vAuto Founder Dale Pollak recently told a group of dealers: “We’re not in the car business, we’re in the business of making money.”
And he’s right.
One of the biggest influencers of new car dealers’ profitability in 2019 has been the health of their new vehicle inventory. In the latest Haig Report, it was highlighted that franchise dealer expenses are growing faster than grosses, and new car holding expense was identified as the primary culprit for this trend.
It’s hard to fathom that in 2015 (per NADA), the average dealer booked $110,000 in floor plan profit — but this year, floor plan will be a $110,000 hit to the bottom line. That’s a $220,000 swing in the wrong direction. At 2% net on sales, dealers will need to find an additional $11,000,000 in sales revenue to make up that difference.
Most dealers I meet with don’t have many $11,000,000 ideas lying around, so increased attention to managing new vehicle inventories has become increasingly urgent.
One of the biggest challenges in monitoring this aspect of the dealership’s operation is that the industry lacks good inventory measurement targets or benchmarks. NADA’s Dealership Performance Benchmarks Guide provides ONE recommendation for new vehicle inventory control: Maintain a 45–60 days supply.
It’s interesting that parts managers have more inventory performance benchmarks and spend a lot more time analyzing their $400,000 parts inventory than a new car manager does for his $8,000,000 new car inventory.
If “making more money” really is the name of the game, dealers will be wealthier and wiser by managing these two critically important new vehicle inventory metrics.
Percentage of Inventory Under 90 Days
Maintaining a high percentage of units under 90 days is vital for three reasons:
- It mitigates exposure to rising holding costs, because in most cases the factory floor plan credit covers the first 90–120 days.
- Dealers with fresh inventories are typically those with higher retail sales turn, which means more trades, more recon, more F&I and more floor plan profit!
- Grosses are BETTER! In a recent analysis Dealertrack conducted with data from 400,000 sales transactions, retailed units with 0–30 days in stock had an average front-end gross (transaction price vs. invoice, not including F&I, factory bonus or doc fee) of -$230, while retailed units with an age of 90–120 days in stock had an average front-end of gross -$750 and units over 365 days old had -$1,690! I don’t think many dealers realize the extent to which they pay a holding cost premium for worse grosses!
Domestic Stores: 70% under 90 days
Import / Luxury Stores: 80% under 90 days
Dealer Days Supply by Model / Trim
Monitoring the relationship between an individual Dealer Days Supply and the overall Market Days Supply allows managers to quickly identify model lines and trims where their pricing strategy, mix or online merchandising is off.
Most OEMs only provide the individual Dealer Days Supply, with no comparison to the overall market. This would be like analyzing your stock portfolio performance without having the S&P as a benchmark.
The devil is usually in the details, and this is certainly the case when it comes to the enormous complexity of most model / trim / option / color combinations. The overall Dealer Days Supply at the model line level might look fine, but when you drill deeper into the trim mix, that’s where you’ll often find the problems. I recently saw a dealer with a 45 days supply of 2020 Camrys, but a 223 days supply of red Camry LEs.
The sooner dealers become aware of issues like these red Camry LEs, the sooner they can begin taking corrective actions to reduce their exposure to holding costs. This granular vision of your inventory will also highlight stocking opportunities of combinations performing well in the market that are not currently in your stock.
Making More Money With Better Inventory Control
Making money has become a lot more challenging for franchise dealers over the last eight years, as the average return on sales has fallen from 2.8% in 2011 to 2.3% this year (per NADA). The major underlying cost structures are not likely to improve: Rent factors / mortgages are not becoming less expensive, attracting and retaining talented employees is not getting cheaper, and advertisers are not looking to charge less.
New car inventory control remains one of the single biggest opportunities for dealers to root out unnecessary expense and drive incremental sales.
Dealers who are managing their inventories with a high percentage of units under 90 days and monitoring the Dealer Days Supply by model / trim will be well positioned to improve the health of their new vehicle inventories and the health of their bottom lines. Remember, “We’re not in the car business, we’re in the business of making money.”