says a Midwest Ford dealer. “We were simply trading or selling the cars closest to the showroom. These were stupid, lazy mistakes that cost me money every month.”
I would encourage dealers to adopt and follow these best practices as soon as possible. The outlook for new vehicles is decidedly less rosy than it was a year ago. Analysts are calling for sales to plateau, if not drop off.
When this market shift occurs, the true costs of a dealer’s inattention to new vehicle inventory management will become painfully evident—which is all the more reason to start paying attention today.
Author: Dale Pollak
Dale Pollak, vAuto’s Founder, has 13 years of Dealer Leadership Experience and is a highly sought after best-selling author and recognized speaker on maximizing dealership profits from preowned vehicle operations. Pollak received his B.S. in Business Administration from Indiana University and is a graduate of the General Motors Institute of Automotive Development. He also holds a law degree from DePaul University’s College of Law, and is a four-time winner of the American Jurisprudence Award.