A Telling Dive Into Used Vehicle Inventory Age and Front-End Gross

October 27, 2016

For the past several years, I have been encouraging dealers to retail at least 50 percent of their used vehicle inventory in less than 30 days.

In more recent months, I’ve upped the ante, urging dealers to retail at least 55 percent of their used vehicles in less than 30 days.

This steeper operational standard follows my belief that the optimal retail window—or the number of days that you can expect to achieve a sufficient return on your investment in a used vehicle—is shrinking.

The other day, a dealer asked me for proof of this concept. He disputed the idea that a 30-day-old or older unit, by definition, could not yield as much front-end gross profit as a fresh unit. He wouldn’t take my word for it. He wanted hard evidence.

With that in mind, I made a few calls. I asked dealers for a breakdown of their front-end gross profits by inventory age. I combined the data, and here’s a quick review of what I found:

Age (Days)              Front-End Average      % Change From 0-10 Day Average

     0-10                             $2,400

    11-20                            $1,742                                         -27%

    21-30                            $1.310                                         -45%

    31-45                              $985                                          -60%

    45+                                 -$75                                           -97%

I shared the findings with the dealer. He was still suspicious. He didn’t think the averages reflected the reality of his inventory. So, we took a closer look. Sure enough, we found the same age-correlated, downward trend in his front-end gross profit averages.

“Dale, I feel like an idiot,” he said. “I should have analyzed my inventory this way a long time ago.”

The dealer felt a little better after I told him that he wasn’t alone. Many dealers still don’t fully appreciate the profit-damaging effects caused by inventory age, much less take the time to assess where they stand.

I offered the dealer three take-aways to help him do a better job of retailing a larger share of vehicles in less than 30 days, and improving his overall profitability and ROI in used vehicles.

  1. Minimize retail-ready delays. It’s still not uncommon for dealers to lose three, five, seven or even more days of a vehicle’s retail lifecycle waiting for reconditioning or detailing work to make it front-line ready. One could argue that a three-day delay doesn’t matter much if you are able to retail the vehicle in a week. But how often does that happen? Looking at his numbers, the dealer agreed that lost momentum in used cars is more likely to result in inertia and diminished profitability rather than a quick retail sale.
  2. Market- and inventory age-attuned pricing. Top-performing retailers understand that pricing used vehicles amounts to a near-constant balancing act. You need to know where the vehicle stands in the market, in the context of competing cars and buyer demand, to determine the best initial retail asking price. You also need to account for how these variables change as your vehicle ages in your inventory, and adjust your price accordingly. In my experience, dealers who are less attentive to these market and pricing dynamics typically have more trouble retailing 55 percent of their inventory in less than 30 days.
  3. Move the goal posts gradually. In the analysis of the dealer’s inventory, we found that he typically retailed about 30 percent of his 100-car inventory in less than 30 days. I advised that he/his team should work to reach the 55 percent benchmark over the course of three months—with a target of 35 percent for the first month, 40 percent for the second, and so on. The dealer understood that the gradual pace of improvement would afford sufficient time for his team to apply a greater degree of market awareness, attentiveness and urgency from the moment they appraise a vehicle and own it, to the moment it sells.

I closed my conversation with the dealer by pointing to the 20-plus percent of used vehicles he retailed after 45 days.

“These cars are costing you big money,” I noted. “And from now on, you must regard these vehicles for exactly what they are—a failure of proper management of your investment.”