What to do when you have too many cars and too little pack money
Here’s an exchange that I recently had with a used car manager.
My name is Josh. I am the used car manager at a Toyota store. At our store, we averaged 46 new and 30 used for 2011. We have had modest growth in used cars the last couple of years until last year we stayed the same. We always tried to keep the used inventory around 60-70 units in stock. I always tried to keep the inventory less than 90 days. Anything over that I marked down and used our pack money to write the cars down. I looked at pricing every couple of months. I realize now that was BIG mistake. Used car sales at the dealership slowed down toward the end of last year and now I have more cars over 90 days than under. Once sales slowed down my inventory jumped up to 80 units. I have used up the write down money to get things in line but gross is down. I have almost finished your new book and realize the need to turn the inventory more often. I am trying to get ownership to subscribe to your vAuto software to help me in the future. My question to you is, “what do I do to dig out of this hole”? Any thoughts or suggestions would be greatly appreciated. Josh
Thank you very much for your question. Your dilemma is common among traditionally managed used car operations. Those dealerships that have adopted the Velocity Management approach typically turn their inventory retail at least 12 times per year (at least 1 time per month) and experience virtually no wholesale loss. This outcome however requires a disciplined approach to management, and an application of new metrics and tools. My book, Velocity 2.0, Paint, Pixels and Profitability describes the process and method of transitioning from traditional to Velocity management.
Specifically with respect to your question about how to dig out of the hole, there is only one practical means to do so. You must first draw a line in the sand perhaps at 60 days and resolve that never, and I mean never will you allow another vehicle to cross that line. This means that you will have to wholesale some vehicles on the 59th or 60th day and take the loss no matter what. This also means that you need to recognize that age management begins on day 1 of a vehicle’s inventory life. Those vehicles that possess only common characteristics and high market day’s supply have to be priced aggressively at day 1 and re-priced perhaps as often as every day. Those vehicles that possess superior merchandising quality and have low market day’s supply can be priced a bit higher and dropped more gradually. The bottom line, however, is that if you can’t retail a vehicle in 60 days or less, it’s only for 1 of 2 reasons. Either you didn’t know where it needed to be priced, or you weren’t prepared to price it there.
Those vehicles that are presently over 60 days of age need to be worked out of as judiciously and aggressively as possible. This means that you’ll need to take some wholesale losses, retail losses, or package them with other vehicles for a wholesale disposition. Although this process will be painful, at least you will never again allow more vehicles to become similarly impaired.
Today, the used car business is a business of discipline, and discipline number 1 is age intolerance. Although I suggest that you draw the line today at 60 days, once you’ve cleaned up your problem I urge you to move the age limit down to at least 45 days. When you force yourself to operate with this discipline, you’ll create an environment that will allow you to recognize mistakes, force you to deal with them early and ultimately profit from your new-found understanding of the current retail marketplace.