Volatility and Velocity
I have exchanged e mail with you in the past. I thought I would let you know that your article in Auto Success titled “Volatility and Velocity” brought me up out of my chair. It is as dead on accurate as any article I have recently read pertaining to a very competitive used car market. I would recommend to anyone currently struggling and looking for some answers to start by reading this article. In my opinion it’s a true eye opener. In addition it’s a quick effective tutorial that can be used to help broaden your stores understanding of just exactly what’s happening differently in market today compared to a year or two ago.
Thanks Dale! Your work is great reference for all of us! – Matt
Thank you so much for the kind words. I’ve copied the article below. – Dale
On a recent visit to one of the country’s finest dealer groups, I sat with the used vehicle manager and other top executives in their main store to examine why the store’s used vehicle volumes have dropped by about 50 percent and why, after months of effort, they still hadn’t been able to move the sales needle.
On the surface, the dynamics at this store are the same as many dealerships across the country-even with the store’s enviable West Coast location and reputation: New sales had dropped for the store’s domestic franchise brand, sapping trade-ins that normally fueled the used vehicle department. Likewise, the store had trouble finding vehicles it could purchase at auction, given an upward swing in wholesale values due to greater competition among buyers in the auction lanes.
But a deeper examination revealed other problems that, when taken together, amounted to a “stand still” in their used vehicle department.
• The store still emphasized its franchise brand, with 80 percent of its used inventory reflecting the nameplate. As we reviewed marketplace dynamics, the store had virtually none of the off-brand highline models that were selling like hotcakes, nor did it stock enough of off-brand, “plain Jane” units that, while not as exciting as sports cars and other snazzy units the store preferred to stock, were selling at faster rates.
• The store’s average days in inventory ran well above 100 days. Its retail asking prices were, on average, 10 percent above the market if not more. Both of these, I learned, were symptomatic of a dealership goal of generating $3,000 gross profit per unit.
• The store did not show any wholesale losses on the books. I was mystified, although a deeper discussion revealed that “packs” and “moving money around” likely masked the true wholesale loss picture.
• The store had not taken any steps to acquire inventory beyond a local auction or two-despite acknowledging that more aggressive sourcing was likely needed.
As I discussed these dynamics, it became clear that the dealership’s desire to achieve its gross profit goal on every vehicle was undermining its ability to become a more efficient and market-attuned used vehicle retailer. In addition, the management practices that masked the true costs of their inefficient processes also inhibited the store’s ability to transform to a new used vehicle management model.
So while this store stands still, here’s what’s happening in the fast-moving, more efficient marketplace that surrounds it:
Wholesale Value Volatility: At the time of writing, the wholesale values of used vehicles are increasing, not falling as they had been the previous year. Manheim Consulting says the reversal is the result of a drop-off in new vehicle sales, diminished supplies of used vehicles at auctions and greater demand for vehicles from wholesale buyers.
Lender Volatility: The rise in wholesale vehicle values is contributing to a pincer-like effect on deal-making at dealerships. Lenders, who are retrenching from losses and recalculating risk, are less likely to pay as much advance on deals, and they’re far less likely to absorb any negative equity than they did in deals just a few years ago. This dynamic, which I view as another sign of marketplace volatility, means dealers and used vehicle managers must be attuned to the vehicles and customer credit profiles that can and will get the ultimate OK from lenders.
Consumer Volatility: Today’s consumers are more circumspect than in the past about spending money on big purchases like used vehicles. What’s more, their interest in buying is more erratic: If gas prices are going up, they move toward fuel-efficient vehicles. If gas prices stabilize, the market for SUVs and trucks picks up.
These market nuances are lost on traditional dealers and used vehicle managers like my West Coast dealer friend who effectively stocks and sells “what they know” versus determining the vehicle segments where demand bubbles are building and breaking.
The key take-away: An efficient market, with its innate volatility, creates risk for dealers and used vehicle managers. The longer a vehicle stays in a store’s inventory, the greater the chance that wholesale value changes, shifts in consumer preferences and other factors will impede a vehicle’s ability to sell and produce an acceptable ROI. Likewise, the longer a vehicle remains in inventory, the longer a dealer’s investment is tied up in a unit that may be a less effective retailing proposition than another.
Meanwhile, a velocity-based approach to managing used vehicle operations by its “from money to metal, money to metal” nature, reduces risk by enabling dealers and used vehicle managers to efficiently track marketplace dynamics and sell vehicles in a shorter time to minimize exposure to the market’s volatility thus avoiding the “stand still.”