The last few months in the automobile business have been turbulent. We’ve seen radical shifts in consumer preferences due to a variety of economic conditions, most notably oil price fluctuations. There’s been massive restructuring in the manufacturing sector in favor of fuel efficient vehicles. Unprecedented investments are being made in new alternative fuel technologies. Automobile dealers have been stunned and confused about what to stock and how to value their inventories. These conditions have brought forth a variety of opinions and theories about how to conduct business operations.
For some time now I’ve advocated that past history is no longer a reliable method for determining proper inventory mix or valuations. In fact, I don’t think that there could ever be market conditions that more clearly validate this stance. Simply stated, if you’re still making inventory decisions based on your past performance, you are, without a doubt, going to be caught off-guard and ill-equipped to address what will certainly continue to be a rapidly changing market environment. I am aghast by solution providers that continue to tout their horn for the need to stock based on core (code word for past) sales history. These solutions only serve to reinforce the outdated notion that past performance somehow guarantees future success.
I’m also distressed by those that are attempting to predict the future of the automobile market. These are the individuals who say that they are “stocking up” on certain models because they perceive that the market will “come back.” Another expression of this equally ill-fated notion is “I can’t replace them for what I paid.”
In the 1988 vice presidential debate, Lloyd Bentsen said to Dan Quayle, “Senator, I served with Jack Kennedy, I knew Jack Kennedy. Jack Kennedy was a friend of mine. Senator, you’re no Jack Kennedy.” To those who attempt to predict the market by the means of overstocking or refusing to sell stocked units in spite of their age in the hopes of making greater future returns, I say in the spirit of Lloyd Bentsen, “I have friends who are hedge fund traders, and we are not hedge fund traders.” If any of us really believe we can predict the future markets, we need to get over it. Hedge fund traders work with a wealth of information and mathematical models that not only predict outcomes with proven certainty, but limit the amount of risk and exposure. Moreover, by law, hedge funds are for “qualified investors”, which means those individuals that are prepared to lose their money and can afford to do so. I firmly believe that we in the automobile business are neither sophisticated futures traders, nor are we dealing with investors that are prepared to lose it all.
Anyone who is going to stock up on certain models in anticipation of a future market or retain existing units for the same reason should be prepared to also accurately predict future oil prices, interest rates, fleet and lease returns and a myriad of other variables, any one of which may affect the shape of their future market predictions. Honestly, let’s be sensible and realize that while our guesses about future markets may turn out to be correct, we really shouldn’t be in the business of trading futures. We have a significant enough challenge in dealing with the present – we should not get hung up with managing from the past or too far in the future.
The only sensible alternative as managers of multi-million dollar inventories is to stay focused on the immediate market and as be nimble and responsive to the inevitable changes as possible. This approach requires real-time market data about current wholesale and retail values as well as market day’s supplies of vehicles in their varied configurations.
Specifically, dealers should focus on three real-time metrics that, if managed properly, will ensure success. The first of these is called cost to market (CTM). CTM measures the cost of inventory as a percentage of its retail market value. A dealer’s cost to market percentage should be approximately 80% for new inventory up to about 30 days old. This benchmark assures dealers an adequate return on their investment.
The second key real-time metric is price to market (PTM). Dealers should keep their vehicle prices at around 100% for the first 30 days. In other words, their vehicles should be priced, on average, right smack in the middle of the competitive pack of identically equipped vehicles in their market. In the critical age category of 31 – 60 days, dealerships should price their inventory at approximately 5% below the market average, at 95% of the identically equipped vehicles in the market. This allows dealers to retail out of a maximum number of inventory units before they either have to accept an aged condition or a wholesale loss.
The third key real-time metric is the market day’s supply of their vehicles. Dealers should make every effort possible to maintain inventory with as low of a day’s supply as possible. Just ask yourself whether or not you would purposely stock new vehicles if they had a high market day’s supply. The answer is obviously not. Yet, this is exactly what most dealers are doing with their used vehicles. Maintaining an inventory with low day’s supply generally means stocking vehicles whose supply in the market (given identical equipment configurations) is less than 50 days.
The three real-time metrics of cost to market, price to market and market day’s supply are available with new technology. The technology is so efficient that it will even notify you proactively through email when or if thresholds are crossed unit by unit. This is what I call real-time market management and it is the only proper way to navigate in times of turbulent markets and uncertain conditions. Again, in the spirit of Lloyd Bentsen, “I know real-time market management. Real-time market management is a friend of mine. Working from your past or trying to predict the future is not real-time market management.”