October was probably the best new-vehicle sales and profit month in the history of the franchised automobile business. But as you know, used vehicle sales failed to keep pace with that month's new vehicle sales rate which, for many dealers, has resulted in increased dollar inventory levels, days' supply and maybe most importantly, a decreased rate of dollar turn.
I have spoken with many dealers who are in a quandary relative to their inventories; auction price results from week-to-week can best be compared to riding a roller coaster.
Adding even more volatility to this situation are the books we use for appraising used-vehicle trades and, for the most part, their inability to keep pace with the day-to-day and week-to-week changes. There are common questions such as “Do I ignore aging during this period and wait for the market to come back?” Ballooning capital requirements are reality.
From a financial standpoint, you should never ignore or disregard your inventory dollar turn. The Harvard Business School notes the following regarding the importance of inventory turn in its Financial Ratios and Financial Statement Analysis class:
“Inventory turnover — determining the number of times that inventory is sold during the year — provides some measure of its liquidity and the ability of the company to convert inventories to cash quickly if that were to become necessary.
“When turnover is slow, it may indicate that inventories are not a liquid asset and suggest they should be excluded from that category for analytical purposes. On the other hand, when turnover is quite rapid, that is when inventory is sold several times each year, the liquid character of inventory can provide funds if needed in the short-term and may protect the firm against inventory obsolescence.”
In October, NCM Benchmark clients turned their inventory dollars .7 times. This equates to 43.5 days to turn their entire dollar inventory. Turn rates for both car and truck inventories individually was consistent at 43.5 days.
NCM prepares a special and in-depth used-vehicle study every two years in which we ask our clients to report their results individually on retail used car and truck sales and wholesale sales, car and truck.
The results have been tallied for the 2001 study and in part we found the following:
On average, the used vehicle department contributes 25.5% of the total dealership departmental gross and 30.8% of the total dealership departmental profit (figure 1).
One other interesting fact was the sales price mix (figure 2). Excluding our high-line clients, 70.7% of the used cars sold had a retail sales price of less than $13,999. 24.4% had a retail sales price of less than $7,999. In the truck category, 12.1% were under $7,999 with an average gross per retail unit of $1,382.
Trucks and SUVs are a large part of the averages dealers business today. Is truck gross impacted by days in inventory as severely as we see in the used car department? In the next chart (figure 3) the impact of aging on gross profit and the resulting reconditioning cost are clearly shown. Consider your return on investment as a part of the gross by age.
In theory, if I have a 45-day-and-out policy I would sell two trucks in a 90 period at $1,963 gross profit each for a total gross of $3,926 (ignoring the reconditioning cost) while the dealer with a 90 or longer day-and-out policy sells one vehicle for a $935 gross profit. That's a 419% difference, but that's an individual dealer philosophy issue.
The first half of 2002 presents a real opportunity for used vehicle growth and contribution to your bottom line net profit, but only if you manage your turn, aging, days' supply and inventory mix by price category each day.
Best wishes for a successful 2002 and, good selling!
Tony Noland is director of international operations for NCM Associates. He has 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.
