Pre-owned vehicles are likely to be a key revenue driver for many dealers moving forward.
Used vehicles are at the top of mind for many automotive retailers at present.
Even prior to the COVID-19 pandemic, many dealers were facing 2020 with a growing number of lease returns and there were signs that demand for new cars and trucks was continuing to contract.
Now, as we try to get back to normal following the economic shutdown this spring, some interesting trends are developing.
For the used car market, downward pressure on prices, driven by a surge of inventory, not only from anticipated lease returns, but rental car firms and fleet contraction is likely to make things challenging for retailers as we head into the second half of 2020 and 2021.
As a result, effective inventory management is going to be absolutely critical for at least the next 18 months both here in Canada and also in the U.S.
To help provide guidance when it comes to managing used vehicle inventory, DrivingSales recently hosted a webinar entitled The New Reality of Inventory Management.
Moderated by Bart Wilson, Director of Operations, Media and featuring two leading experts in used car management, Mike Cavanaugh, Executive Vice President, MAX Digital and Tim Scoutelas, Director, Strategic Accounts at MAX Digital, the webinar covered a range of key topics that are critical in the used car space at present. These include:
- Creating ways for sourcing new inventory
- Looking at new and smarter strategies for the appraisal process
- Key reasons for supporting CPO programs
- How attending to merchandising can grow your gross profit
- Dealership performance metrics that matter most right now
Successful inventory sourcing is key to having a thriving used car operation but as any dealer will tell you, market conditions can at times, appear to make it difficult to find good, quality used cars. Today is no exception.
At present it does seem that quality used vehicles are at a premium, meaning in a number of cases, sought after cars are going for significantly more than book value but again, what a vehicle is ultimately worth boils down to supply and demand in a particular market.
Additionally, low-mileage vehicles are in particular demand which makes it good for those sellers that have them but tougher for buyers who are looking to acquire them.
Furthermore, besides mileage, equipment and trim levels can also have a huge influence on how much gross profit is in a particular vehicle but with many physical auctions closed, it can be tougher to decipher what options a particular car has since the VIN itself doesn’t always tell you.
Window stickers and option data
Tim Scoutelas said that having access to tools that are able to provide option package data and even window stickers for a particular vehicle can be a huge advantage for dealers, especially in the current climate of social distancing where it can sometimes be difficult to physically inspect potential purchases.
He noted that MAX Digital in the U.S. currently has over 35 million window stickers available—at no extra charge to users.
Mike Cavanaugh said that having access to option package information is particularly important since, without it, dealers can sometimes overbid on a particular car or miss one that could have potentially brought in a significantly greater amount of money.
He noted that option packages are particularly important when you’re dealing with premium and luxury vehicles since buyers often seek out specific features.
When it comes to appraisals, diligence and knowing what the numbers actually are is key to being successful in the used car space and today, increasingly sophisticated appraisal tools are a key part of ensuring you are getting the right car, for the right money.
Mike Cavanaugh noted that it’s important for dealers to pay attention to the details and that not only includes options and features but also a condition of the vehicle since you also have to factor in reconditioning costs when you buy it.
Additionally, understanding market data and recent sales are critical in today’s marketplace and dealers should not be relying on book values since supply and demand vary considerably by region and some vehicles that may be hot in one market may sit for months in another.
“If you understand your inventory and what is moving you can make some good decisions,” said Cavanaugh.
He also noted that it was important to consider that sometimes a car may not seem like a good buy initially, but you might be able to turn it quickly and sell it for a decent profit, provided you’re properly managing your inventory.
Always a key talking point when it comes to used cars is trade-ins and there are many dealers that see the trade-in allowance as the greatest profit centre during the used car transactional process.
Yet the trade-in is also one area that can be rife with friction, especially if the dealership and the customer can’t agree on the trade-in value.
Today, sophisticated appraisal tools make the process more accurate and arguably less confrontational but still, there are strategies dealers can employ to make the process smoother.
One of them is having a collaborative approach by working with the customer on the process, such as getting them to rank their vehicle in terms of condition and also enabling a dealer staff member to do the same.
Additionally, by using accurate data and algorithms to help determine the actual value of the vehicle, dealer staff can credit the customer for the condition of the vehicle and options (where applicable) but also explain why the appraisal tool arrived at a particular number (pointing such things out as stone chips, bumper rash, curbed wheels or stained carpets, etc).
And while it can be tempting to lowball on trades, Cavanaugh says that doing so can actually mean you miss out on a lot of good trades and hence, gross profit.
Leveraging tools such as Max Digital’s Market Based Appraisal to deliver a fair market value benefits both the dealer and customer.
This has become particularly important today, as COVID-19 has seen a big increase in using remote appraisal strategies in which dealers and wholesalers target private sellers to source inventory.
Private sellers can often be a good source for low-mileage well-maintained desirable vehicles that are always in demand and make good retail offerings for dealers since they tend to require minimum reconditioning before being put on the market.
We Buy programs
Besides traditional sourcing methods such as these, We Buy programs can also produce good results.
Dealers often have an advantage in the local markets they operate since they can often do a better job at sourcing the right vehicles locally, compared with big networks such as CarMax or Carvana.
Creating a We Buy program with a marketing budget and a compensation plan for sales staff involved with it can be a great, creative strategy to source the vehicles you need, yet in order for it to work effectively, a solid process needs to be put in place for it to work effectively.
Scoutelas cited Lutherbuyscars.com as a great example of an effective We Buy strategy.
When it comes to creative sourcing, COVID-19 has also changed the criteria for many dealers when it comes to the type, age and mileage of vehicles they will consider for retail.
This becomes especially important as a surge in demand for affordable used vehicles is expected—particularly as consumers look to rein in spending and some former mass transit/ ride share users now look to personal mobility solutions.
Sometimes you can find gems in your inventory that you might not have previously considered.
Scoutelas pointed to a Toyota dealer that consistently finds great vehicles in his own wholesale lot.
He notes that good condition, older used cars can be a great way to drive traffic to your dealership and court new customers that you might not have previously considered.
Furthermore, a good, older, wholesale vehicle can be a good source of gross profit at retail, especially if needs minimal reconditioning work.
Cavanaugh agreed that older, entry-level vehicles can be a huge source of profit for savvy dealers and has loan deferrals end and consumers tighten their wallets could be a prime revenue source for dealers as they navigate through the overall surplus of used vehicles hitting the market.
Other creative sources can include loaner cars, especially if work in the service department has slowed as a result of the pandemic.
Scoutelas recalled a dealer with a sizeable loaner fleet who decided to pull them and market them as used cars to bolster his inventory.
In many cases, for OEM dealers, these vehicles can also make prime Certified Pre-Owned candidates since they will often have low mileage and regular maintenance records.
An additional strategy in sourcing used inventory can be done by employing Reverse Look Up or Aged Inventory Exchange from other dealers, particularly if you have a customer who is enquiring about a specific vehicle and you don’t currently have it in stock.
“I’ve listened to hundreds of calls over the years that come into the BDC from customers,” said Cavanaugh.
“You’d probably be shocked by how many times a call comes in and somebody in the BDC says, ‘we don’t have one of those’ and the customer hangs up.”
What if, instead, the call comes in and the dealer representative says, ‘let me find one of those vehicles for you’—which can lead to additional sales opportunities and profit for the dealer.
Even if the store has to pay another dealer a premium to get their hands on that particular vehicle, it leads to another sale which potentially leads to additional business down the road, plus you’re also helping the other dealer out by removing aged inventory they’re having trouble selling.
Private third-party ads
Searching third party sites for ads posted by private sellers is also another strategy that can be effective for sourcing inventory, though Cavanaugh and Scoutelas both cautioned that doing this can be time-consuming and should be considered as a bolster tactic for other inventory sourcing options.
In addition to bargain/entry-level vehicles, likely another great source of profit for franchised dealers over the coming months will be Certified Pre-Owned vehicles.
Given the glut of lease return vehicles expected over summer and into the fall, along with a growing shortage of new car inventory (as a result of assembly line shutdowns in the spring), there will not only be a greater supply of used CPO vehicles but likely a greater demand for them too, provided they are marketed properly.
Scoutelas noted that the combination of OEM support, warranty programs along with F&I products available, make CPO cars a great option for franchised dealers, while the piece-of-mind these elements provide also makes them highly appealing to consumers.
Additionally, another advantage for dealers that represent a particular brand is the familiarity with CPO vehicles from that manufacturer in both sales and service operations.
Where the latter is concerned, time to market and reconditioning is often reduced because service advisors and technicians are already trained to work on those particular vehicles.
“If you are working on some unique vehicle that you don’t have parts for, that is going to slow down the process of getting that car online and turning it quickly, which is super important right now, especially considering the volatility of the market,” said Cavanaugh.
When it comes to CPO vehicles, how they’re marketed (especially in the current economic climate) is absolutely critical.
Again, it goes back to knowing and understanding your inventory, taking quality and timely photos, creating quality descriptions and doing whatever you can to make your vehicle unique, especially if it is competing against a sizeable number of similar CPO offerings.
This is particularly true in a COVID-19 environment where consumers are seeing more ads online and dealers have a broader market reach than ever before.
Scoutelas said that it was important that dealers use their online marketing tools to ensure vehicles are advertised and listed correctly and include the list of recent, quality photos and each vehicle’s particular options.
“OEMs spend millions of dollars per year creating fancy names for option packages and if you can incorporate that, you’ll want to get it in your ad for all different search reasons,” said Scoutelas.
In summarizing, the webinar panel looked at four core metrics dealers should focus on to effectively manage their used vehicle inventory.
- Appraisal Closing Rates
- Stop the Drop
- Retail Sales Efficiency
- Price and Cost to Market
When it comes to appraisal closing rates Scoutelas said that if dealers were struggling here, they need to find ways to improve it.
“There is no reason why a traditional dealership can’t be at a 50 percent appraisal closing rate,” said Scoutelas. “Hold people accountable and drive that number up.”
For Stop the Drop, Cavanaugh said that a key strategy for dealers to avoid giving away gross on a vehicle is to have their sales processes dialed in, as well as ensuring the car is priced right and marketed correctly out of the gate with information customers want to see.
“Do we give away deals to just try and close them or do we get better in building the value into this unique vehicle and educate the customer?”
In terms of Retail Sales Efficiency, tracking the percentage of inventory you are actually retailing and what is selling within the first 30 and first 60 days, as well as the average cost per used vehicle, is also critical.
Additionally, if you do have a large inventory of vehicles over 60 days, how many units do you have in stock and how many are actually retail ready?
Given how quickly things continue to change in the marketplace, price and cost to market is also a critical metric, dealers need to be following.
Scoutelas noted that dealers should be observing market data on a daily basis and leveraging online tools available to ensure their inventory is priced right, marketed properly and provide optimum results in turnover and gross profit.