Warning! Danger Ahead

April 30, 2012

A recent industry publication heralded an article with the headline Cha-ching! Dealership profits soar. In fact, the entire article was focused on the success of used car departments for many leading automotive groups. Multiple executives cited their strategies of retailing lower priced cars and implementing more creative ways to source used vehicles. The article left one with the impression that there is a feeding frenzy for the wholesale acquisition of used vehicles.

Reading the article, I was troubled because of a reoccurring theme that I experienced every year at this time. Specifically, in the spring time business predictably improves, profits rise and competence abounds. I receive numerous self-congratulatory messages from dealers claiming to have finally cracked the code of used vehicle success. Their bountiful optimism and confidence creates an appetite to kick their used vehicle department into high gear through the acquisition and stocking of evermore inventory. This trend is more than anecdotal, but also reflected in the inventory metrics that I monitor, now for over 4000 dealers in the US.

Unfortunately for many of these dealers however, their optimism carries their stocking strategy into the summer and early fall months. Usually by September, those same self-congratulating dealers begin suffering the indigestion of their satiated appetite: Too much inventory and too few sales. It’s like the same bad movie that I see over and over. I’ve now been issuing this warning to dealers for the past several years, however it seems to have little effect. A little spring time success and all discipline goes out the window.

One more time, let’s just review the basic immutable rule of proper used vehicle inventory stocking. You should not stock more cars because you’re selling more cars. You should not stock more cars because you want to sell more cars. You should not stock more cars because it’s spring time. You should not stock more cars because your staff says that you need more cars. There is only one reason ever to adjust inventory up or down, and that is to regulate your used vehicle inventory turn rate.

Specifically, a dealer should turn their used vehicle inventory a minimum of once a month, 12 times per year. Once a dealer manages to increase their used retail turn to a minimum of 14 times per year, they’ve earned the right to add a few additional units to slow their turns to the minimal acceptable rate of 12 times per year. If sales continue to be robust and the turn rises again to 14 or above the process should be repeated. Not if, but when sales slow and retail turn dips below 12 times per year, then an immediate reduction in inventory is required.

It should be remembered that true long-term sustained growth comes incrementally. Unfortunately, this time-tested axiom violates traditional notions of dealer thinking, that is to “kick a running horse.” To be sure, loading up on a bunch of inventory when things are hot might produce a temporary spike in sales, but it will always be offset with the costly condition of aged and depreciated inventory. It is a relatively small minority of dealers that understand this fact and adhere to this discipline.