Monday in Nashville

January 16, 2009

Once again I am going to go out on a limb and stating that the way the majority of our industry puts a value on a used vehicle is ineffective and outdated.  Although I have sensed it for a long time, an experience at the Nashville Auction this past January crystallized my understanding. On Monday January 5th, Ford’s Closed Sale in Nashville drew a bustling crowd of eager buyers. Amidst the herd was a small group of the enlightened – a special group that marched to a different drummer.

As the chilly January morning progressed, vehicle after vehicle was bid up to a level not seen for several months.  While the herd eagerly outbid one another, a contrarian few stood silently by, exchanging glances of disbelief.  One after the other, ’08 Ford Explorer XLTs escalated in value as the bell rang regularly with values in the upper $15,000s. As soon as one achieved a new level, the next one brought even more. This frenzy continued well into the late afternoon. 

When the Auction began to clear, the few congregated to reflect on what had transpired.  Among this small group it was well understood that the wholesale prices paid throughout the day were considerably over existing retail values after considering fees, transportation, reconditioning, and profit. So what happened on that Monday in Nashville?

Upon analysis, the traditional herd had been set loose from their dealerships with instructions to “get cars” because during the prior four weeks the auctions had been largely shuttered by the holidays with the used car managers splitting their time between year-end clearance sales and family celebrations.  Monday was the day to get back to work and restock the lot.  In another era, what happened that Monday may have just gone unnoticed, but the few knew something that the herd did not.  What they knew was the fact that Ford had approximately 80,000 more similar vehicles to be liquidated over the next few months.  Moreover, they knew that the current market supply of the auctioned vehicles was well in excess of 100 days.  Specifically, on that Monday, ’08 Ford Explorer XLTs had an average retail market value of $17,180 and 124 days supply in the Midwest.  (In other words, if no other similar vehicle entered the market, at the present sales rate it would take 124 days for the market to be depleted of ’08 Ford Explorer XLTs.) Unknowingly, the herd had just purchased vehicles that, after fees, transportation and reconditioning, would have to be retailed for well above current average retail market prices.   

This scenario would have been very different if there was only a current market supply of 30 days versus 124 and/or the current average retail value was $1,000 higher, but no such luck.  The few knew what the herd did not and agreed that they had saved themselves approximately $50,000 by not having purchased truckloads of vehicles. Moreover, they agreed that just a year prior they would have behaved just like one of the herd buyers. 

That day, what the few understood was a new and better way of determining a retail vehicle’s fair wholesale market value.  They used a formula based on their understanding of the efficient market and the principles of velocity supported by using live retail market data.  Before they showed up in Nashville, they already knew the average retail market value for every vehicle that they intended to purchase.  To calculate fair wholesale market value, they took these retail values and deducted their anticipated fees, transportation and reconditioning costs as well as their expected profit.  For example, if they knew that an ‘08 Ford Explorer XLT’s average retail value was $17,180 with fees of $500, reconditioning of $800 and desired profit of $1,500, they knew they would only be willing to purchase the vehicle if the cost was around $14,400.  Moreover, they knew how many identically equipped competing vehicles were currently available in their market and the rate at which they were being retailed.  This is why it was abundantly clear to them that the herd mentality was not for them to follow.

Two days later on Wednesday, several of the same few reappeared in Nashville- minus the herd- for the Open Sale.  On that day, they scored truckloads of vehicles including ’08 Ford Explorer XLTs for as little as $14,400.  Granted, it took an extra two days for the herd to clear and for the rationality of the efficient market buyers to return. But it did.

My conclusion is that the wholesale market is no longer relevant in determining the proper price to pay for a retail unit. Prior to the Internet, when consumers could not properly access a vehicle’s value, what they paid at retail was most often driven by what the dealers paid at wholesale. Today, however, the tables have turned. Consumers can readily identify those vehicles that are overpriced.  Consequently, if you can determine a price for a vehicle that is highly competitive and subtract cost and desired profit, that will represent the only viable wholesale purchase price if your goal is to make money in the retail market.