45 to Thrive

July 11, 2008

Many are predicting that in 2009 we will witness an unprecedented number of dealership closings. I don’t think that this comes as a huge surprise to anyone, but what I don’t think most people realize is that decisions that are being made right now will largely determine those who die, those who survive and those who thrive.

Think about it, we are experiencing record high fuel prices, an economy that is spiraling downward and a presidential election in November, which is typically followed by interest rate hikes. It should come as no surprise to anyone that the next year is going to be very challenging. In any challenging economic period, cash often determines who will live and who will die. What is the primary source of cash for a dealership? You’ve got it, the used car inventory.

Now ask yourself what that means for you. Specifically not if, but when your dealership needs cash in the coming year how available will it be? Will you have the ability to draw down your used vehicle inventory if necessary? Or, will your cash be locked into assets that, if liquidated, will produce large financial loss? Now is the time to ask yourself this important question, not 6 months from now.

What I’m driving at is that during the next 6 months we will probably see inventory values decline at an increasing pace. I say this for a variety of reasons. First, we’re going into the summer, fall and early winter seasons when it always happens. Second, it is likely that fuel prices will continue to rise and the economy will continue to deteriorate. Moreover, interest rates are likely to rise after the election. All of these factors combined means that the cost of not turning your inventory quickly will likely result in your working capital becoming frozen in assets which will make it very difficult to liquidate.

The only way to survive is to stay very liquid. The only way to stay liquid is to turn inventory quickly. For this reason my best advice to everyone is to immediately institute a strict policy that says that no vehicle shall exceed 45 days in stock. Yes, this even includes your acquisition and reconditioning period. Desperate times place greater burdens on all of us and one such burden is to speed up all the processes necessary to turn inventory more quickly.

Specifically, I would recommend that dealers institute a strict policy of priority for used vehicle transportation and reconditioning. It is simply not acceptable to have a vehicle investment languish in either the transportation or reconditioning phases of their inventory life. Similarly, there should be a higher sense of urgency to get quality descriptions and photos on the internet. Most importantly, there should be a hard and fast rule that allows no vehicle to exceed 45 days in inventory, even if it means taking a loss. The old 60 day rule will get you in a lot of trouble over the next 6 months. Nobody can tell me that 60 days is acceptable under the conditions that we’re experiencing where vehicles depreciate at an unprecedented pace. If you do not pay attention to the consequences of accelerated depreciation you will likely not have the ability to reach for cash when you need it the most. Simply stated, how you manage your inventory today and in the coming weeks and months, may make the difference between surviving and thriving.