To Buy or Not to Buy in Today’s Inflated Used Car Market

August 26, 2009
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Below is an article published in today’s Dealer Pre-Owned, along with a question from a dealer, and my response.

Rising used-car prices means shortage on lots
Morrie’s Automotive Group Inc. has only $6 million worth of used cars available for sale at its eight Twin Cities dealerships, two-thirds less than it had a year ago, reports. Demand is relatively high for used cars, but declining supply and the corresponding rise in prices are making it difficult for Minnetonka-based Morrie’s and other local dealerships to purchase enough vehicles to keep their lots fully stocked. “That’s probably one of our biggest challenges right now – acquiring inventory at what we consider a reasonable price,” said Morrie’s Chief Operating Officer Karl Schmidt, who estimated that his company is paying an average of 10 to 15 percent more for used cars than it did a year ago. Used-vehicle values have risen for seven straight months due to decreased supply, according to the most recent Used Vehicle Index from Atlanta-based Manheim Consulting, which operates auto auctions in Maple Grove, Shakopee and numerous other sites across the country. Prices are up across the board for used vehicles, but the supply is especially tight for cars and trucks that are just one or two years old, Manheim Chief Economist Tom Webb said.

Good Morning Dale!

I am forwarding you an article that portrays the current situation, as you know, that we currently are facing!

I was hoping you could share a few words of wisdom on how we should react to this and still step up and buy vehicles that are way above our targets??

I look forward to sharing with you!

Thanks, Rich

Rich –

I work with Karl, and I agree with his strategy.

Let’s begin with the question of whether you really need to buy any cars at all. The justification to buy cars should not be based on a desired inventory level, nor should it be based on how many you want to sell or the time of year. Rather, the only appropriate indicator is the relationship between your recent sales pace and current quantity of inventory, in other words, your turn rate. If your present turn rate is above 18 times per year, then you need cars. If it’s below this level, you don’t. If your turn rate justifies purchasing more inventory, you should purchase only enough to bring your sales versus inventory ratio back to the desired target.

Now that we agree that the quantity to be purchased is only the amount needed to close the spread to get to your turn target, the next question is which vehicles and how much. With respect to the “which” question, please be sure to identify the vehicles in your live market that have the very highest demand and least supply (i.e., low market day’s supply). Preferably you would like to find the ones that are not obvious to every other used car manager in town so as to make them a little bit easier on the wallet. If they show up on your heat sheet and surprise you, then they’re probably not top of mind for every used car manager in town. Once such vehicles are identified, then you pay what you need to pay to get them on your lot. Remember that vehicles with high demand and short supply are not nearly as price sensitive as cars with higher supply and less demand.

So when you really stop and think about the problem, and take it in this perspective, it doesn’t seem to be as overwhelming.

Thanks for the question – Dale

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