“Fresh units sell” is a common statement among pre-owned vehicle dealers that's probably as old as the business itself.
I have no idea when I first heard that. It just seems to be part of the knowledge that is imparted to pre-owned vehicle managers as they grow up in this business. It is an axiom that dealers all seem to believe, but they often choose to ignore by holding on to aged inventory.
If pre-owned vehicle dealers truly believe a fresh unit is more likely to sell than an old unit, why would they allow the pre-owned inventory to age past a reasonable point in the first place?
Whether you know it or not, there is a given probability of retailing a pre-owned vehicle within a given time frame on your lot, based on your store's process and effectiveness.
Regardless of what the exact probability is in your store, the first 30 days of a pre-owned vehicle's life in saleable inventory represents your best opportunity to retail the unit. After 30 days, that probability goes down and down again after 60 days
A couple of the big-box retailers looked at this and enlisted the help of their analyst to answer the big question, “How do you know fresh units have a better probability of selling”?
They tracked the inventory as it aged and when it sold, from up to 30 days, 31 to 60 days and over 60 days on the lot. What they found in the stores that had good processes was that units in stock less than 30 days had a 65% to 70% probability of sale.
They found that units in between 31 and 60 days had a 25% to 30% probability of sale and, when that unit aged past 60 days, the probability of selling it within the next 30 days dropped to less than 15%. This was also the justification for instituting a hard-turn policy.
Let's put some perspective on this, assuming you have $1 million in pre-owned vehicle inventory sitting on the lot.
If your highest probability of sale is within the first 30 days and your lowest probability of sale is over 60 days, where do you want your investment to be, in fresh inventory or aged inventory?
Inventory is an investment and with any investment there is risk and opportunity. Would you keep your money in a stock that you knew would never be worth more than it is right now and had a rapidly decreasing probability of paying any dividend? At some point, you would take a loss and reinvest in a fresh opportunity.
This was all brought home to me again in a conversation with a dealer. Like most dealers these days, he is feeling the pain within the current market conditions.
Traffic counts, pre-owned vehicle sales and grosses were all down. We looked at the aging of his pre-owned vehicle inventory and found over 70% had been in stock over 60 days.
There were several reasons given for the aged inventory and we have all heard them. But the interesting thing was what we found when we looked at his sales rate by age.
He was continually selling over 60% of his inventory that was less than 30 days old. The sale rate of his aged inventory was less than 20%. Based on the gross generated and the higher commissions that he was paying to try and move the old stuff, he was only making a return on less than a third of his inventory investment.
At best, there is a 65% to 70% probability of selling a pre-owned vehicle within the first 30 days. This assumes, of course, that all your processes are in place and functioning well.
This also means that, in order to keep the inventory fresh, you will need to wholesale some units that you made ready for retail.
In theory, based on these findings, if you started out with 100 fresh units today and applied these probabilities, you would sell 70 units the first month and have up to 30 units remaining that would be over 30 days old. At best, you will sell six of those and have an investment in 24 units with the lowest probability of sale.
It is your investment. Where do you want your money to be?
Tony Albertson is executive conference moderator for NCM Associates. He is at [email protected].
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