By now, all dealers have experienced the mind-bending twists and turns of the 2020 used car market: sharp rises in demand, the scrambling for inventory, the pressure of overpaying for vehicles mid-summer, and the wide margins between wholesale and retail. Some played the game well and doubled down on their inventory back in the Spring, setting them up for success. Others went on pause and then were subjected to the higher prices of used inventory leaving them with little to no profit margins and struggling to keep up.
Now here we are, entering the final months of the year and we’re far from normalcy, but we do have enough hard data accumulated along with insights so that dealers can rally around sound strategies rather than take actions based on chance. Used demand continues, although perhaps a bit lighter than in the summer, and low interest rates, additional stimulus and delayed new car manufacturing supply all feed into the push for used vehicles. The need to have a smart, strategic inventory management system has never been more paramount. It’s also never been more accessible. With the right approach and newer technology solutions in place, dealers can gain more independence and control over their inventory not just to survive the pandemic, but to sustain and thrive for years to come.
Despite some unusual market trends, some things do hold true and can and should be applied today:
1. Consistently sell at a 1:1 new-to-used ratio
It’s a natural hedge against market volatility, new car supply, interest rates and unemployment. Even if margins are lower as wholesale prices reach record levels, there’s still a lot of money to be made in backend products and warranties, not to mention the added residual service-related business every sale represents.
2. Keep this “rule of thumb” in mind for less expensive cars
Another consistency (in any market condition) is that pre-owned margins can increase with less expensive cars if dealers apply this “rule of thumb”: for every $1,000 you can lower your average cost of sale, your profits increase by an incremental 10%. A healthy supply of <$15k units on the lot will significantly help overall margin profitability.
3. Remember: the first 2 ½ weeks a vehicle is on your lot are key
Keep supply up and apply pricing strategies for profit in your first 2 ½ weeks. When the market is in a short-day supply situation, set asking prices higher in the first 2 ½ weeks. Dealers that are doing this are making substantial margins.
Dealers also need to stay nimble and creative.
4. Take advantage of the cars coming through the service bay.
Are there new incentives that would enable you to pull negative equity customers forward or substantially lower their payments? Look at the service drive as another auction lane on your own property.
5. Think bigger and broader.
Dealers need to go beyond their local market and capitalize on trade opportunities with other dealers and consumers.
6. Maximize your own inventory.
For groups or dealerships with multiple rooftops, take advantage of some (legal) insider trading. What isn’t selling on one lot might be in demand on another.
7. Use the latest solutions to make inventory management easier.
Sourcing inventory beyond mobile or virtual auctions doesn’t mean dealers need to sit in front of a computer all day researching and bidding on vehicles. Using a platform like CarOffer, dealers can use automated features that set specific pricing, model and volume needs and the trades happen online while dealers can focus on other parts of their business.
Stay adaptable in 2020 - and beyond
The challenges and unpredictability of the market today has led to a greater level of autonomy among dealers and an increase in the adoption of innovative solutions. That’s a good thing. Because if the shock-and-awe factor of 2020 has taught us anything, it’s that we need to be prepared for anything and that requires quick adaptation, bold actions, and self sufficiency.
Founder + CEO of CarOffer