This morning I had two lengthy conferences with dealers, one in Pennsylvania and the other in Rhode Island. Each dealer cited concern and anxiety for their inability to source vehicles for prices that would allow a reasonable profit. The pain of these dealers is without a doubt being shared by all. The solution, however, is understood by few.
I explained to these dealers that the answer to their problem lies in what I call “inventory engineering”. What I mean is that you have to be able to find the hottest vehicles in the market that are not understood by every other used car manager in town. In the case of one of the dealers, 97% of their inventory was either Toyota, Honda or Nissans. I asked, “How in the world would you expect to acquire vehicles of these makes for reasonable prices?” Every used car manager in town thinks that these are the right vehicles, and they’re out chasing them. The same can be said for a lot of other domestic vehicles.
I explained that the key is to have knowledge about which cars are hot in the market, but are not commonly understood by every other used car manager in town. For example, I demonstrated to the dealer in Redding, Pennsylvania that in the last 45 days, 17% of the vehicles being sold in his market were compact SUVs in the $15-$20k price range, and yet only 1% of the dealer’s inventory was comprised of compact SUVs. Hmmm…this looked like a problem. Next I said to the dealer, let’s find the hottest selling $15-$20k compact SUV in your market. You never would have guessed what came up number 1 on the list. How about an 08 Suzuki XL-7? I showed the dealer that there are presently 62 available in his market and in the last 45 days, 165 have sold. Wow! Triple wow! The market day’s supply of this vehicle was an astounding 17 days.
I asked the dealer if he thought this red hot vehicle was obvious to every used car manager in town and he predictably responded no way. I further asked him if he ever would have thought about stocking this vehicle, and he responded that he wasn’t even sure if he knew what the vehicle looked like. I explained that knowing something about your marketplace that is not generally understood by everyone else is the art of making money.
Next, I said to the dealer, let me show you that the market’s ignorance about this vehicle would make it an especially easy vehicle to purchase. I took the dealer to his appraisal tool where we booked the vehicle out in Black Book for an average wholesale value of $13,675, and a national auction value of $13,362. I then showed the dealer that there were currently 6 available for sale in a 150 mile radius of his dealership with an average retail price of $16,278. I further showed the dealer that after an anticipated $500 reconditioning and a $2,500 profit, he could purchase the vehicle for as much as $14,083 and have the third best value out of 6 in the market at a retail asking price of $17,083. With an average Black Book of $13,675, and an average auction price of $13,362, the dealer agreed with me that the vehicle could be easily purchased.
Interestingly, when I had the same discussion with the second dealer in Rhode Island, one of the hottest vehicles in his market was a 08 Kia Sorrento. Again, the dealer couldn’t remember stocking one and would have never thought about doing so. The appraisal exercise demonstrated a similar result in that the vehicle could likely be purchased because its supply and demand was not well understood by every used car manager in town. By the way, the 07 Suzuki XL-7 was the 7th hottest vehicle on the Rhode Island dealers list.
This exercise is called inventory engineering. Inventory engineering stands in stark contrast to the common practice of happenstance which is employed by most used car operations. In other words, the used vehicle inventory is stocked with vehicles that happen to be traded in or happen to be available at this week’s local auction. Happenstance stocking, I proclaim, is a poor way of creating conditions for success. Both dealers completely agreed with the merit of the different approach.
The problem, however, with the inventory engineering approach is that it takes time and effort and requires doing and thinking in a way that is unfamiliar and unwelcome by most used car managers. I try and explain that the time required to identify these vehicles is not time spent, but rather time invested. This is because the time invested in engineering inventory is in fact engineering future success. The best and most successful used car operations today are embracing the inventory engineering approach to stocking by providing their used car managers, and in some cases, stocking assistants with new tools and training.
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I’m brand new to the new car business so I apologize if this is a dumb question. With that said, I was reading this to a more experienced co-worker. He asked me how you are suppose to get someone financed on a vehicle like this. He said that the loan to wholesale ratio seemed out of whack. I don’t know enough to argue either way. Can you help me understand?
Dale ,
Let me play “Devils advocate” for a moment . I current hear this as the #1 challenge for most of the Dealers I serve . Let say they are all reading this post and just 50% impliment this new stratgy. Will this not create a whole new supply and demand issue on those units in their market ?
I am an advocate of your inventory philosphy and want to better understand . How can every dealer who employs Vauto and wants to sell more cars PROFITABLE , be the lowest priced unit in their market ? As more Dealers understand the days supply idea and adopt this as a buying stratgy, will this not drive the prices up on the hot low supply/high deamand units and shrinking profit margins ?
Respectfully ,
Tim Elliott
Tim,
Thank you for the very thoughtful questions. First it important to understand that in today’s new used car market the key is to not price every vehicle low, nor is it to price every vehicle high. Rather, it is to KNOW which vehicles must be priced low and which ones do not. The answer to this question lies in the knowledge in that vehicle’s supply, demand and price sensitivity in that market at that very moment.
Vehicles that have high demand and short supply can be priced at the top of the pack and still draw traffic, while those with high supply and low demand must be priced among the lowest. It is an incorrect assumption to think that my philosophy has every car priced among the lowest.
Now with the respect to your broader concern, if every dealer had my technology tomorrow the unfortunate reality is that many would not even flip on the switch, and many more would not use it correctly. It is only those dealers that understand the Velocity method of management and are willing to make necessary changes that will enjoy the competitive advantages of our approach. So, the practical answer to your question is that there is no need to worry.
It is, however, interesting to wonder what would happen if every dealer followed the system properly. In other words, what if there was perfect knowledge on everyone’s part in the used vehicle market? Would there be a race to the bottom and everyone would go out of business? The answer is no, and to be sure of this, we can look to other markets that are highly efficient and commodity like.
For example, consider the mercantile markets i.e. grain, cattle, beans, etc. In these highly efficient markets, there is always an equilibrium point at which a product will transact. When too many traders know that point, it forces the price down and that causes market participants to exit, in favor of more lucrative opportunities. When too many sellers exit, the transaction, or equilibrium price, rises. When it rises too high, it draws more market participants which pushes the equilibrium transaction point back down.
In the case of the automobile markets, when too many people know the retail market price for an 08 Kia Sorento, no one can make any money so some sellers exit the market in favor of other models that are less well-understood. The winners in all such markets are those that have superior knowledge, ability to make the fastest adjustments, and the most efficient operations that can maintain profitability at what will certainly be a tighter, less forgiving market. My mission, and the success of my clients, is based on helping them become the ones that have the most knowledge, greatest agility, and most efficient operations. Unfortunately, these will never be the characteristics of the masses but only the successful few. Again for this reason, no need for alarm but I appreciate the question and concern.
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