The New Science of Used Vehicle Sales and Stocking

Presenter: Dale Pollack, VAuto Inc at NADA 2012

You may not be aware but Dale Pollack is blind. He cannot make decisions on used vehicle stocking based on look and feel. He has to rely upon the use of numbers. While this is a confronting new frontier for many dealers (who have traditionally relied upon "gut feel" and instinct from experience), the game has changed.

Three things changed for Dale to think this way:

1. The internet
2. Diminishing Gross Margins and
3. Increasing expenses

These changed the playing field away from a "irrational and inefficient" market to a "rationale and efficient" market for used cars.

In an irrational market the sellers had all the control. There was a clear differentiation from new car stock, dealers could control price and there was no supply of stock information.

Amongst all the three game changers, the Internet has the biggest impact. It shifted knowledge to the consumers. In today's market, the buyers know the market supply, what price and where they are located.

In a rational and efficient market, there is a balance of information between buyers and sellers. Your success in this market place is governed by supply, demand and price sensitivity. So why not focus on the information to make decisions?

To compete you must understand the market, surround yourself with the right information and tools to compete the best and win.

Let's explore this further.

The 4 vital signs to Used Car success today!

Provisioning is defined as the successful allocation of resources. To be successful there are 4 vital things you must know, manage and accomplish.

1. Market Days’ Supply

This is, the single most important thing you must know - what cars, how many and what price. By definition, market days’ supply expresses the relationship of the vehicles supply versus it's demand. That is, how many cars there are for sale compared to how many people want to buy those cars.

The benefits of knowing this include:

• it will help you decide which cars to have in stock, only focus on those that customers want to buy and are in demand
• the cost of acquiring customers will come down, as these cars are in demand and therefore the customers will find you! You have what they are looking for. So rather than push your cars, that they don't want out to them, and paying large amounts of money for press, and online advertising, the customers will simply find you.
• the cars you stock will be less price sensitive- because they are in demand and not over supplied.

2. Price to market

The price to market measures how the price of a vehicle compares to the average price of identically equipped competing vehicles in the market. The challenge most dealers face on a daily basis - what price do I set the car to sell. To get it right is takes a combination of:

• emotion and
• economics

To set the correct price you can't eliminate all your years of experience. Cars are still an emotional purchase. Dealers should still use an element of emotional look and feel to set the price. However the need to also support this with some economics. You need to look at each car as if it were an investment or a pile of cash. The main objective of investments is to get the best possible return. In a rational market this all come down to market days supply.

However, still there are too many dealers who only use the emotion, with little regard for market information. This is good fortune rather than good management and in time, the market and competition will succeed.

If there is one lesson I learned in Vegas, it is that the house always wins...eventually.

So what to price the car on Day 1. The answer is...it depends:

• if it is a high demand car, in short supply, then set the price high- at 104% of market price
• if it is low demand car, in high supply, then price it low to sell immediately- at 96% of market price

3. Costs to Market

The cost to market is a number that expresses how true to value the vehicle is owned. In the industry we often look at gross profit and from Deloitte benchmarks state that this is 13 to 15%. Well this number flips this and focuses on the cost side rather than the gross side of the equation.

Put simply it is the formula of owned cost, divided by average retail price. For example, if the costs of the car was $8,500 and the average retail price was $10,000, then your cost to market is 85%.

As we expressed earlier, used cars and dealers in general face 3 key challenges:

• the Internet puts a ceiling on the cars price, driving prices lower
• the cost of ownership of cars is increasing and
• as a result of the above and increased competition, margins are decreasing.

You need treat used cars like an investment to be successful, then you need to measure the equity in them.

This measure is otherwise known as the equity you have in your used cars. You must measure this number every day not just at the end of year event for tax write downs.

The equity in your used cars today is your profit tomorrow!

In the USA, if your cost to market is more than 85%, then you are out of the money and will not make a profit in used cars.

4. Absolute intolerance to aged inventory

Picture this, if your cash draw did not balance by $100, how would you react? You would probably recount it, inform the manager or owner and call the police if you could not find it, right!

However, let's say your $1M in used car inventory was 5% negative equity and out of balance by $50,000. What action do you take?

Remember your equity today is your profit tomorrow.

The fourth vital sign for used car success, is measuring and managing used car inventory.

Used cars are simply assets that depreciate over time. This is guaranteed with certainty.

The golden rule is you must not have less than 50% of inventory more than 30 days old.

So with this in mind, the gift of an efficient and rational market is that you can predict it to be successful.

Conclusion

Proper conditions plus effort equals success.

Give your sale team the vital conditions:

• high demand cars - in low market days supply
• pricing to be competitive
• equity is stock and
• clear inventory aging

And used car success will follow.

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