I’m not sure we’ve ever been here before.
By “here,” I mean a market where we face two simultaneous headwinds—higher-than-ever incentives for new vehicles, and an unprecedented supply of late-model used vehicles.
It’s not that the headwinds are unfamiliar, it’s their scale and sustained nature that are making it harder for dealers and used vehicle managers to get the gross profit they expect for what you might call “near-new” inventory.
“Our grosses on certified pre-owned vehicles are anemic,” says the used vehicle manager for a Southeast Toyota store. “We have to be a lot more aggressive on these vehicles than we have been price-wise. The biggest hurdle is the incentives being offered on new cars. They’re higher than I’ve ever seen them with Toyotas, and the same is true for other manufacturers.”
Both of the headwinds have been building for some time. In recent weeks, Velocity dealers have seen an uptick in the Market Days Supply metric of near-new vehicles. They’ve also noticed that it’s taking a few more days to retail vehicles that previously sold more quickly.
The current conditions are putting pressure on dealers and used vehicle managers to maximize your front-end profit and return on investment (ROI) for each vehicle. Here are four tips Velocity dealers offer to make the most of this less-than-ideal retail environment:
Source more trade-ins. If you’re taking in half of all the vehicles you appraise, work to increase your win percentage and maintain your Cost to Market acquisition targets. The goal of increasing your trade-ins should especially apply to near-new inventory. The retail market still shows strong demand for certified pre-owned vehicles. Hence, your efforts to source more of these units via trade-ins will put you in a more cost-, price- and profit-favorable position than if you acquire them at auction.
Assess your “new” competition. In today’s market, late-model used vehicles can sometimes represent a toss-up for buyers than new vehicles, given factory cash and finance incentives. “Your used vehicles have to be well behind the new vehicles right now or they won’t sell,” says a Midwest Ford dealer. “That’s true for off-brand inventory, too. Some of the pick-ups from General Motors now have $10,000 incentives. You’ve got to know that when you’re appraising a similar one, or you’ll make a big mistake.”
Know the asking prices that sell. As time increasingly becomes money in used vehicles, dealers are getting even more pricing-precise. By monitoring their Price to Market and days in inventory metrics for specific vehicles, they effectively know the asking price that attracts an immediate buyer. The metrics helped the Southeast Toyota store manager recognize a tougher retail environment. He saw that near- new vehicles that previously retailed in 22 to 23 days at a roughly 93 percent Price to Market ratio now required nearly 28 days and a 90 percent Price to Market ratio to sell. “I’m starting those cars out at 90 percent now because that’s what it takes to sell them and move on,” he says.
Diversify your mix. The volatility of near-new used vehicles is spurring some dealers to focus on older, higher-mileage vehicles that offer greater gross profit potential. “Those aren’t the cheapest cars now, because everybody wants them,” the manager says. “But they’ve still got enough spread in them to justify the higher cost.”
As I look ahead, it doesn’t appear that the headwinds will subside any time soon.
The OEMs seem to be determined to keep up their incentive spending. The supply of off-lease vehicles is projected to continue to grow for another year or so. And, all the while, used vehicle margins will continue to face persistent pressure from these and other market forces.
It’s an unkind environment for those who fail to recognize that time is no longer on your side in used cars.
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.