3 Ways To Win Amid A Declining Wholesale Used Vehicle Market

November 26, 2014


Let’s be honest: Some dealers have taken historically high wholesale used vehicle values for granted.

vision-gt_7629-620x349These dealers have eased up on their efforts to quickly retail every used vehicle, knowing that they’ll probably do OK if they decide it’s time to wholesale a unit. At some stores, dealers have realized a profit as they wholesale aged units.

But this luxury has pretty much disappeared as wholesale used vehicle values continue to decline, thanks to rising supplies and seasonally based value drops that arrive this time of year.

So now what?

The answer to this question, of course, is a return to the “retail-first” fundamentals that dealers should always follow, irrespective of the ebb/flow of wholesale market values. Indeed, dealers who focus on the decisions and steps required to retail every vehicle for maximum profitability believe wholesale values are simply the cost of entry to retail a car, not an aspect of their exit strategy.

Here are three fundamentals I recommend to help dealers maintain a “retail-first” focus as the wholesale market becomes more volatile:

Retail-focused appraisals. As wholesale values decline, it’s tempting for dealers to believe they’re stealing a car, particularly given the historically high wholesale valuations we’ve seen in the last two or three years. But this view typically obscures an important retail reality: In most instances, wholesale value declines result from increases in vehicle supplies. In turn, these cars inevitably end up as retail units, which often causes retail asking/transaction prices to diminish.

Dealers who appraise vehicles based on current retail conditions for a specific car rarely fall into this trap. Using technology and tools, they assess the current retail conditions as they size up an auction vehicle or a trade-in. In this scenario, wholesale valuations may play a role, but it’s the spread between the cost to acquire a vehicle (e.g., the Cost to Market) and its likely retail selling point (e.g., the Price to Market) that matter most.

When dealers use these retail-focused metrics, they instantly know if a vehicle fits their inventory needs and profit objectives, as well as steps they’ll need to take (e.g., cost-conscious reconditioning) to manage units that are likely to pose a retail profit challenge.

Real-time retail pricing. Dealers who focus on a retail-first used vehicle strategy are vigilant about each car’s price position relative to the market of the same/similar competing units. With this view, the ups and downs of the wholesale market merit little consideration; instead, the dealers balance each vehicle’s competitive retail price position (as measured by Price to Market data) with the unit’s profit and turn objectives.

At these dealerships, it’s common for dealers to check and adjust their retail pricing at least once a week, if not more frequently. By doing so, dealers are able to mitigate profitability and return on investment (ROI) risks that flow from incoming supplies of competing cars and diminished buyer demand.

Tighter retail turn timelines. I’ve long advocated that dealers maintain at least 50 percent of their used vehicle inventories under 30 days of age. The reason: This standard ensures dealers retail a greater share of their used vehicle inventory in less time to maximize profitability. In a volatile market, this turn-focused standard becomes even more important.

Interestingly, some dealers are even more aggressive, setting a goal to maintain 75 percent of their inventory under 30 days of age. This decision did not follow any worries about volatility in the wholesale market, or even significant shifts in the retail landscape. Rather, the dealers raised the bar for themselves. They recognized a higher level of process efficiency and sales throughput would elevate profitability and sales in used vehicles and other dealership departments.

Each of these fundamentals poses its own set of challenges, particularly for dealers who have become too dependent on the ability to wholesale used vehicles for a profit.

But, again, let’s be honest: A wholesale profit on a retail vehicle is really putting “lipstick on a pig.” After all, the vehicle failed as a retail unit, and this failure cost the dealership far more than the wholesale profit it might have earned.