Why Don’t Dealer-Owned Vehicles Depreciate?

by dpollak on 11/22/2011 · 4 comments

It’s not uncommon for dealers to quietly, sometimes firmly, let customers know the vehicle they believe is worth $X is really worth $Y.

depreciation Why Don’t Dealer Owned Vehicles Depreciate?“It’s depreciation,” a sales manager might say when offering the customer less for a trade-in than he/she had hoped to get.

Curiously, dealers aren’t quite as honest with themselves about the depreciation of their used vehicle inventories. Some dealers may write down and recognize the inventory value depreciation on a monthly or quarterly basis, but most dealers avoid the exercise altogether. These dealers seem to believe, like their customers, that depreciation affects the other guy, not themselves.

The problem, of course, is that this thinking can lead dealers to believe their used vehicle departments are performing just fine, when they may well be missing the mark.

Here’s what I mean: Suppose we have two stores with $1 million in inventory. Each brings a 10 percent return on the investment per month, or $300,000 after three months. The first store doesn’t depreciate its inventory or systematically address aging units, while the second store regularly adjusts its inventory valuations and gets rid of aging units when their current market values decline. A dealer might look at each store’s $100,000 monthly return and think, “Both of my stores are performing on par with each other and I can expect a 120 percent annualized return on investment.”

However, this dealer would be wrong. In effect, he would be giving himself and the first store credit for profitability they haven’t yet earned. Meanwhile, the second store’s inventory management discipline would be getting short-shrift—even though it’s poised to deliver a better overall return on the dealer’s investment.

This scenario remains all too common in our industry, at dealerships and dealer groups large and small. I can’t help but wonder how much better these dealerships would perform if they took an honest look at their inventory valuations and regularly and dispassionately address depreciation and age.

Let’s remember:  What dealers must understand is that allowing inventory to age and consequently depreciate provides a glimpse of profitability that hasn’t really been earned.

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  • Anonymous

    Dale,

    What is your opinion on aged new vehicles? Any thoughts on what to do with them since there is no exit strategy (auction) like there is for used cars. Do you sugest writing them down to move them?

  • http://www.dalepollak.com Dale Pollak

    Scott,

    Thanks for the question. In a rational environment it would make sense to write new vehicles down to their actual marketable value on a periodic basis. The problem however is that there’s very little rationality in the new car market. This is primarily due to the transitory factory incentives. Some times a new vehicle could be worth more in the future than in the present, if and when an incentive is announced.

    Under circumstances where you’re absolutely sure that the factory will not issue future incentives and such vehicles are on your books for more than their market value, I would recommend that they be written down. Aside from incentives, the only other issue that I’d be cautious about is not to violate your manufacturer’s working capital standard. Unfortunately, this is a case where doing the right thing can get you in trouble and just another example of the irrationality of the new car marketplace.

    Dale

  • CJLESW

    Hi Dale.
    Chris Lake here. Just got your email. Thanks. Was also just watching your 9/10 video presentation on Paint to Pixels. You are dead on. If a dealer is not going manage the virtual lot with the same passion as with the physical lot, just don’t spend the internet marketing dollars!! I’m kind of chuckling now but each time you made the point it seemed you got more emphatic and maybe even a bit more frustrated. Truth be told, each time I wanted to scream out “and if you’re going to get out of the internet marketing of your used cars, you might as well liquidate the inventory, lock the doors, put the proceeds in t-bills and be happy with a 2% return while sipping a corona from the beach”. Please don’t ever stop. You are a true inspiration.

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