It’s like that old saying, “No good deed goes unpunished.”
For the past several years, dealers have done a bang-up job selling more new vehicles than ever before.
And to thank dealers for their sales records, many automakers have continued pushing more and more inventory to dealership lots, even as sales plateau.
In the past three years, new vehicle inventories have increased by 16 percent across the industry. Some well-known, mass market brands have watched their inventories swell by as much as 30 percent! Dealers across the nation are now holding more than four million units on ground for the first time ever.
Just like you, I’d like to believe the car companies will do the right thing and cut production.
“…some dealers believe their new cars are not depreciating, therefore they do not pay as close attention to it.”
But guess what? Automakers are actually investing significant dollars to increase their production capacities. Incremental production from new plants in North America is forecast to grow by nearly four million units by 2022, as car companies continue to fight for a bigger slice of the retail sales pie. The phrase “maybe we should cut production” is not a very popular suggestion in the c-suites of most automakers.
This situation bears a very real consequence on dealer financial statements. We’ve seen floorplan expense grow by as much as 40 percent at some brands in 2017 compared to a year ago. This expense growth will likely continue as the Federal Reserve is expected to raise interest rates again in June.
But here’s the opportunity. You can turn this expense into a profit center by doing a better job of managing your inventory against the ticking clock of your bank’s floorplan program.
A recent independent dealer survey commissioned by vAuto, revealed that only 33 percent of dealers make floorplan expense management a priority, while the remaining 67 percent either “hope” floorplan credits outweigh expense or they just pay the bill as it comes. It shouldn’t be surprising that the dealers who proactively manage their aging inventory are among the roughly 30 percent of dealers who earn a profit from floorplan credits at least seven months out of the year.
Consider two dealers who share the same brand and each stock 300 new units. Let’s assume their manufacturer provides floorplan assistance to cover 90 days of holding expense. Dealer A sells about 60 percent of his inventory before it hits 90 days, which leaves about 40 percent (120 units) older than 90 days. Dealer B sells 50 percent in less than 90 days, with 50 percent (150 units) older than 90 days.
This 10 percent (or 30-car) difference equals about $50,000 in additional annual floorplan savings, which flows straight to the bottom line for Dealer A at current interest rates. Dealer A’s net income would go up another $10,000 if interest rates increase by .5 percent.
With new car margins at all-time lows, this $50,000-$60,000 a year is definitely worth pursuing. So how do you get there? Here are five best practices to help you flip your floorplan expense into profit:
- Write down all new vehicles older than 60 days. A 3 percent write-down on aged units against monthly new vehicle gross will keep sales managers/consultants accountable and focused on retailing aged inventory quickly.
- Don’t take a car back on trade unless you really NEED it. You may be better off just executing one way trades vs. taking back a unit that is high in availability. This is particularly true on sedans right now.
- Tie new vehicle specials to aged units. Make sure your oldest vehicles in stock are featured on the New Vehicle Specials section of your website. All too often, I see very few vehicles listed as specials.
- Identify slow-moving vehicles early, not late. Leverage technology and tools to understand which vehicles have high market days’ supply and price them appropriately on day 1 in inventory vs. day 300.
- Monitor vehicle-specific shopping activity. If specific vehicles and VINs aren’t getting much online attention, adjust your digital marketing/merchandising on those units to boost demand.
I often ask dealers what their oldest five used cars are and they can very quickly tell me. But when I ask the same question about the 5 oldest new cars, I typically get blank stares. This is due to the fact that some dealers believe their new cars are not depreciating, therefore they do not pay as close attention to it. This perspective drives higher holding costs, leads to more “lot rot” and ultimately bigger discounts on aged units.
While the new vehicle market remains very challenging, there’s more money to be made if you commit yourself to earning it. Closer attention to new vehicle inventory management provides the very real opportunity of turning a good deed into profit, not punishment.
Author: Brian Finkelmeyer
Brian Finkelmeyer serves as the Director of Business Development for Conquest at vAuto. In this role, he is responsible for all aspects of vAuto’s New Car business. Prior to vAuto, Brian spent 18 years with Nissan North America in a variety of sales leadership positions. He is a routine presenter and author for various automotive trade publications. His topics focus on the importance of increasing new vehicle inventory turn by having the proper inventory mix, strategically pricing based on age and supply, and insights on maximizing effectiveness of dealers marketing investment.