For some time now all of us in the industry have been feeling the pain of sourcing vehicles. As I've written in the past, I believe that most of the pain has to do with the fact that there is an increased demand at the wholesale level causing prices to spiral upwards. In other words, it's not really about a shortage of vehicles (yet) but rather an uncertainty about how to make retail money at the current wholesale price levels.

 

 

For some time now all of us in the industry have been feeling the pain of sourcing vehicles. As I've written in the past, I believe that most of the pain has to do with the fact that there is an increased demand at the wholesale level causing prices to spiral upwards. In other words, it's not really about a shortage of vehicles (yet) but rather an uncertainty about how to make retail money at the current wholesale price levels. I submit that the difficulty in sourcing cars is serving to expose a fundamental weakness in our dealerships. For too long our used car department has depended on what I call happenstance or chance stocking. In other words, our used car inventory reflects what we happen to trade for or what we happen to be able to buy at today's local auction. Today we're not able to trade for enough, nor are we able to source enough at the local auction for reasonable prices. Consequently everyone is feeling pain. I think that we should all pause and take note of the fact that the way we've stocked in the past isn't working today and probably won't work in the future. Specifically it's time to do two things differently. First we must move from happenstance inventory to engineered inventory. Engineered inventory means that somebody sits down on a regular basis and creates a list of ideal inventory units based on what is hot in the market right now. The dealership's past performance with certain vehicles is relevant but not necessarily the driver of what should be on the lot today. Dealerships have facilities, people and capital that can be used to sell any type of vehicle, and it only makes sense to apply these assets to vehicles that have the highest demand and least supply. These same vehicles then need to be found. It's not realistic to expect that they're all going to be traded in or available at the local auction. Someone needs to scour the landscape of auctions, dealers, and private sellers to find the vehicles. They also need to do an analysis to determine how much they can be sold for in order to know how much to pay to acquire them. All of these tasks take a great deal of time and generally much more than a typical used car manager is capable of committing. I contend, however, that the time taken to engineer inventory is not time spent, but rather time invested because you are engineering your own success. This stands in stark contrast to happenstance stocking which is much faster and easier but won't produce reliable results any longer. This brings me to the second change that should be made. I propose that there needs to be someone in the dealership that has the time and skill required to create the engineered list, determine target acquisition values and source the vehicles. This person, who might be considered a "stocking assistant" may already on your payroll. They simply need to be someone that has an analytical mind and enjoys working with data and the internet. There are tools today that will make their time invested very productive and the outcomes very fruitful. This afternoon I received a call from a former Chrysler dealer that asked me what I thought he should do next. After I spoke with him for a few minutes, it was clear to me that he understood used cars and technology very well. I told him that I thought that our industry would soon be placing high premiums on talents like his if applied as a stocking assistant. I think that some dealerships may use underutilized existing staff, full-time positions and contractor positions. I would like to hear from any individual like the one who called today, interested in serving in this capacity. I would also appreciate hearing from any dealership that would like to be connected to one of these individuals. I would assume responsibility of training both the philosophy and the technology of producing an engineered inventory. If you're an individual or dealership interested in this approach, feel free to post a response to this blog or respond to me by email (dpollak@vauto.com) or phone (630-926-9016).

Everyone in the retail automotive industry is experiencing a case of whiplash from the starts and stops, ups and downs, and ins and outs of the used car market place. From the extraordinary volatility of gas guzzlers and compact cars to the seemingly irrational rise in the wholesale marketplace, even the experienced sages of the industry are scratching their heads when considering what to buy or how to value a vehicle. I contend that the volatility that we have experienced in the last half of ‘08 and first half of this year may actually be the “new order”.

In the past, the market’s preference for certain vehicles and the expected rate of their depreciation was fairly steady and predictable. This steadiness was a result of the old market’s inefficiency. Today, the used car market is an efficient market where information flows freely and quickly. Used vehicles are no longer one-of-a-kind but much more like commodities. The efficiency of the market and the commoditization of the used vehicle have largely been created by the transparency of the Internet. If you understand this, then you can understand why I say that volatility is the new order. Any efficient commodities market by its nature is volatile; consider the oil, metal, grain, or cattle markets. All such markets are subject to frequent and extreme volatility. I am not saying the used car market is perfectly efficient nor am I saying that used cars are true commodities; but the market is getting more efficient and used vehicles are more like commodities everyday. As the nature of the market changes in this way, volatility is to be expected.

The first indication that volatility is here to stay in the used car market is the retreat of finance companies offering leases. In order to calculate a lease, there must be predictability of a vehicle’s residual value. Today, financial analysts cannot find enough certainty in the future of a vehicle’s value or market preference to set a reliable residual value. The other key indicator that the volatility is here to stay is the decision by third party guidebooks to publish values on a more frequent basis such as weekly or even daily. These companies haven’t undertaken this task with the belief that volatility is temporary − they too know that it is the new order.

Once we come to the conclusion that the predictability of a used vehicle’s value and marketability is subject to much more volatility than it has been in the past, then some changes in practices and habits are in order. First, we must realize that volatility equals risk and risk often equals loss. The only way to minimize the risk in holding a used vehicle is to minimize its exposure to time. If the industry had any belief in the past that 60 days was the outside limit to hold a vehicle given the perceived risk, then I say that 45 is absolutely the new 60. This approach flies in the face of the traditional approach of trying to maximize average gross profit by trying to get the last dollar from every customer on every car. This simply takes time, and time equates to greater exposure of risk. The more enlightened approach to making money in the used car business is to worry less about your PVR and more about the velocity in the turn of your used vehicle inventory. Ironically the higher the velocity of your turn, the better your PVR will be!

Another needed change is to change to buying vehicles in lower quantities, but more frequently. Once you understand that market shifts in value and preference occur in weekly rather than monthly increments, you understand that you can more easily be caught long in any particular type of vehicle. True enough, if you were long on SUVs when gas prices dropped and then hung on to them long enough, you would have made a lot of money this spring. But it could have just as easily gone the other way. In other words, I think that you should make a fundamental decision as to whether you are in the business of speculation or retail sales. I don’t deny the attractive profits that can be derived from speculation but I also recognize that a lot of speculators go bust when they are wrong. The more prudent approach for dealers is to stay lean and right even if it means being light rather than long and very possibly wrong.

With volatility as the new order, prepare yourself to stay attune to the values and preferences of your live market. Let loose of the notion that what worked for you in the past will likely work for you in the future. Instead, take an approach that will keep your operations consistent with the new order.

The new efficient used car market place once again requires a new approach for valuing a used vehicle. In the past, our industry has valued a used vehicle for retail disposition based on its historical wholesale value. Today, I am firmly of the opinion that the value of a used vehicle intended for retail should be derived from its current retail market value rather than its wholesale value.

For example, imagine that you are a seller of an ’07 Ford Explorer Eddie Bauer 4x4 with an automatic transmission. In your market, there are 42 of them that are identically equipped with very similar mileage. Based on a ranking of price, yours happened to be 38th highest out of 42, the likelihood is very small that a shopper for this type of vehicle will appear at your store. If, however, your price rank was in the top 10, the likelihood of seeing a shopper would be much greater. If you agree with this premise, then you’re halfway there to understanding why buyers purchasing used vehicles based on wholesale values are dead wrong. 

The reason they were wrong is that these vehicles were recently being purchased in the auction lanes in the high $17,000’s to mid $18,000 range. So let’s suppose that you paid $18,000. After transportation of $300, reconditioning of $700 and a mere profit of $1,500 you would have to ask $20,500. The problem is that the average retail price of the 42 identically equipped similar mileage vehicles in your market was $19,200.This means that your asking price is $1,300 over the average and your competitive ranking would have been 38 out of 42.  Considering the fact that there are 37 identically equipped similar mileage vehicles in your market available for sale for thousands less, how likely is it that you would sell this vehicle quickly? Not too likely. If you wanted to position yours in the 10th position, you would have to have priced it at $18,464, which would have been a $536 looser after transportation and reconditioning. 

So I ask you, was the vehicle that you purchased worth $18,000? Well, yes, if you believe that a vehicle’s worth what someone is willing to pay in the wholesale market place, but clearly no if you have the more enlightened view that a vehicle in today’s transparent and efficient market place will only bring what the retail market will bear, and in this case that is somewhere in the mid $18,000’s (top 10). 

Resist temptation to pay extraordinarily high prices for vehicles just because the herd is doing so. Rather, purchase vehicles for amounts that will allow you to put a respectable profit on top of your acquisition price and still position the vehicle in the lower range of its current competition in the market. If it means that you can’t buy a vehicle that way, then let it go. It is a far better problem to be light on inventory that is owned right and current than to be heavy and long on inventory waiting for the market to come around.

Last Sunday, my wife Nancy chaired the third annual Vision Walk at Soldier field in downtown Chicago. The event drew over 600 people and raised, so far to date, $203,000 for the Foundation Fighting Blindness (FFB). FFB is the largest non-governmental research funding source for degenerative retinal diseases, the leading cause of blindness in America. This even was the culmination of a year's worth of work that consumed Nancy's focus and attention. It was nothing less than a labor of love for me and for that, I want to say thank you and I love you. If you'd like to make a contribution please click this link: http://www.fightblindness.org/site/TR/Events/VisionWalkTR?fr_id=1600&pg=entry

I just concluded a conversation with Mike Miller of Bobb Automotive, formerly Bobb Chevrolet in Columbus, Ohio. He told me that they gave up their Chevy franchise because "it just wasn't profitable." He cited the fact that they had 13 competitors in a 45 minute radius and according to Mike, had to "just give them away." With pressure to stock millions of dollars of new inventory, they simply concluded that it just wasn't worth it. They have a downtown location and they do about 150 used vehicles a month, mostly sub-prime business. Their web site is bobbsaysyes.com. I told Mike that it was very similar to a client of ours in Portland that has a secondary operation called dicksaysyes.com (not a joke). Mike told me that he knew that, and in fact, copied the dicksaysyes.com website and marketing approach. He also said that in a recent publication, the dicksaysyes.com website ranked #6 and the bobbsaysyes.com website ranked 10th on some survey of most trafficked automotive sites. Mike also told me something frightening. One of their secondary sources, called Consumer Portfolio Services (CPS), recently took about 30 days to fund a batch of deals that had complete documentation and stipulations. He could only speculate as to the reason for the delay, but surmised that it might have to do with the liquidity problem in the sub-prime marketplace. I'm curious as to whether anyone else is experiencing similar problems, and if so, whether they understand the cause for the delay. Mike also told me that the secondary business is getting much more difficult because sub-prime customers seem to be slipping ever further into debt and unable to come up with even the most nominal down payments. My discussion with Mike this morning is highly reflective of what I see out there in the market. Specifically, little opportunity to make any money, or even avoid losses in the new car business, and the growing importance of the used car business, particularly the secondary market. On an optimistic note, Mike Miller reinvigorated my confidence. He is a 53 year old, 9-year veteran of the automobile business that refuses to accept the status quo. He's intent on improving the bobbsaysyes.com website and stocking model. He said that he has seen a lot of general managers in his operation come and go, some with good and some with bad ideas. In spite of it all, Mike continues to focus on the fundamentals and made a point of saying that he "tracks and measures everything." I find that managers that track and measure are the ones that typically succeed in tough times. By the way, Mike has had only one job in the automobile industry, and that's with the Bobb Organization. Prior to joining Bobb, Mike owned a coffee shop. One day, when learning that the coffee shop was for sale, Mr. Bobb asked Mike what he was going to do. Mike said that he looked him in the eye and said, "I'm going to come to work for you."

Top 5 Sub-Compact Cars: With gasoline prices soaring, we all intuitively understand that gas sipping cars are quickly becoming the rage. I thought it would be interesting to take three markets, Los Angeles, Chicago and Tyson's Corner, Virginia, and show you the top five gas sippers in each market. Note that the ranking is based on lowest day's supply, in other words, the current available supply divided by the average daily retail sales rate over the past 45 days. These are the ones that people will beat your door down for, more than any others. I can do this for any vehicle segment in any market. Let me know if you'd like to see data like this for your local market and I'd be happy to perform the same analysis, ie trucks, SUV's, luxury cars, etc. Days Supply Available Sold Chicago 2004 VW Beetle GLS Conv. 37 17 22 2005 Scion xB 50 40 35 2007 Toyota Yaris S 54 19 17 2004 Chevy Aveo 56 82 43 2006 Scion xA 60 32 24 Los Angeles 2007 Toyota Yaris 38 47 55 2005 Chevy Aveo 45 94 95 2004 Scion xB 45 92 91 2007 Honda Fit Sport 47 26 25 2004 Honda Civic LX Sedan 54 116 97 Tyson's Corner, VA 2007 Toyota Yaris Base 32 18 25 2004 Honda Civic LX Sedan 40 35 39 2005 Chevy Aveo 42 32 34 2005 Honda Civic LX Sedan 54 93 77 2003 VW Beetle GLS Conv. 58 27 21

Vehicle Inventory or Market Day's Supply; Where Do You Stand? For the first 100+ years of the used car business, we'vealways adjusted our prices based on how long we'veowned the vehicle. But I say its time to stop doing this. OK, maybe I don't really mean that completely, but listen to what I'm about to say. What if you had to choose: you could either pay attention to the age of the vehicle in inventory or its day's supply in the market, but not both? My professional opinion is that you'd be way better off knowing the vehicle's day's supply in the market rather than how long you'vehad it in your inventory. Think about it. If you knew from the first day that you had a vehicle in stock that it had a market day's supply of over 100 days, how long would you be proud of it? Answer this question: how long would you be willing to advertise a new vehicle for over market money if there was 100 day's supply of identically equipped vehicles in your market? I think the answer is that you probably wouldn't do it at all. So why are you doing it in your used car operations today? I can show any dealer that they have vehicles with 100+ market day's supply being advertised for over market money. The reason that our industry is willing to do this with used vehicles is that they don't understand what it means to do business in an efficient market. An efficient market is one where buyers and sellers have relatively equal knowledge about their choices and alternatives. Given this definition, was the used car market efficient before the internet? No. We often got buyers to take cars home for more money than they would have if they'd only known where other similar ones could be found around town for less money. There were always such vehicles; it was just that they were not easily found. Today, is the used car market efficient and getting more so every day? Yes. The internet gives shoppers access to the information they need to be aware of all of the available choices and alternatives for every vehicle. Now, think about this. Any market that's efficient is governed by the same forces and principles. It doesn't matter whether it is the oil, grain, cattle or automobile markets. If they're efficient, they're governed by the forces of supply, demand and price sensitivity. In other words, now that the used car business has become an efficient market, dealers are either sailing on the seas with the wind at their back or in their face, on a unit-by-unit basis, depending on the vehicle's supply and demand. When I say the vehicle's supply and demand, I mean its current availability (exact year, make, model and specific equipment) divided by its average daily retail sales rate over the last 45 days. Simply stated, if you have a vehicle whose demand outpaces its supply, shoppers will beat your door down, even if you price the car over the market and call it "ugly." Conversely, the market will punish you if you take a vehicle whose supply outstrips its demand and price it over the market. The simple time-tested principles of supply and demand never mattered when the market was inefficient and customers didn't know where other similar vehicles and better deals were to be found. Now that the market is efficient, I say that the vehicle's day's supply is actually a much better determiner of how proud your asking price should be rather than the calendar that marks the age of your vehicle in inventory.

If you asked any three top used car managers in the same market to produce a list of the best used vehicles for stock, would these lists look alike? The answer is, probably not. What does this say about the vehicles that are being purchased for our used vehicle inventories? It tells us that our lots are stocked with vehicles that represent the best units based on the opinion and judgment of the acquiring manager. Without a doubt, many used car managers possess excellent skills of judgment. The bottom line, however, is that these critical decisions are just that - judgments and opinions New technology has been introduced that shows you what, in fact, are the best used vehicles in your market without any judgment, opinion or debate. What makes this new technology different from existing stocking tools is that it incorporates information from the live local market rather than simply relying on a dealership's own past performance history. First, however, we must decide what the term "best used cars" means. For one dealership, best may mean vehicles that sell in the highest quantity in the local market. To another, best may mean vehicles that make the highest gross profit. This new technology allows dealers to solve the problem of what "best" means by simply using a slider bar and a scale of 1 to 5. With the setting at 1, the system produces a list of the highest volume used vehicles in the local market based on current sales. When the slider bar is set at 5, the system produces a list of vehicles that will generate the highest gross profit. Furthermore, this information is derived from a true "live market view" which sees every vehicle in every market, every second of every day. And perhaps most importantly, the technology quantifies the current supply and travel rate of every vehicle in real time. It even identifies vehicles that are sold as wholesale versus retail units. With this understanding of current supply and demand, sellers of used vehicles have a perfect view of what's hot and what's not. Let me give you an example. With the slider bar set at 1 (high-volume) and the model year criteria set between 2003 and 2007, the 10 highest volume selling used vehicles in the Chicago market are listed below: Vehicle Available/ Sold Avg Price Avg ODO Market Days Supply Dealer History 2006-2007 Chevrolet Impala 1,175 avail. 546 sold $16,243 28,006 mi. 97 In stock: 2 Sold: 3/60 2007 Ford Taurus 805 avail. 304 sold $12,738 27,511 mi 119 2004-2006 Ford F-150 1,545 avail. 702 sold $20,547 34,523 mi 99 In stock: 1 Sold: 0/60 2005 Nissan Altima 496 avail. 273 sold $14,411 42,879 mi 82 In stock: 2 Sold: 2/60 2004-2005 Chevrolet Impala 842 avail. 481 sold $11,988 51,413 mi 79 2007 Pontiac Grand Prix 431 avail. 250 sold $15,918 24,563 mi 78 In stock: 2 Sold: 1/60 2004 Pontiac Grand Prix 407 avail. 245 sold $11,940 58,451 mi 75 2004 Jeep Grand Cherokee 360 avail. 241 sold $14,846 52,948 mi 67 In stock: 1 Sold: 0/60 2006-2007 Ford Explorer 761 avail. 348 sold $21,150 23,592 mi 98 2007 Ford Focus 529 avail 233 sold $12,752 17,632 mi 102 In stock: 2 Sold: 1/60 Now, using the same 2003 to 2007 parameters, let's see the top 10 highest grossing vehicles today in the Chicago market by setting the slider bar to 5 Vehicle Available Sold Avg Price Avg ODO Market Days Supply Dealer History 2003 Hyundai Santa Fe 47 avail. 48 sold $10,733 66,622 mi. 44 In stock: 1 Sold: 2/60 2003 Dodge Stratus 51 avail. 52 sold $7,659 72,943 mi 44 2003 Honda Element 31 avail. 31 sold $13,462 62,347 mi 45 In stock: 1 Sold: 1/60 2006 Mercury Mountaineer 107 avail. 102 sold $21,508 24,799 mi 47 2006 Suzuki Grand Vitara 28 avail. 26 sold $16,483 16,065 mi 48 2004 Dodge Ram 2500 27 avail. 25 sold $19,893 64,470 mi 49 In stock: 1 Sold: 2/60 2003 Dodge Durango 83 avail. 74 sold $11,522 64,722 mi 50 In stock: 1 Sold: 0/60 2006 Mazda 6 32 avail. 39 sold $11,075 71,583 mi 50 2004 Chevy Aveo 52 avail. 46 sold $7,699 54,966 mi 51 2003 Honda CR-V 44 avail 38 sold $15,037 59,551 mi 52 In stock: 1 Sold: 2/60 If you're wondering why this second list represents the highest grossing vehicles, simply examine the relationship between the number of vehicles available for sale and the number of vehicles sold over the past 45 days. For example, on the first vehicle, the 2003 Hyundai Santa Fe, there are 47 currently available for sale, yet 48 have sold over the last 45 days. When you have a vehicle with high demand and limited supply, the vehicle becomes less sensitive to pricing pressure. Simply stated, when there is a greater demand than supply, you can price a vehicle high and it will still draw a crowd. As revolutionary as this technology is, it goes even further. It is not enough to simply know that the #1 volume and gross vehicles today in the Chicago market are the 2006-2007 Chevrolet Impala and the 2003 Hyundai Santa Fe respectively. You must also know the specific trim and equipment configurations within each year, make, and model. For example, consider the following possible configurations of the 2006-2007 Chevrolet Impala. Vehicle 2006-2007 Chevrolet Impala 2006 LS LTZ SS LT 2007 LTZ LS LT SS Can you tell which one of these possible configurations is the highest volume selling vehicle within the 2006-2007 Chevrolet Impala category? If not, you're likely to acquire the wrong vehicle even if you know that you want to purchase 2006-2007 Impala's. This new technology reveals that in order of volume the best to worst configurations of the 2006-2007 Chevrolet Impala are as follows: Vehicle Available Sold Avg Price Avg ODO Market Days Supply Dealer History 2006-2007 Chevrolet Impala 1,175 avail 546 sold $16,243 28,006 mi. 97 2006 LT 289 avail 125 sold $15,542 32,839 mi 104 In stock: 0 Sold: 1/60 LS 107 avail 66 sold $13,145 43,662 mi 73 In stock: 1 Sold: 0/60 SS 45 avail 10 sold $20,291 26,152 mi 104 LTZ 34 avail 18 sold $17,861 27,996 mi 85 2007 LT 543 avail 233 sold $16,444 24,463 mi 104 In stock: 1 Sold: 1/60 LS 98 avail 52 sold $16,529 20,300 mi 86 LTZ 41 avail 29 sold $18,843 24,856 mi 64 In stock: 0 Sold: 1/60 SS 20 avail 4 sold $22,661 13,262 mi The ability to see the vehicles in proper rank order beyond year, make, model, trim and equipment configuration is the key to making this technology pay off. It is not enough to compare apples to apples when you have the ability to compare granny smith apples to granny smith apples. And, when the technology also shows you which dealerships and private parties have these vehicles currently for sale in your market, managers can zero in on the specific vehicles that meet their profit objectives and purchasing criteria. This technology is already changing the used car industry. As we know all too well, every dealer has investment capitol tied up in used vehicles that could be re-deployed in better performing ones. Reallocating dollars from lower performing investments to more productive ones unleashes value for those dealers who are using this new technology as well as for the industry at large. Call out: What makes this new technology different; is that it incorporates information from the live local market;

OK, I'm going to go out on a limb to challenge a conventional notion. I'm really troubled by the concept of "core inventory". I'm not saying that each store doesn't have a certain natural traffic profile based on its brand, location and community, but I am suggesting that the notion of a "core inventory," while appealing and comforting, is fool's gold. The idea of "core inventory" suggests that there is a fixed profile of used vehicle inventory that produces optimal results. In other words, if you stock certain types of vehicles, you'll be well on your way to success. This notion makes the assumption that the automobile market place is steady and predictable. Without the assumption of steadiness and predictability, one could not legitimately suggest that dealers should stick to a defined core of inventory mix. However, the truth is that the used car market place, by definition, is anything but steady and, in fact, is extremely unpredictable. There are hundreds of factors that are at play in our environment that influence consumer's purchase preferences and they are anything but steady and predictable. Fluctuating gas prices, interest rates and weather patterns are just a few that constantly befuddle those that attempt to stock inventory today based on what has worked in the past. In fact, the ultimate irony is that dealers who purchase such solutions for the purpose of maintaining "core inventory" are usually doing so because they're dissatisfied with their own past performance. It seems insane to keep doing the same things and expect different results. As uncomfortable as it is, we need to let go of our security blanket or in the words of Thomas Freedman, our "olive tree" and accept the fact that in the words of Bob Dylan, "time are a changing." We must embrace uncertainty and accept the fact that what worked last year, last quarter or last month may not work today. This means that we must keep our finger on the pulse of the market place and take our cues from it in "real time" rather than from history. Our present inventory must always reflect the market at the moment. If gas prices are up, way up, we have to dump gas guzzlers in favor of compacts. If we're experiencing unusual amounts of snowfall, we must quickly respond with more 4-wheel drives. If silver cars loose their appeal, we must quickly respond by changing our preference of color choices. We simply can no longer afford the convenient comforting thought that what worked in the past will work today or tomorrow. The only things that are constant and predictable are death, taxes and change. Let's wake up, smell the coffee and realize that the notion of "core" is rotten.