As the fall season is firmly upon us, I see three potentially problematic trends for dealers in used vehicles. First, inventory levels are climbing. For many dealers, the increases are due to a rise in the number of off-lease and trade-in vehicles that flow from new vehicle sales. Some dealers have also chosen to increase inventory levels due to favorable purchase prices and a belief that consumer demand will not abate.
Second, wholesale values continue to slide south. In early October, analysts noted declines in most vehicle segments (an $84 drop for cars, and a $20 drop for trucks, according to Black Book analyst Ricky Beggs), with higher-end premium vehicles suffering the most. Most predict the trend to continue, which will put pressure on dealer margins for the inventory they currently own.
Third, it’s taking longer for dealers to retail their current inventory. I’ve heard from several dealers who report the average days in inventory is increasing, while their inventory turn rates are decreasing—a two-headed symptom that appears to owe to higher inventory levels and, in some segments, a potential softening in buyer demand.
To be sure, these dynamics are typical in used vehicles at this time of the year. Even so, they pose potential profitability and return on investment (ROI) risks for dealers who do not proactively address them as they manage their used vehicle inventories. In my recent conversations with dealers, I offer the following three best practices to minimize the chances that a seasonal slowdown becomes a seasonal slump:
- Pay close attention to your pricing. A Midwest dealer recently noted that he’s making $300 to $400 weekly price adjustments to individual cars to keep his current inventory in line with the market and meet his inventory turn and profit objectives. As he says, “It’s painful, but we’ve got no choice. The cars are still here and we need to move on.”
- Stick to a 45-day retail window. In the current environment, some dealers choose to hold on to vehicles longer than they should because they “can’t replace the car for what I’ve got in it.” Such decisions typically only make a bad situation worse, particularly when there are few signs that wholesale values will increase in the near future. I encourage dealers to maintain at least 50 percent of their used vehicle inventory under 30 days of age, and to give each vehicle a maximum 45 days as a retail unit. If a car doesn’t sell in the 45-day timeframe, dealers and managers should examine the hows/whys behind their inability to retail the unit in a timely fashion.
- Mind your average used vehicle investment. I’m seeing the average used vehicle investment increase for many dealers. The rise appears to be due to two factors: First, dealers are paying up to acquire certified pre-owned (CPO) vehicles, which has proved to be a profitable, fast-turning segment for much of the year. Second, some dealers are buying more large SUVs and other higher-dollar inventory because declining wholesale values make them more attractive. Neither approach is necessarily wrong, but I caution dealers that increasing their average used vehicle investment also means a commiserate increase in the amount of risk inherent in each vehicle.
Ultimately, dealers who maintain a consistent, steady course of market-based inventory management decisions during the fall will be better positioned to meet the challenges of fewer customers and slower sales as the winter months arrive.