A Perspective on Dealers’ Difficulty Finding Wholesale Inventory

May 21, 2020

In the past several weeks, as retail sales of used vehicles have grown, dealers have been returning to auction. In recent days, I’ve heard the same question so often, I’ve almost come to expect it in every conversation with a dealer.

Where can I find the auction vehicles I need for my inventory?

This question is reflected in dealer responses to an ongoing Cox Automotive survey of franchise and independent dealers to gauge their priorities and sentiments in the current COVID-19 crisis. This week’s survey found that 31 percent of franchised dealers and 53 percent of independent say their used vehicle inventories are lower than they’d like them to be. Going deeper, the franchise dealers reported their inventory levels were about 40 percent below normal, while independents indicated their inventories are 20 percent below normal.

Perhaps most interesting is that for dealers who reported lower-than-preferred inventory levels, a sizable share of franchise and independent dealers, 63 percent and 52 percent, respectively, say the current situation was “unintentional” and owed to lack of available inventory supply.

The survey results, and recent dealer conversations, lead me to my own questions: How can there be a lack of available cars when wholesale supplies are still above normal? Am I missing something?

I went to Cox Automotive data for insight. Indeed, while the days supply of wholesale inventory has declined significantly to more than 40 days, the supply is still nearly twice as high as what might be considered “normal” for this time of year. Also, if you compared the level of wholesale supplies to retail inventory in the current market compared to their respective levels prior to the COVID-19 pandemic, it would have been much more difficult to acquire vehicles earlier this year. Yet, I don’t recall dealers talking about a lack of available supply back then.

The data led me to consider what other factors might be at work, and I believe there are two principle reasons dealers believe they can’t find available wholesale vehicles.

The first reason relates to how dealers access wholesale inventory. Since the pandemic, physical auctions have gone from being totally shut down and largely remain so. If you want to buy vehicles at auction, you must do so online. It’s a situation that has some dealers and buyers, who have relied heavily, if not entirely, on physical auctions for inventory, stuck on the sidelines. I can see if they are reluctant or unwilling to transition to online auction-buying, they would be more likely to believe that wholesale vehicles can’t be found at the current time.

The second reason relates to a factor I discussed recently—where dealers are looking for deals that simply don’t exist in a wholesale market that is seeing ever-greater activity. We know, for example, that this activity is pushing wholesale purchase prices higher, sometimes climbing above Manheim’s MMR index. Even so, the data shows us that wholesale values remain 8 percent below where we would normally expect them to be. We also know that retail asking prices haven’t reset to reflect the rapid decline in wholesale values that followed the onset of the pandemic. In other words, if dealers are evaluating vehicles by comparing their wholesale costs to their retail asking prices (the “retail-back” approach), there are plenty of cars that provide suitable gross opportunities even if you need to pay above MMR for the privilege to retail them.

In the end, I think everyone can agree that the wholesale market is far different today than it was just a couple months ago. But I don’t buy the idea that dealers are suffering from a lack of wholesale supply. As I tell dealers, if you’re not finding the auction cars you need, it may be time to change where and how you’re looking for them.