4 Pointers for Acquiring Inventory in an Appreciating Market

March 31, 2021

With wholesale values of vehicles reaching record highs, dealers are asking if it makes sense to continue acquiring inventory at costs at, near or sometimes above current retail asking prices for the same or similar vehicles.

Here’s an example of the acquisition questions that have been a constant in recent conversations with dealers and managers. The example comes from a ProfitTime 2.0 dealer in the Midwest who’s a thoughtful student of the market and deserves credit for reaching out to understand what is, in fact, a highly unnatural used vehicle market right now:

“As the market accelerates into the spring and summer, we can see an acquisition problem brewing. We like to own our purchase cars for under 92 percent Cost to Market. My buyers are telling me that to continue to keep up with the pace of the market they are going to have to pay 95, 96 or 97 percent Cost to Market, maybe even more. My theory is pretty simple.  Stay to the fundamentals, follow the strategy page, stretch on cars you need. My buyers are wanting more direction. I can’t see a scenario where acquiring vehicles in the mid- to upper 90’s makes sense given the fact that we are currently priced 96 percent and 97 percent and 97 percent Price to Market on Bronze and Silver cars, respectively. Do you see any merit to paying those kind of acquisition costs to maintain your sales rate? Do you think the market is likely to accelerate 2 percent to 3 percent week over week meaning cars we buy today are going to be a little better investment when compared to last week? Any direction you can provide would be a huge help.”

In my response to questions like this, I’ll affirm what we don’t know–which is whether the crazy state of value appreciation in the wholesale market will continue and, if it does, for how long. I do believe that we have yet to see the market peak, given the experience of last year when dealers enjoyed strong retail sales and profits, despite rising wholesale values and concerns about COVID-19, well into the mid-summer months. This year adds a another challenge to the mix. Wholesale vehicle supplies are lower now than they were at any time in 2020, a factor that means higher Cost to Market percentages on auction purchases appear likely to continue near term.

More important, though, is how to think about acquiring cars amid these market conditions. On this front, I’ve been offering four pointers for dealers and managers:

Find your balance between risk and reward. Some dealers are buying everything they can, even using off-site locations to store the vehicles. These dealers have effectively put aside what might be regarded as the more balanced approach to inventory acquisition I typically advocate. That is, you should generally not stock more cars than your rolling 30-day total of retail sales. This best practice ensures you aren’t too heavy or too short of inventory as the market changes. With the current market, it’s reasonable for dealers to stock ahead of their 30-day rolling total of retail sales, given the prospect that vehicles will cost even more in the future. But how far ahead should you stock? I think the answer goes to each dealer’s tolerance for risk and reward. Stocking up now could pay off big if value appreciation continues; it also poses a risk, if the market slows, that you’ll have too many vehicles you own for too much money. In the current moment, it seems to me that dealers could elevate their stocking levels to achieve a 40- to 45-days supply without significant risk of a downside.

Acquire the cars you need and know are right for your dealership. Given the current high acquisition costs, I don’t think it makes sense for dealers to acquire vehicles that fall outside their wheelhouse or would augment a vehicle segment or type where you’re currently over-stocked. In these times, dealers need to be very intentional and strategic with inventory acquisitions. Dealers and managers should pay close attention to the vehicle segments and types that are selling now, and where you perceive there may be shortages. Focus your attention to fill the inventory gaps you anticipate in the weeks ahead.

Handle the cars with utmost care, efficiency and speed. When the market effectively forces you to acquire vehicles with Cost to Market percentages at 95 percent to 100 percent, or even higher, it’s important to recognize that these vehicles likely won’t offer significant front-end gross profit potential, if any. These vehicles may only provide money-making opportunities in your F&I and service departments. This does not mean that these are “bad” cars. But it does mean that they need to be reconditioned, merchandised and priced with utmost urgency. The care, efficiency and speed you apply to selling these vehicles to retail customers represents your most effective strategy to mitigate the risk of having too many vehicles for too much money if market conditions change for the worse.

Look for retail pricing opportunities. In a market where vehicle values appreciate, there are likely some opportunities for dealers to increase retail asking prices. Such instances often relate to a combination of favorable circumstances for the vehicle–you own it right, its Market Days Supply is low and the vehicle is selling well in your market. The ProfitTime 2.0 system automatically identifies when these favorable circumstances converge and recommends an optimal pricing range. At a minimum, now’s the time to pay more, not less, attention to your retail pricing to ensure you’re not missing opportunities to optimize gross profit or mitigate risk on a vehicle that needs to sell fast.

In my next post, I’ll address another topic that’s come to the forefront in recent days and weeks–how to view wholesaling vehicles when values are red hot.