Strategy for stocking

March 5, 2009

Dale- I wanted to get your thoughts on the following. We are currently, like many, in need of used cars. With new car sales being what they are, used vehicle sales are what we have to at least have the opportunity to generate gross for the sales dept. Even if it’s a slim front end margin we have opportunity on the back. Additionally, in order to generate any gross you obviously have to move inventory and my feeling is that used cars gives us the best opportunity to have a chance at generating some gross. Up until this point we have been very cautious and pecking away at auctions.

Here’s what I propose. With how we have our pricing set up we’re turning over our inventory fast and that minimizes downside risk if the market changes. That aggressive pricing strategy also helps to make it more manageable buying vehicles at auction. With respect to choosing what we purchase we look at what types of vehicles we need in each segment and look for vehicles with a combination of gross and volume. We try to work backwards with vRank to see how much we can pay for vehicles. Our pricing policy dictates that by day 60 we have a vRank of 1 within 250 miles. That being said my thought is to think of the worse case scenario based upon current market conditions. By worse case scenario I mean if an auction buy ages to day 60 and we have a vRank of 1 within a 250 mile what is the most money we can lose (again, all I have to base this off of are current market conditions/pricing). If that worse case scenario is, for example, a $500 loss being at a vRank of 1 within 250 mile radius and it’s a vehicle that we are interested in, we might very well buy it. Obviously we hope the vehicle doesn’t age to that point and that we can turn it quickly and make some money. However, if it doesn’t turn the downside risk is minimized to a degree (granted we don’t know how the market will be 30-60 days from now). Even at a $500 or even $1000 loss we still have the ability to make some money on the back end and turn the cash. There is minimal downside risk, compared to the $3000 or $4000 many dealers would face with traditional pricing. This might be an odd way of looking at auction buys, but given the market place, thought it would help to give us some parameters to minimize any potential “damage.” Some of my thought process might very well be a reaction to the lack of success historically we’ve had in buying vehicles at auction (although I would say some of that has been a lack of discipline when it comes to pricing).

Again, although I would love good grosses I have no issue with skinny front end grosses if that what we have to do to move units and help our sales dept generate some gross. Let me know your thoughts/I hope this was clear. Thanks