Yesterday I received a copy of a letter written by David Desmarais stating:
Gentlemen,
My apologies in advance but I need to make you aware of something.
See the articles below. Dale is 100% wrong about his “Danger!” statements. I just spoke to the West Coast Credit Manager of Chase Auto Finance. They haven’t used NADA values in a year, are still using Black Book and are advancing well over “70% of average wholesale” across the board. Based on what’s going on at the auctions today is the wholesale market softening or are cars going for clean book +++? Are you stuck paying top dollar because you didn’t overstock when the market was soft? Is this the type of ‘out-of-touch’ advice you’d want for your most critical investments?
Sorry, it just bugs me when someone passes along internet gossip as fact and doesn’t see what’s happening in the real transactional world.
In response, Matt Murphy at Falmouth Toyota replied as follows:
Guys – Personally, back in May I too was positive the wholesale market was going to slow down. And January?….Please. Who knew what was going to happen back then? What’s going on now has no precedent in the 20 years I’ve been in the business.
Matt, thank you very much for your support, now it’s my turn!
David Desmarais – congratulations on your perfect 20/20 hindsight. You definitely exemplify the best traits of a Monday morning quarterback. Since you profess to have a better sense than me of the “real transactional world”, please inform all of us when or if you ever think the used vehicle wholesale market will level out. Are you suggesting that used vehicles are no longer depreciating assets? Do you believe that what goes up doesn’t have to come down? Please give us your expert opinion, I will now clarify mine.
David, today’s used car market is an efficient market and used vehicles are much less individualistic and more like commodities. In any efficient commodities market volatility is inherent. Consider the oil, gas, metal or grain markets. These are all efficient markets that are volatile by their nature. Because of market efficiency and product commoditization volatility is the new order in the used car market.
Think about the radical fluctuation in values in the last half ’08 for SUVs and fuel efficient vehicles. Consider what seems to be irrational exuberance in the wholesale prices of used vehicles in the first half of ’09. Think about how difficult it is for third-party guides to keep up with current valuations. These are all signs that the used car market today in inherently volatile.
Volatile markets are inherently risky markets and risk often equates to loss. This was the basis for my warnings and previous postings and articles. Used car dealers recognizing that today’s market is volatile must make a fundamental decision as to whether they are speculators or retailers. If they want to be speculators, i.e. buying as much inventory as they can in anticipation of future higher markets as you suggest, then they must be prepared financially and psychologically for the inevitable boom and bust cycles of a gambler.
If on the other hand, used car dealers perceive themselves as retailers, then they must prudently manage the risk inherent in the market. From my perspective, this means moving from money to metal, from to money to metal and so on as quickly as they can. They simply can not afford to be caught long on yesterday’s inventory.
It is in this spirit that I issued cautionary warnings to dealers. If you want to take me to task for being wrong on the timing of my predictions, have at it. But if you’re suggesting that dealers should not have concern or sensitivity that what goes up will come down, then I think that you are misguided. Simply criticizing me for being wrong on the timing of my prediction is in the words of John Adams when referring to Thomas Payne, “Being better at tearing down than building up.”
David Desmarais, please clarify the justification for your position that dealers should stock up when the market’s soft so they don’t have to get stuck paying top dollar later. Specifically, are you advocating that dealers be speculators, and if so please accord them the respect of your expertise by providing them with proper timing for acquisition and disposition. Until you clarify your position and/or provide reliable guidance on market timing, I will continue to caution dealers to behave as rational retailers should in a volatile market.
{ 11 comments }
“OORAH” Dale.
speculate vs retail is a function of the time value of money in the speculated asset vs the EV of asset after the market gain. Example if you chart convertible ACV’s in the r months vs the non r months over time you get a sine curve that works with a high degree oonfidence. outside forces other than seasonal predictability “snow vs spring” like oil embargo’s etc will increase the beta of risk, and volutility. learned that buying 98′s and Electra’s that people traded in on vega’s & b210′s back in the 70′s. Hope this clears things up.
Overstock when prices were cheap? You have got to be kidding…That’s the kind of reckless outdated Bubba Gump inventory management that got most people into trouble in the past. I would be willing to bet the author isn’t a dealer with his heart, skin, blood and cash in the market. If he did I bet he would feel differently. As of today I have $2,700,000 of used car inventory. It is turning 16 times per year and we have no units over 60 days old. It is impossible to turn your inventory and protect your gross profit when the inventory is aged and not turning because you overstocked when prices were cheap. The theory is outdated and no longer works.
Dale
why don’t you you control the part of the supply chain by having a interest in financial institutions ( Small banks).
Just an idea.
RObin Trehan
I was explaining the formula. congratulations on your ROI.
Bubba
Dale,
You summed it up perfectly: “You definitely exemplify the best traits of a Monday morning quarterback.”
‘Nuff said.
Eric
I wrote this comment on Wardsauto.com in March….still say buy and sell in todays market is the smart play.
I can say that after looking back on this winter and Dale’s prediction of used vehicle values I am happy to have listened to and followed alot of what Dale has to say. Although many vehicles have made a comeback in value, holding on to inventory hoping it is going to rise in value only works in specialty markets and takes research and capital along with guts. Technology is making selling cars new or used a different game. The dealers that embrace the technology available will be the best off in the years ahead. Long gone are the days of having the right customer fall into your lap and pay too much for a vehicle because they don’t know where to find a replica. Today’s nearest competition is now 1 click away and if they have the same car for $2000 less because you left room for negotiation will they even call?
Counter punchers, 2nd guessers, arm-chair QBs. This personality drives me nuts.
I lost track of how many times I have observed managers uncomfortably fumbling for ideas on how to take their team forward. Wait, I take that back, actually, they have ideas, it’s the ridicule of a failed idea they don’t want.
In my travels, most managers are comfortable counter-punching the ideas of others. I think it comes from years of “bitch circles” as a sales rep, 2nd guessing their bosses efforts.
There are no money making ideas to be found staring into the rear view mirror. All you’ll accomplish is making sure to CYA (Cover Your A**). Maybe this adds to why sales training & marketing gurus are so popular.
Dale,
Too each his own, 214% ROI YTD, oldest car in stock is 31 days…grosses are up, and 43% of my inventory I would consider “Core”.
Go Yankees!!
The reality is that there is truth in both notes. Used cars have not just become a commodity; they have been one all along, just less predictable recently than in the past. While the gasoline crunch hit us all by surprise there has always been trends in the market based on the time of year that dictated what you stocked and how much of it. Many dealers do well by purchasing certain units in the down market in anticipation of the upswing or more predictable trends in the market such as Tax Season. Yes it is more difficult to predict what used to be typical swings in the market place but what a successful dealer does or the one who wants to be should do is have a strategy or game plan for selling each unit he or she purchases or trades for. This includes a pricing and marketing strategy both to the customers and to the staff of the dealership. You have to know your market and who you advertise and market to. As an example if you are a heavy subprime store then you have to know before you purchase a vehicle where it fits within the big picture. What kind of down payment will be required to get this unit done for your average customer? What term can you get? What backend potential is there? Is your recon going to put you in a situation where your profit is limited? Personally I had what I considered several inventories. My subprime, Internet, Core, Non Core, really you can call them what you want, the reality is that every vehicle I traded for or purchased was to fit within one of those inventories and within that inventory there was a strategy for retailing them and maximizing profit. I call it buying with a purpose. Stephen Covey talks about having your “end in mind” and rather than waiting for a car to age I had my end in mind from the beginning. With all of that said if you are not marketing your inventory properly it really doesn’t matter how well you stock, you will never reach your full potential until you have mastered the ability to market them properly both online and offline, this includes pricing strategy and Search Engine Optimization which is a whole other subject. In closing, the dealers with purpose and strategy tend to be more nimble and less affected by market changes. They adapt with the market, create new strategies and execute them. There are always going to be vehicles sold in your market it’s just how many will you sell that is the question. A good question to ask your UCM is what his or her game plan is for a specific vehicle and wait for a response, you might be surprised by the answer. I believe that most worry about that “purpose” only when the car reaches a pre determined number of days in stock, and in reality it should start when you appraised the vehicle or decided to bid on it.
I wouldn’t trade our current inventory turn of almost 11 times per year and a nearly negligible aged inventory (less than 8% of total investment over 75 days) for a return to the old days. Regardless of whether wholesale prices are high or low, buying AND selling in today’s market at today’s prices is the only strategy that any intelligent “investor” would employ.
Even our 12 units of overaged inventory (over 75 days in inventory) are saleable at 93% price to market.
In case Dave Desmarais questions our credibility, we are the #1 retailer of Toyota Certified Used Vehicles in New England, outselling Toyota dealers in much larger metro markets with an advertising cost per vehicle retailed about 50% less than our peers.
Comments on this entry are closed.