Literally, every day, we are all watching gas prices skyrocket. There couldn’t be any environment that more dramatically highlights the fact that the theory of dealers stocking based on their “core inventory” is just plain wrong. If any dealer today stocked their lot based on their past core inventory, they’d be purchasing gas guzzlers and, quite possibly, avoiding the purchase of today’s hot selling, gas-sipping vehicles.
We are now seeing reports of both Ford and GM shutting down manufacturing plants that build their large SUV’s and pickup trucks and shifting production to more fuel-efficient models. What if Ford and GM were, instead, using the same philosophy that some companies are promoting to dealers for their used vehicle stocking? In other words, what if Ford and GM kept producing and stocking their dealers with “core inventory,” (i.e., lots of trucks and SUV’s)? They and their dealers would be guilty of the worst management malpractice imaginable.
Today, I spoke to a highly successful used car director of a large multi-franchise organization. His comments made me realize that the absurdity of “core inventory” goes well beyond the issue of gas prices. He said that, as an experiment, they stopped stocking used Infiniti’s at their Infiniti dealership. They experimented with high volume, off-brand vehicles, such as Impala’s and Malibu’s. I asked him if he was sure he knew what he was doing, and he told me that they were selling like “hotcakes.”
He said that we all get hung up on the notion that we should stock according to our past sales and/or in accordance with, our franchise brand. Yes, it may be true, he told me, that there is some natural traffic for these vehicles, but that does not necessarily mean that they are the most demanded products in the market. Properly used, the internet allows dealers to be successful with products that are hot, but not necessarily their brand or part of their past core. Remember, he said, that no used car manager ever got fired for not selling the right mix of used makes and models.
So why is it hard for many dealerships to do what my friend has done at his Infiniti store? I think that the answer lies in the fact that we are all more comfortable operating in a zone of comfort and familiarity. Think about how hard it would be for someone very knowledgeable and familiar with Infiniti’s to say, “there might be something better out there, and I’m gonna give it a try.” It must have been really hard for that Infiniti manager to go out and pull the trigger and buy a bunch of Impala’s and Malibu’s. It would be like waking up one day and putting your watch on your other wrist and deciding to part your hair on the other side. It’s just really hard to do! So we don’t do it, even if there’s a chance that it might work out better. It’s a lot easier for us to go with the inventory that we know, rather than venturing out and taking the risk associated with buying something different.
The good news for the industry is that there is now technology that can analyze any market and tell a manager, at the level of year, make, model and specific equipment, which are the hottest vehicles at the moment, based on volume and/or gross. It can even show you where to go to buy those vehicles. This takes much of the risk and uncertainty out of the equation. So if you haven’t seen this, you need to. In my opinion, it’s the only way to stay in tune with the market. And, to those that continue to advocate the message of “core” I say, “What in the world are you thinking?”
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I was on Yahoo and found your blog. Read a few of your other posts. Good work. I am looking forward to reading more from you in the future.
Tom Stanley
Dale,
This is really good stuff. I remember back in the day a Ford dealer friend of mine bought a bunch of
Chevy Vegas for a bargain price from a rental company in Florida. The Vegas will give you an idea how long ago this was. I thought he was crazy. But he retailed them fast at low prices, quick turns, and substantial F&I and wholesaled the rest through his own auction and others. He wasn’t guided by technology in those days, but took a chance. More common examples would be a Pontiac dealer friend who bought a quantity of GEO PRIZMS and blew them out in 60 days. He could do warranty work on them and didn’t have to pay a premium for recon parts as they could be sourced through GM.
But there are some questions that arise in this new day and age. First, there is still the OEM’s focus on CPO. Second, if all dealers were using
the same technology, wouldn’t all dealers be pursuing the same “fast moving” vehicles thereby driving up the price of those vehicles. At the same time, there would be a cap on what they could be sold for so wouldn’t there be a minimal profit available even though the theoretical turn would be fast?
As it pertains to efficient markets, there has been a lot of talk over the years about the Efficient Market Hypothesis (EFH) as it regards the stock market. There are those who think investors should buy SPYDERS to take advantage of the long term rise in the stock market as they believe the stock market is too “efficient” to allow for one to consistently “beat the market”
over time. Yet, there are the Warren Buffets who
consistently do.
In addition, there is another significant difference between the stock market and the pre-owned market. In the pre-owned market there are stil those who can buy at wholesale (dealers) and those who can’t (consumers).
I know you study this stuff a lot and am really interested in your take! With our Arbitrage product we understand that if all dealers had it and used it, it would “move the market” and increased wholesale prices caused by market demand would reduce the arbitrage opportunity on the pre-owned lease. The good news is that there would be other opportunities rise up to take its place. Currently the depressed prices on pre-owned SUVs and trucks haven’t been commensurately reflected in the residuals offered by the lease lenders so there are many vehicles out there with minimal depreciation to be calculated into a lease. Of course, these vehicles may not be categorized as “fast turn” in the market, even though I can turn them fast for a really low payment on a short term, with the lender taking the residual risk. But then I have always had a little of the “contrarian” in me.
Funny, I worked for a dealer group that would acquire any franchise just so they can have the credibility and finance sources to sell exotic used cars, because that was their “core inventory”.
This is another article that proves one irrefutable truth and that is the car business was for the longest time literally upside down.
The so called “rules” (which are so many, by the way) that old-timers are constantly telling us about are simply, non-existent.
David,
Did you sit up late and drink too much coffee? Honestly, I’ve attempted to make a response on three different occasions and got interrupted. Soon, I plan on writing a piece, under separate title, that addresses your points. Thanks for being an active contributor.
George,
Thanks for the contribution.
Dale,
Actually, I am in Japan doing my annual seminar here. This is my 16th year. My client is one of the world’s largest privately owned Toyota Dealer Group with 96 dealerships. I’m introducing some of your concepts here as they fit better than some of my own… leasing isn’t broadly viable here. The time zone difference might explain the time stamp on my posts.
We should put our heads together as there seems to be a need for your technology here in Japan, although the franchised dealers are so focused on selling new, they view pre-owned as a necessary evil. There are some forward thinking pre-owned guys here though, and they seem to have their own web community.
The fact that SUVs and light trucks are at market lows and ALG has not dropped to the same degree presents unbelievable opportunity in pre-owned leasing. Of course, there are OEMs and banks taking huge hits on leases coming due now. But the Arbitrage lease opportunities are at historical highs!
Of course, I was a guy in the 70s buying fleet Chevrolets at large auctions, re-detailing them, adding a pinstripe and beauty rings, and re-wholesaling them at smaller auctions for a few hundred profit per… so now you know why I think the way I do. My first car sale in 1970 was actually a lease… years before showroom leasing where lenders guaranteed the LEV. I was an original GECAL guy… we went to the auction with our GECAL residual guide to buy vehicles as close to the 24 month residual as possible… then took them back to the store to market them for payments no one else could touch.
So now you know “The rest of the story!
I also apologize for my numerous typos as I think better than I type, especially in the middle of the night.
The good resource is informative and actual
Thanks the author!
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