Falling Wholesale Prices Signal Opportunity and Trouble For Dealers

May 30, 2012

Recently the automotive press has been reporting the long anticipated decline of wholesale values. This morning I saw an article written by Ricky Beggs, a true industry valuation expert, entitled Wholesale Values Make Historic Decline.

Credit for the accurate prediction for this trend should be extended to Tom Kontos of ADESA and Tom Webb of Manheim, chief economists of their respective organizations as they predicted this decline well over a year ago. To be sure, this is the type of wholesale pricing relief that dealers have been waiting for, and it certainly provides great buying opportunities.

The real problem that this trend signals however, is for the existing inventory of traditional-minded dealers (i.e. those that like to hang on to vehicles with little, if any regard for age). For these dealers, the falling wholesale prices and the inevitability of the late summer and early fall slowdown will create a condition of high negative equity in used car inventories. This is a certainty as velocity minded dealers get fresher cars they will have a significant retail pricing advantage in the very near future. These velocity dealers own their inventory for less because most, if not all of their inventory will have been purchased in the last 30 day period, and they will consequently have their way in the market.

The message here for all dealers is to do the thing that is most counter-intuitive to do. Specifically, in the height of the spring selling season, get aggressive on your pricing, turn your entire inventory in the next 30 days and replace it with lower cost units. Yes, you might leave a little money on the table now, but you will definitely reap the rewards in the coming months as the traditional dealers struggle to sell their old inventory.