A Retail Revival? It’s Out There for the Willing

April 16, 2020

Today’s current COVID-19 crisis has triggered an unfortunate situation for many dealers in their used vehicle departments.

As the crisis has caused wholesale and retail sales to dramatically decline across the industry, dealers now own inventory that is worth less than what they paid to own it. That is, if dealers sold their inventory today, they could likely go out and acquire essentially the same cars for less money.

Put another way, the slowdown in the market has created a glut of wholesale supplies and weaker retail demand, which has left dealers with a lot of “water” in their inventories that appeared almost overnight.

As a result of this situation, I’ve been counseling dealers to follow a two-pronged strategy. First, liquidate your inventory in the interest of creating cash flow and, second, look for opportunity once you’ve aligned your inventory levels to retail demand and your prices reflect each vehicle’s true market value in the current moment. My counsel follows a principle that in a crisis, it’s critical that dealers first ensure their financial survival and then pursue opportunities that improve their current situation.

But I’ve been both delighted and surprised to see that dealers who have followed this advice are finding opportunity in the retail market a lot faster than I or any of the dealers would have ever imagined.

At a mid-Atlantic group, a dealer tells me some of his historically weaker stores are now out-selling sister stores that typically retailed more volume in normal market conditions.

It’s a similar story with a two-store operation in the Southeast. The dealer purchased a Nissan store two years ago that has lagged the sales performance at his Toyota’s store—until now.

Meanwhile, in the Southwest, a dealer shares that his two stores are on track to set sales volumes records.

These experiences beg the question: What’s driving the growth in sales that’s causing some stores to perform better in the current crisis than they did in the past?

The answer is that these stores, because they made the decision weeks ago to reduce the prices and liquidate vehicles at retail, are now able to move the market. In effect, the dealers have re-set their inventories with fresher vehicles they were able to acquire at a lower cost. Meanwhile, the competition still carries higher-cost inventory with asking prices that don’t reflect current market realities. In turn, the dealers who have the benefit of stocking lower-cost vehicles can place them on the market in a more price-competitive position and capture an out-size share of retail customers.

“It’s strange that none of the dealers I talk to is seeing the kind of success we’re having here,” says the Southwest dealer, who’s average inventory cost is now about $20,000, down from $25,000 a month or so ago. “The other dealers don’t seem to be doing much of anything.”

“The stores that are seeing success are bending the Cost to Market curve and enjoying the benefits,” says the mid-Atlantic dealer, borrowing a term that’s become ubiquitous in the current pandemic.

In many ways, the current situation reminds me of the earliest days of Velocity nearly 15 years ago, when most dealers had not yet recognized the need to price vehicles competitively as the Internet made the market more price transparent.

At the time, early Velocity adopters had a field day. These dealers experienced immediate, extraordinary success that enabled them to dominate their markets. Their competitive advantage lasted until other dealers in their markets began to recognize that they, too, needed to become more price competitive.

I’m seeing exactly the same situation in the current market with an important difference: Unlike the early days of Velocity, I don’t believe the competitive edge we’re seeing for dealers right now will last very long. That’s because I’m sensing that dealers who thought the market would bounce back quickly, and opted to hold on to their inventory to avoid a loss, are now reconsidering their optimism. I have a hunch that they’ll reckon with the current market realities, and begin to price their vehicles more realistically, sooner rather than later.

In the meantime, though, let’s regard these examples of retail revival for exactly what they are—signs of a resilient market that, in time, will bring opportunity to those who remain to enjoy it.