The model year-ending close out incentives are now in full swing and dealers everywhere are scrambling to sell the balance of their 2002 models to make way for new inventory.
In our quest to take advantage of each potential sale, we sometimes are forced to put more money into a used vehicle than its wholesale value or lose the deal to our competition. This situation is the beginning of potentially larger troubles and it starts this time each year.
As noted many times in this column, one of the most difficult situations dealers face each August is this: business is brisk, everyone is selling new cars and trucks and trading for numerous used vehicles. Our used vehicle inventory dollar value is in line based on the August sales pace.
But when forecasting our used inventory needs for September and October, basing those needs on travel rates of August business will likely lead to excess inventory.
Your dealership policy is no used vehicles in inventory that are 90 days and older, so this means that we must be in the wholesale market during late November and December when used vehicle values traditionally are nearing their low point of the year.
Obviously many dealers aren't prepared to take substantial wholesale losses so they have to retail out of excess inventory, which requires higher commissions, lower grosses and excess reconditioning to name only a few concerns. So, how can we avoid this accumulation of inventory when we least need it?
First, take a look at your historical September and October used-vehicle sales separated by car and truck. Look at the cost of sales for those individual months.
For example, if your historical inventory sold during the September-October period is $500,000 per month, do you want to go into September with a $1 million inventory?
Instead, take advantage of the early September period to start bringing your inventories in line by wholesaling the vehicles that don't fit your inventory profile.
This action will allow you to aggressively attack the market. Not only will you be able to trade for vehicles when the opportunity presents itself, you will turn your dollars more quickly, minimize potential wholesale losses and most likely have higher grosses per used vehicle retailed.
This action should give you a competitive advantage because you have prepared yourself for the season, and in many cases your competition has not.
There is one additional benefit to this action. In November and December when the market traditionally reaches its lowest price-point, you will be in a position to trade and purchase fresh inventory.
There is another option available instead of wholesale. It's retail. Years ago, a good friend commented that many dealers have used-vehicle inventory problems late in the fourth quarter of each year due to their managers not realizing or admitting the potential problems that lie ahead.
His point is this: If I'm a “real” used-vehicle manger, I know when I am high in a vehicle price. For example, if I'm $1,000 high on a used vehicle, and our average/traditional gross per used vehicle retail is $1,800, I know I need to strongly consider an $800 deal if that's all I can make.
The key to a successful used-vehicle operation is a manager who knows the market and buys, sells and trades on the retail and wholesale market.
By not allowing our inventory to age, our retail grosses will increase and our wholesale losses decrease. You will be in a much stronger position to step up when it's required to make that deal.
In addition, when used vehicle values drop to their seasonal low, as noted, you will be in a position to buy low and sell high.
Meet with your used-vehicle management staff and establish a plan to have your inventory clean and liquid by the end of September. Historical sales data for the fourth quarter should help establish your plan for 2002.
One last word of caution regarding program vehicle aging, watch it! You should not allow programs to remain in inventory for more than 21 days and you should set the aging policy at 15 days. Why?
Think about the volatility of this market from week to week, especially this time of year. Doesn't it stand to reason that your chances for wholesale losses will be less in two weeks than in three months?
By staying on top of the used-vehicle market and your individual inventory, especially during the next four months, you will most certainly enhance your dealership's net profit.
Tony Noland ([email protected]) is the president and CEO of NCM Associates, Inc. He has over 30 years of automotive retail experience.
For information to obtain a complete analysis of your financial operation in comparison with Best Practices benchmarks, fax a written request to (913) 649-7429.