A Little “Say You, Say Me” in Used Vehicles

A couple days ago I was riding in a car on my way to a dealer meeting when Lionel Richie’s song, “Say You, Say Me,” came on the radio. The tune brought me back to the mid-‘80s when it was all over the airwaves. It also made me think of recent conversations I’ve been having with dealers and used vehicle managers and the common topics we cover:

Say You: We’ve got way too many Bronze cars in our inventory.

Say Me: Yes, the Bronze designations vAuto’s ProfitTime GPS assigns to these vehicles signal that they are distressed investments. But there’s nothing wrong with a Bronze vehicle. Some of them are really nice cars. Your problem appears to be how you’re treating them. They should be priced to move quickly, enabling you to turn the distressed investment into a retail sale that allows you to capture some front-end gross, F&I sales, a customer and possibly a trade-in with a more favorable investment profile. The share of Bronze vehicles in a dealer’s inventory can also signal an opportunity to improve how and where you’re acquiring inventory. If you’re leaning heavily on auctions, your share of Bronze vehicles will be higher than a dealer who’s less reliant on this sourcing channel. Likewise, it’s worth examining whether appraisers and buyers are putting too much into inventory acquisitions without a good reason (i.e., they needed to make a deal or you really needed the vehicle).

Say You: If we want to sell 100 units a month, we need 150 in inventory.

Say Me: We are fully back into a market where depreciation has returned in full force. If you’re consistently stocking more than your rolling 30-day total of retail sales, you’ll always be fighting an aging problem as the 50 vehicles you don’t sell in a given month roll into the next. This dynamic is especially true when the carry-over vehicles are lower tier investments (units ProfitTime GPS identifies as Bronze and Silver) and you’re pricing them too proudly—which means they won’t sell unless/until you price them more realistically for the market.

Say You: We knew we over-paid for this vehicle when we acquired it. But we wanted to give it a shot. Now it’s 55 days old. I now see we should have priced it to move sooner.

Say Me: Good on you for recognizing the problem with this car. The faster you fix it, the faster the headache and heartache goes away. I would point out, though, that the idea of giving a vehicle a “shot,” especially when you know you over-paid for it, effectively means you’re kicking the can down the road. We now know that more than 50 percent of vehicles in dealer inventories begin their first day of life as Silver/Bronze vehicles. Such vehicles don’t deserve the “shot” your instinct and training suggests they should get. In the current market where depreciation has returned, these vehicles absolutely will not get better over time.

Say You: We have a firm, 60-day age (or turn) policy.

Say Me: By definition, an age or turn policy recognizes the need for dealers to retail vehicles before depreciation saps away their ROI potential. But it’s even more important to understand that, as we now know through the data science behind ProfitTime GPS, vehicles do not depreciate at the same rate. That is, some are more sensitive, and some are less sensitive, to the passing of time. The problem is that a standard 45-, 60- or even 90-day age policy does not reflect the variable nature of vehicle investments. I’d encourage you to move toward a variable turn policy, where you’re managing each vehicle’s days to sell in accord with its unique investment value. In ProfitTime GPS, this tends to manifest in the following manner: Platinum vehicles turn in roughly 50 days; Gold vehicles in 40 days; Silver vehicles in 30 days and Bronze vehicles in 20 days. This variable approach helps you manage the varying levels of risk and opportunity that exist across individual vehicles and a dealer’s overall inventory.

These are just some of the recurring themes from recent conversations. In sum, they point to a need for dealers to consider how they’re managing their inventories in the current market to deliver the most optimal returns on individual used vehicle investments.

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