The new normal: Managing risk and making profitable decisions in a growing used vehicle supply environment

Setting the stage…

After the crash of 2008 and the 40 percent decline in new vehicle sales (SAAR) in 2009 (from 2007 totals), dealers faced new challenges in creating opportunities for profitability in their dealerships. They turned to their used vehicle and service and parts operations for that profitability, and the subsequent “used car boom” in a high vehicle valuation environment has created a series of unique opportunities — along with challenges — for dealers.

Over the past few years, in fact, automotive dealers have experienced record high used vehicle values, and for much of the time have dealt with a severely anemic wholesale supply. While this has helped to create record sales and net profits, many dealers have voiced concerns about low used vehicle supply and high prices in the wholesale market. What dealers might not have recognized early on were the benefits that they received from a high valuation market. The “used car boom” gave dealers an automatic risk control for their inventory. In a weakened supply environment, dealers were able to mitigate significant risk via a strong auction market where vehicles depreciated at a much slower pace. Valuations remained strong even after a 45- to 60-day dealer stocking cycle, and dealers were forced to experiment with more trade-in vehicles that in the past they might have wholesaled at auction or online. In other words, dealers would either make a profit or lose less when remarketing a vehicle wholesale after failing to retail. Customers adjusted to higher prices and lower new vehicle incentives that helped to keep late model used vehicle prices strong. The end result? Savvy dealers sold a lot more cars.

Fast forward to Q3 2014…

Welcome to the “New Normal,” where today we see a more normalized seasonal adjustment in used vehicle values. Think about the typical three-year sales cycle. Consider that 2011 was a year when sales were up, thanks to record leasing, low interest rates, an enlightened economy and increased fleet sales to rental companies. Now, all those sales and lease maturities are returning to dealerships, while dealers are selling a record number of new vehicles and trading a record number of vehicles on those purchases.

Take a look at the equations:

A. More inventory + more supply + slow sales growth = lower values

B. Lower values + increased supply = MORE risk

The “New Normal” means that dealers must make better decisions in what they source, what they keep and how much risk they are willing to take on a given vehicle. That requires tools to help mitigate and control current and future risk in their used vehicle inventory. More than any time over the past few years, in fact, dealers will need to scrutinize their approach to stocking, sourcing, appraisal and days supply.

Tools like Inventory+ are rooted in this kind of risk control. Long before the award winning Inventory+ tool was a merchandising, pricing and syndication tool, it was at the very heart of a dealer’s used car department as a way to maximize profitability and minimize risk in a dealer’s inventory. Inventory+’s proprietary recommendation engine powers a dealer’s ability to identify profitability and risk, while at the same time creating efficiency in a dealer’s process to appraise, assess, merchandise, price and syndicate their inventory.

So, as inventories rise, prices will drop and values will continue to decline at a normal pace. The dealers that will win in this “New Normal” world are those that balance risk and profitability by implementing tools like Inventory+.

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