A 2019 Priority: Managing Your Inventory Investment Value

January 4, 2019

We have a tendency as dealers to think of our new and used vehicle inventories as large, singular investments.

Together, the new and used vehicle inventory investment at many dealerships ranges between $7 million and $10 million—a sum that represents a significant amount of skin in the game for a typical dealer.

But while many dealers are readily aware of how much they’ve invested in their inventories, it’s become clear that we need a higher level of attention and focus on the overall health of each vehicle as an investment and its ability to drive a meaningful return.

I’ve come to this conclusion after spending much of the past year trying to figure out why as much as 50 percent of used vehicle inventories, and 30 percent of new vehicle inventories, at dealerships across the country represent distressed investments.

By distressed, I mean investments that have lingered too long, failing to find a retail buyer and, over time, losing their ability to deliver a profit-positive return.

The ubiquity of this inventory investment inefficiency leaves me troubled.

Dealers are entering a year where virtually all signs suggest that it will be more difficult and challenging for you to achieve the new and used vehicle sales volumes goals you expect for your businesses.

I haven’t talked to any dealers who say, “We’re planning to do worse in 2019.” Most, in fact, aim to grow retail sales volumes, particularly in used vehicles, and strive to bring more customers back to their service departments.

These growth-minded goals are well and good.

But I would submit that the retail sales goals, and the meaningful returns they should represent, won’t arrive unless and until dealers address their current inventory investment inefficiencies.

After all, the share of effectively “dead stock” in dealers’ new and used vehicle inventories drags down your ability to grow sales volumes and, in many cases, makes margin compression even worse.

For all these reasons, I’ve been encouraging dealers to apply a more investment-minded approach to their inventory management. This approach requires at least three fundamental shifts in thinking:

1. A sharper focus on the investment value of each vehicle. There’s a long-standing saying, “The car is the star.” The saying generally holds true, except when it doesn’t. Consider the stars in a clear night sky. Some shine brighter than others. The same is true for new and used vehicles. The star quality, or investment value, of each vehicle varies. The variation owes to the realities of your market. Some cars have an innately higher investment value, or level of brightness, than others.

The key is to know, from the moment you appraise a used vehicle or configure a factory order, whether a specific vehicle will offer a meaningful investment return or not. Thankfully, today’s technologies and tools provide this critical insight.

2. Managing each vehicle to achieve its unique investment potential. Once dealers and managers understand each vehicle’s investment value, it’s critical to make decisions that reflect its investment return potential as a retail unit.

It’s easy to tell when dealers and managers don’t think this way. You see the evidence in standard mark-ups and price points applied to every vehicle, irrespective of the unit’s individual standing in the market or inventory.

Unfortunately, today’s market is too efficient, too margin-compressed and too transparent to support anything less than precise, car-specific decisions that align with a vehicle’s investment value. If the reality were different, we wouldn’t see such an out-size share of distressed vehicles in dealer inventories today.

I should note that managing each vehicle’s investment value isn’t always pretty. Some vehicles are troubled investments from Day 1, and may not hold any retail profit potential or even represent a loss. I encourage dealers who struggle with these scenarios to consider the parallels between auto retailing and marriage—if you’re in it for a successful long haul, you learn to accept what comes, for better or worse.

3. Avoid hoping for a better investment outcome. When I ask dealers why they’re still carrying their most investment-distressed inventory, the answers typically boil down to something like, “we were hoping it would sell and we’d make some money.”

We all know that hope isn’t a strategy, and it’s also a hard habit to break. But breaking the habit is easier when you have a clear-eyed view of each vehicle’s investment potential, and use it to avoid letting yourself believe you can engineer a more profit-positive outcome than either the vehicle, or your market, will allow.

The results I’ve seen from dealers who have applied an investment value management mindset to their new and used vehicle inventories are encouraging. In most cases, they’ve reduced the share of distressed inventory, turning these units faster to increase volume and total gross. At the same time, the dealers are more effectively managing their best investments, and maximizing the gross profit these units should rightfully bring.

These are all positive outcomes that lead me to believe that managing investment value-based inventory management offers a better way forward for dealers to both mitigate margin compression and meet their 2019 profit and sales volume objectives.

P.S. I will be attending the upcoming NADA convention in San Francisco, spending the bulk of my time at the vAuto booth (#1620S). I’d welcome the opportunity to discuss how investment value-based inventory management can help you achieve your goals for the coming year.