It’s common for dealers to commit two cardinal sins in used vehicles as summer gets underway.
The first sin is the impulse to beef up used vehicle inventory to drive additional sales. Every summer, it seems, I hear from dealers who plan to add 30 to 50 units to their used vehicle inventories.
I’ll often ask these dealers a question: “What’s your plan to deal with the 75 to 100 cars on your lot that haven’t sold yet?”
In most cases, the question does the trick. It gets dealers to realize that they shouldn’t stock up on additional inventory when the units they own aren’t moving fast enough. In addition, the question helps uncover current merchandising and pricing problems that contribute to the dealer’s less-than-optimal sales performance.
Dealers should only increase their used vehicle inventory under the following conditions:
- You already achieve an annualized inventory turn rate of 15 or 16. Dealers should consistently meet this benchmark before they add more cars. The reason: These dealers have proven their ability to acquire, recondition, merchandise and price each unit for an efficient, profitable retail sale. Their processes can handle the additional vehicles with less risk.
- You add inventory incrementally. It’s best to add inventory in five- and 10-car increments. This measured approach hedges the risk of burdening the used vehicle / service departments with too many cars too quickly. It also helps ensure your annualized inventory turn rate does not fall below 12, the minimum performance benchmark for today’s more volatile market.
The second summertime sin occurs during used vehicle appraisals. As new vehicle sales soften, dealers press their managers and appraisers to acquire an even larger share of their used inventory from trade-ins. The problem: The dealers often don’t hold appraisers accountable for purchasing these vehicles “on the money.”
To avoid this profit-damaging problem, dealers should evaluate each appraiser’s performance on a monthly basis. The evaluation should address two metrics: the appraiser’s “Look to Book” ratio and the Acquisition Cost to Market ratio.
When I review appraiser performance, I like to see an overall Look to Book ratio around 50 percent, coupled with an overall Acquisition Cost to Market ratio below 80 percent. These benchmarks, which can vary based on the individual and dealership, tell me that the appraiser is properly avoiding the sin of acquiring trade-ins at the expense of the unit’s front-end profit potential, or letting too many retail-worthy cars slip by.
Dealers who commit these sins of summer will face a disadvantage as fall arrives. They’ll be sitting on aged cars and diminished profitability while their competitors reap the retail rewards that prudence always delivers.