Do profit margins really matter?

by cblackledge on 05/09/2008 · Comments

Of course they do. As long as you have a good profit margin on a unit that will sell in your location.

I had a great conversation with Dale last week. This is the meat ‘n’ potatoes of what we discussed.

“What is the days supply in your location?” This is the NEW first question you should ask yourself when deciding what to stock. Not “how cheap can I buy it?” If you make a poor decision and purchase a unit with a high days supply, your retail asking price may quickly turn back to a wholesale or worse.

I live in Georgia. In the winter time, our hardware stores and other retail stores don’t stock snowshoes. We don’t get more than a couple of snow days a year around here. No matter what the price, they probably wouldn’t sell (unless they get so cheap that I buy them all and ship them up north). Either way, it’s not a local retail.

You can’t rely solely on your store’s sales history. The market changes daily and it’s tough to follow (gas prices, economy . . etc). You can’t hope that just because you bought it cheap that it’ll sell. Interest and advertising can quickly take a unit from black to red. By compiling live internet data, Dale’s new Stocking Tool is the only thing I’ve seen that gives us the current information needed to make an intelligent purchase.

vAuto is the only proactive solution I’ve seen. The others just react to the market.

Thank you for giving this market some perspective Dale!

Colin Blackledge – Milton Martin Toyota

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  • ruggles
    Dale,

    I certainly agree with you about having to take trades to keep selling cars. I strongly disagree with anyone who wants to overstate a used car to move a new one. I think it is better to show the loss one the new one, if that is actually what happened. I fight anything that is going to put me underwater in pre-owned inventory, but believe one should step up and put an honest number on each appraisal. I believe that a high days supply is often caused by a market shift that means most or all of a certain model experiences a decrease in value. Dealers who own the vehicle for a current market price will probably be able to sell it.

    This might be the contrarian in me coming out, but I often buy used what no one wanted new. These types of vehicles are usually cheap as pre-owned and can be offered at such a compelling price they are easy to sell.

    Even if I have a limit on working capital, each used car has a value. I look at used vehicles in my inventory as piles of cash, not cars or trucks. If I own a group of Escalades at the current market value, and they lease especially well because ALG hasn't caught up with what will probably happen down the road, I can offer a low enough lease payment to buy a LOT of petrol and lease a lot of Escalades. And after 36 months, neither the dealer or the customer has to worry about the Escalade's value. While everyone else is trying to sell their over age and over valued Escalades, I am making their problem even worse as I am blowing them out for high gross profit and rapid turn.

    While I agree that days supply and historical sales data is important I don't want to be another lemming heading for the cliff when the market changes abruptly. If I'm going down its because I made a proactive mistake, like buying 3 truckloads of Escalades because I thought they were cheap and I could put them out on cheap, short term, payments.

    Even in the parts department your inventory systems will be set up to not order a lot of batteries and anti freeze in the Spring, even though days supply at rate of travel might recommend it.

    And yes, we are pitching our Arbitrage software to the lenders so they can identify and fix certain residuals. Does anyone think a 2005 Escalade will bring $16000. in 36 months with 81000 on the clock? That's what certain lease lenders guarantee as a future value.

    We aren't out to bury the lenders, however. We would like to look for lease opportunities based on an advantageous current market price, caused by a seasonal adjustment, temporary over supply, or something like that. But if a lender wants to put their head on the chopping black, Arbitrage will help a dealer take advantage.
  • Ruggles,

    Here's my question for you: Assuming that you have a limit on working capital and parking spaces, do you really need to own any vehicle that has a really high day's supply? For me the answer is no if there's a choice.

    The reality, however, is that there are some vehicles that we must take on trade and often these vehicles have a very high day's supply. In such cases, I would advocate wholesaling out of them immediately. Let someone else take the challenge of trying to get out thru retail. If, however, you end up in the vehicle for too much money, then I would say get very creative, perhaps with an aggressive used vehicle lease payment and "get out of Dodge".
  • Question: Background..... The days supply of 2005 Escalades in a market is extremely high, due to a combination of lack of demand and the fact that the dealers holding Escalades in stock probably are the stubborn ones who think their inventory is worth what they have it one the books for unless they take a wholesale loss. (First I would say they have already taken the wholesale loss even though they haven't reflected it on their books yet.)

    Should I stock it if I can offer a payment of $350./mo for 36 months?
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