A Used Vehicle Market Warning: Tune Up Inventory Turns Or You’re Toast

February 10, 2016

I’ve noticed a troubling trend in used vehicle inventories for dealers across the country in recent weeks.

The problem: The average Market Days Supply for many dealers’ used vehicle inventories is creeping toward or past 100 days. Typically, this critical metric, which indicates how quickly a dealer’s used vehicles are likely to sell in a local market, hovers near 80 days.

This shift hasn’t happened overnight. It’s the result of a steady increase in used vehicle supplies, driven in large part by the return of fleet and off-lease vehicles into the market.

But many dealers don’t appear to be aware of, or directly addressing, the harmful effects that ever-rising supplies can create for their used vehicle performance and profitability. It’s like there’s a cancer in used vehicle inventories, and dealers aren’t heading the warning signs.

Even more troubling, this upward trend in the average Market Days Supply is occurring as industry analysts and observers acknowledge what many students of the market have been saying for some time—front-end margins for used aren’t what they used to be, and they’re getting worse. An AutoRemarketing article this week notes that public dealer groups like Asbury saw their front-end margins decline from 8.5 percent to 8 percent in 2015.

It’s fair to ask why dealers aren’t aggressively adjusting to these more challenging market conditions. The answer, I believe, owes to the old axiom that “volume cures many ills in the car business.” Indeed, dealers have collectively sold more used vehicles in the past few years, commanding a larger share of retail market. Analysts also predict relatively stable sales volumes for the year ahead.

But I worry that dealers will wake up to the unwelcome reality of over-age units and a less-than-satisfactory return on investment for the vehicles they do retail. The time has come, I believe, for dealers to apply an even greater focus to turning their used vehicle inventories quickly to mitigate these retail risks.

Here are three recommendations I’ve been making to help dealers tune up their inventory turn rates:

Minimize acquisition mistakes: The AutoRemarketing article includes an astute comment from Manheim chief economist Tom Webb: Dealers “can’t afford to make buying mistakes. You’re not going to get those big gross deals, because there’s not only been a narrowing (of margin), but the bell curve distribution of those grosses, if you would, has actually narrowed quite a bit.” It’s imperative that dealers appraise auction or trade-in vehicles with a clear, objective view of every unit’s market potential—and avoid the emotion/speculation that leads to bad purchase decisions.

Match pricing to market conditions: Dealers who spotted the rise in their average Market Days Supply are setting more aggressive initial asking prices and revisiting each vehicle’s price position more frequently. “We’re far more focused, frequent and precise in our pricing than we used to be,” says a Northeast dealer. “The market doesn’t seem to care that we think a car should deliver a better front-end gross.”

Reduce your average inventory age: As I’ve long advocated, today’s market conditions require dealers to retail at least 50 percent of their used vehicles in less than 30 days. To achieve this operational standard, dealers must make the proper purchase and pricing decisions noted above. In addition, dealers need to inspire collective recognition—in sales, service and parts—that reducing each vehicle’s days to sale is a necessary imperative to maximize used vehicle performance and profitability.

I think Asbury CEO Craig Monaghan, who’s quoted in the AutoRemarketing article, aptly summarizes what changing used vehicle market conditions mean for dealers: “The game for us is to get the car, get it reconditioned, get it back on the front line and move it quickly.”