An urgent notice to all dealers
I’m writing this post out of great concern for all dealers. Specifically, the current used car market is in an extraordinary deflationary spiral. As such, any vehicle can be replaced for hundreds if not thousands less from one week to the next. As a result, I am encouraging you to be relentless about liquidating current inventory, reinvesting in lower cost basis units, liquidating and then reinvesting again with great urgency.
While this advice reflects rational economic behavior in a deflationary environment, it violates the long-held operating principles of automobile dealers that they must make acceptable average gross profit in order to justify a transaction.
Because of this conflict, too many dealerships are holding inventory whose replacement price is as much as 33% less than current market value. Although I believe that the existing deflationary spiral will eventually subside, I know that the acquisition value of old inventory can never be recovered. This situation is the greatest threat to the viability of the retail automotive dealer community.
When dealers attempt to access needed capital from their used vehicle inventory they’ll discover, too late, that it is unattainable without incurring losses that are too great to bear. I predict that their consequential lack of liquidity will lead to mass insolvency. It will be this condition rather than decisions made on Capitol Hill that will lead to unprecedented dealership closings.