2021 Yields Two Positives to Remember in the Coming Year
As December arrives for dealers, it’s worth reflecting on two positive and proactive things the best dealers did this year to achieve record-setting used vehicle sales and profitability, despite the high cost and relative scarcity of available inventory.
The first thing could be described as “the Big Pivot,” wherein dealers effectively turned the tables on the traditional two-channel strategy for acquiring used vehicles. For years, auctions and trade-ins have been the primary sources for inventory. With historically high auction prices and fewer trade-ins coming from new vehicle sales through much of 2021, dealers pivoted to acquiring vehicles directly from customers.
Last week, the used vehicle manager at a Chrysler Jeep store in the Midwest shared that of the 80 vehicles he had in stock, half came through direct-from-customer purchases as new vehicle sales and related trade-ins have effectively dried up. For many dealers, auctions now occupy the equivalent of a third-row seat in an SUV—you go there only when it’s absolutely necessary to get inventory.
The second positive thing relates to the wholesale market, and it’s directly tied to the “Big Pivot” to direct-from-customer vehicle acquisitions. In the past, I think it’s fair to say dealers would often cherry-pick the cars they acquired from customers. If a customer had a vehicle that didn’t fit the dealer’s inventory or wasn’t needed, I’d submit it was a 50/50 chance someone would contact the customer.
Today, dealers leave fewer customers who want to sell cars in the wind. They are more likely to engage them quickly. Dealers know that, if they don’t respond fast, someone else, perhaps a Carvana or Vroom, will serve up an appraisal offer and capture the car and customer first. Another reason for the more proactive outreach relates to the wholesale market. Dealers and managers know that if they acquire a vehicle they don’t need or typically don’t sell, there’s a high likelihood they can send or take it to auction right away and make money.
As the Midwest manager notes, “In today’s market, you’ve got to wear two hats. You’ve got to look at wholesale and you’ve got to look at retail with every car.”
I regard both positive things—a willingness to acquire inventory from anywhere and a clear view of the best financial outcome for a vehicle in the retail or wholesale markets—as operational imperatives for dealers in the months and years ahead.
With acquisition, analysts expect limited supplies and high wholesale prices to persist into 2022 and beyond. At the same time, companies like Carvana and Vroom aren’t going anywhere. In fact, they’re gaining momentum, thanks in no small part to their ability to pick off and acquire cars that, in years past, would likely have found their way to dealers. In 2021, some dealers have proven they’re up for the competitive opportunity to make customer vehicle appraisals and purchases as easy, convenient and transparent as anyone else. The next step will be to ensure that, regardless of the acquisition channel, dealers understand and extend the best offer to acquire the car and customer, and make money.
With wholesale vehicles, the big lesson here relates to the manager’s “two hat” perspective. While the wholesale market in the future may not offer the seemingly guaranteed profit it does today, it’s been useful for dealers and managers in the past year to at least acknowledge the wholesale opportunity that may exist for each vehicle. In time, dealers and managers will need to be more aggressive about choosing the retail or wholesale exit strategy that produces the best financial outcome for the dealership and pursuing it in earnest. Today, dealers often put vehicles into the retail and wholesale market at the same time, which amounts to two-line fishing for the highest profit. This strategy won’t work when the markets normalize and each vehicle’s exit decision on Day 1 will need to stand on its own, just like it used to.