There are a few signs that market volatility could make the upcoming spring and early summer selling season challenging for dealers.
Sign 1: Increased supplies of wholesale used vehicles.
The expected influx owes to the industry’s emphasis on leased vehicles in recent years. Leasing volume has been a key driver behind the industry’s year-over-year growth in new vehicle sales since 2009. Many of the lease deals carry two- and three-year terms, and analysts expect a rise in the rate of returns as these leases expire. These off-lease cars, coupled with a greater number of off-fleet rental vehicles at wholesale auctions, are expected to cause wholesale values to diminish.
Sign 2: Attractive factory incentives.
After the National Automobile Dealers Association (NADA) convention in February, industry reports showed most factories predicting double-digit gains in new vehicle sales this year. The reports noted factories planned to use a variety of financing, leasing and rebate incentives to meet their targets. The incentive-driven push for new vehicle sales will make it more difficult for dealers to distinguish the value proposition of late-model used vehicles from comparable new vehicles.
Sign 3: Rising gas prices.
In late February, the American Automobile Association (AAA) noted a 44-cent increase in per-gallon gas prices compared to mid-January. Dealers say this near-record-setting increase is softening buyer interest in larger, less fuel-efficient vehicles. It’s unclear if gas prices will continue their upward trajectory through the spring, but the lesson for dealers is clear: External market factors like volatile gas prices can cause some used vehicles to quickly lose their appeal with potential buyers.
Collectively, these signs of market volatility underscore what I call the “new normal” for dealers. That is, we now operate in an era where ever-changing market conditions raise risks for a dealer’s ability to maintain an acceptable return on investment (ROI) and profitability in their used vehicle operations.
These risks are most profound for dealers who take a look back or historical approach to their used vehicle inventory management decisions. This is because today’s market serves up a more complex mix of supply / demand factors — each of which has its own degree of day-to-day volatility. The upshot is that it’s highly unlikely the precise mix of yesterday’s market conditions will replicate themselves tomorrow.
In this environment, I believe it’s a must for dealers to align their used vehicle decisions to the current market and manage their inventories in a manner that minimizes risks from volatility. Here are four best practices to help:
1. Monitor the market days supply on every car.
This metric helps dealers manage supply-driven volatility. A higher market days supply means there are a greater number of competing units available in the market than a vehicle with a lower market days supply. In general, dealers should aim for a 65- to 70-day market days supply average for their overall inventories. Dealers who maintain this average are less likely to make the mistake of acquiring and pricing a vehicle as if it were a hot seller — only to see it turn into an aging unit. Similarly, dealers who monitor the market days supply can readily see when a vehicle’s market days supply shifts from 75 days to 120 days, due to an influx of available competing vehicles in the market.
2. Recognize retail demand risks.
The first signs of changing consumer interest in vehicles typically flows from the clicks and queries they make on classified sites like AutoTrader.com and Cars.com. For example, dealers who monitor the number of search results pages (SRPs) and vehicle detail pages (VDPs) can see when rising gas prices shift consumer interest away from SUVs and trucks toward more fuel-efficient vehicles. These early warning signs are absolutely essential to help dealers maintain the most desirable vehicles in their inventories.
3. Make pricing a primary focus.
Over the past few years, top-performing dealers have made it a policy to examine their used vehicle pricing more frequently, often moving from once-a-month price adjustments to weekly or biweekly intervals. These more frequent pricing adjustments are driven by price-to-market metrics that show how a dealer’s pricing compares to available competing units in their markets. Dealers who have made pricing a primary focus are better able to increase their inventory turn rates and maximize the profitability potential on every vehicle.
4. Keep your cars fresh.
I encourage dealers to maintain at least half of their used vehicle inventories at 30 days or sooner. This operational standard, by definition, minimizes each vehicle’s exposure to market volatility and helps dealers capitalize on the age-old axiom that “fresh cars sell fastest and deliver the highest gross.”
I should note that these best practices require dealers to deploy a greater degree of diligence and discipline to managing their used vehicle operations. But the extra elbow grease is far less costly than the price dealers pay when they let market volatility water down their used vehicle inventory investments.