I’m taking part in a new “Dialogue” series with Cox Automotive. The ongoing series offers dealers and industry stakeholders to ask questions, and get answers, from Cox Automotive leaders. Last week, I received several questions that I thought would be relevant to share here. Below, I’ve included the questions and my responses.
Question from a Mid-Atlantic dealer group sales associate : “In the height of Covid-19, Dale, you took the position to sell sell sell and take advantage of all these outstanding Buys at Auction—that it was a fire sale at auctions all over the country. We as a company elected not to take that position and hold!! We felt as though the market was going to bounce back, which it did. I personally feel there’s a market correction coming, which there typically is this time of year. Where do you the market is headed after the election?”
Answer: Thank you for your question. I appreciate your perspective and decision to hold inventory earlier this year as the pandemic disrupted the wholesale and retail markets. I would point out, though, that dealers who took a different path and chose to liquidate their inventory found themselves with a once-in-a-lifetime opportunity to replenish their inventory at historically low wholesale values and sell them in a market with higher-than-normal retail values. This rare opportunity to buy low and sell high more than made up for any losses the dealers incurred as they liquidated their inventory.
I would also agree with your instinct that a market correction is coming. In fact, I am concerned that uncertainties about the outcome of the election, coupled with ongoing issues related to COVID-19 and unemployment, will weaken retail demand in the final quarter of the year. The wild card, of course, will be whether Congress passes another round of stimulus spending. If they do, it may be enough to soften any market correction and re-energize retail demand for new/used vehicles. If they don’t, I tend to agree with the Federal Reserve chairman Powell’s assessment that our economy and consumer spending power will suffer. Given this outlook, I’ve been encouraging dealers to align their inventory levels to current retail demand on a rolling 30-day basis. When dealers do this, the corrective action they need to take, if the market gains or loses steam, is typically less disruptive and drastic than if they had stocked up in anticipation of a strong retail close to 2020.
Question from a fleet management company executive: What does the forecast for 2021 look like? Do you see the wholesale market leveling back to normal? Will repo’s flood the market and drive the average wholesale value down?
Answer: Thank you for your question. I wish I had a crystal ball to inform everyone what 2021 might look like. If I had to guess, I would submit that the wholesale market will appear much more “normal” in 2021 than it has been this year. I think everyone has been surprised that wholesale values appreciated, rather than depreciated, during the late spring and summer this year.
On repos: I have noted the recent rise in loan delinquencies and vehicle repossessions. I am not able to say, in the current moment, whether such circumstances will bring a flood of vehicles to the wholesale market in the coming months. But I would agree with your assessment that, if these vehicles come to the wholesale market, they would increase supply at a time when demand appears less strong—a condition that typically translates to diminished wholesale values. The good news, though, is that the wholesale market’s return to more “normal” conditions would suggest that an increase in supply from repossessions probably won’t trigger any dramatic, downward changes in wholesale valuations.
Question from a Northeast dealer group partner: What are your appraising best practices??
Answer: Thank you for asking a question that gets to the heart of making money in today’s used vehicle market. We are at a point and time, I believe, where the money dealers make in used vehicles increasingly comes from how well and right you purchase a vehicle rather than its retail sale. It goes back to the old saying, “you make your money when you buy the car.”
With appraisals, I encourage dealers to follow what our vAuto Performance Managers call an “active appraisal” process. An “active appraisal” means your appraiser and the customer evaluate the vehicle together, noting the good, bad and ugly aspects of the car in an objective, shared fashion. This process is transparent and leads to a greater level of trust than the traditional appraisal process, where a customer hands over the keys and, later, gets an offer. It’s also important for dealers to measure and monitor their appraiser performance. Top-performing dealers now achieve Look to Book ratios of 55 percent to 60 percent (an achievement that owes, in most cases, to a more customer-engaged process). The dealers also measure the Cost to Market percentages for each appraiser to ensure they aren’t losing too many deals, or over-paying to get inventory they need. As a final point, I encourage dealers to validate their offers with figures from Kelley Blue Book or another third-party entity that’s known and trusted by customers. The third-party validation adds credibility to your offer and comfort to your customer.
Questions from an independent dealer in the Southeast: I think both sellers and buyers would benefit if cars being sold “as-is” should give the reason they are being offered that way and not necessarily because of miles. If the buyer knows that that the A/C compressor is bad, then he can figure that in his recon costs and bid accordingly. I feel that sellers will get more bids because it would take the mystery out of the “as-is” announcement.
Also, how does Manheim come up with MMR numbers? They are extremely high on trucks and when I look at recent transactions, I don’t see where most trucks brought those high numbers. Some of the MMR numbers for trucks are also high on the suggested retail price, which affects what banks will loan on these units.
Answer: Thank you for your questions. On “as-is” disclosures, you are 100 percent correct. Interestingly, I am working on a project with Manheim leaders that aims to bring more clarity, confidence and transparency to the wholesaling process. We know, for example, that many dealers simply won’t consider vehicles with condition grades below 3. But we also know that some buyers would buy vehicles with lower condition grades if they knew what a vehicle needed to make it retail-ready. The effort is in the early stages, but I think it’ll ultimately move Manheim, and wholesale markets in general, to a level of clarity about a vehicle’s condition that would benefit both buyers and sellers.
On MMR: Manheim creates an average value or MMR based on the past 45 days of auction transactions for specific makes/models, with adjustments for mileage and some specific configurations. As such, MMR is an aggregate number that may not directly reflect the characteristics of specific trucks you’ve seen transact in more recent auction sales. In addition, your observation about lower-than-MMR transaction prices might reflect a softening of wholesale values as dealers see less retail demand for trucks in their markets, which translates to less competition to purchase the vehicles at auctions.
The post Take-Aways from Cox Automotive’s “Dialogue Series” appeared first on Dale Pollak.