No one can drive us crazy unless we give them the keys

November 10, 2008

Some people define insanity as doing the same thing over and over and expecting a different result.  I say that this is one definition of insanity, but there is yet another that we have all experienced over the past six months.  This one has been caused by gas prices going from $2.50 per gallon to $4.50 per gallon, and then back again to $2.50. Does getting hung up with gas guzzling trucks and SUVs that wouldn’t sell, then paying big money for compact cars, only to find that compact cars wouldn’t sell when gasoline prices fell and trucks were back in vogue sound painfully familiar?  This gyration of on again and off again demand in trucks and SUVs has definitely created its share of insanity throughout our industry.

The automobile industry’s own insanity is not going away anytime soon unless we change how we do business. To borrow from Barack Obama’s now famous line in his presidential debate against John McCain, “this is the final verdict on the failed policies of our past.”  Unlike Obama, I am not referring to the economic policies of our government, but, rather, our industry’s long held belief that the past is somehow an accurate predictor of the future. This simply isn’t the case any longer.  Today we must realize that the market rewrites history each and every day. What this means to us as automobile dealers is that what stock units worked for us last month, just might not work again today.  What a vehicle was worth a week ago may not be what it is worth today.  And what a vehicle’s retail value is today will most likely be different tomorrow.  These conditions necessitate the need for what I call market-based management. Simply put, the only relevant reference point for what to stock, how much to pay, and how to price a vehicle is determined by the current market, not historical data.

The automotive industry has been slow to change how we conduct business.  I say that we need to let go and realize that our businesses must adapt to the new realities as they present themselves each and every day. This means that we need new tools to determine what to stock, how much to pay, and how to price.  We have already seen third party valuation sources such as Kelley, NADA, Black Book and others move to reporting daily versus weekly or monthly values for this very reason.  There still, however, is little recognition of the need to discard stocking models that are based on historical performance.

As I work with dealers around the country, I see their aged inventory representing yesterday’s news.  As I explain the need to stock based on today’s news and to keep inventory light and fresh so as to be able to respond to tomorrow’s news, I have discovered a troubling reluctance. I have come to understand that in difficult times like these, our natural tendency is to become risk adverse. In other words, it is not easy to venture outside the realm of comfort and familiarity for our own product or the type of products that the market seems to be favoring at the moment.  We all know that there are many different types of vehicles possessing multiple possible configurations, each one of which has its own peculiar characteristics in the market.  I believe that it is our innate fear of the unknown that prevents us from venturing out to test different types of inventory stock to meet the needs of emerging trends.

There is a growing group of dealers around the country that have managed to anticipate the trends and take some risk, with minimal downside and a maximum amount of upside return. These dealers share two common characteristics. The first is that their inventories are thin relative to their sales, being light and nimble provides them with the opportunity to be flexible.  These dealers typically turn their inventories a minimum of 12 times per year based on cost of sales dollars.  The second characteristic of these dealers is that they use current data from their live market for making decisions. Those dealers that work with live market vehicle supply, demand, and price sensitivity data have had the advantage to anticipate and respond to changing market conditions ahead of their competition.  In recent times, this has allowed them to sell gas guzzlers to their competitors while they still seemed to be hot, acquire compact vehicles before they rose in popularity, and, again, sell these same compact vehicles back to their competitors before it became apparent that gas hogs were on the rebound. True enough, it took courage as well as faith in the data to make wholesale acquisitions and sales prior to the market acceptance of these trends.  But make no mistake about it – the timing of these moves was not driven by experience or instinct about the market, but, rather, by using revolutionary data about current supply and demand. These dealerships were acting as sophisticated investors with faith in their live market data and models.

This practice represents a new breed of dealers, ones that understand the realities of the new market and are adapting to meet the challenges. There is no doubt that great companies are built in the toughest of economic climates. Without the motivation of the market, it is unlikely that anyone would bother to change the way they do business.  I would encourage every dealer to take note of those that are using these conditions to change, grow and dominate their market. While claiming “insanity” may feel good at first, it is unlikely to hold-up as an acceptable excuse for long.