This year, we’ve all watched demand for used vehicles gather strength and momentum with each passing month in 2020. And while the sales opportunities have surfaced, not all dealers have been able to take advantage of the situation.
I’ve heard some dealers say, "I'm not buying much right now; this market is too volatile!" or "I need cars so badly that I am paying whatever it takes to just to keep my lot stocked." And now, as we are turning the corner toward the new year, I’m starting to hear: "I need to ramp up my inventory for tax season."
But is 2020 a Safe Year for Risk-Taking?
Whether dealers’ responses to stocking inventory are seasonal or pandemic-related, the gut reaction is often to do what everyone else is doing, especially in times of uncertainty, because it feels more secure.
Used car retailers and inventory managers have to toggle between two different markets —wholesale and retail— all day long, making the decision process on inventory management convoluted, even on a good day. Throw in a pandemic, and now there’s more variance between these two markets than ever before. As a result, doing anything different than what the rest of the herd feels terribly risky...
But retailers should remember:
This Year’s Wholesale Market Has Been Volatile
The wholesale market has been very volatile in 2020, ranging from periods where average auction prices were a steal, then overpriced, and back down again. As an example of recent market volatility, consider the fact that the wholesale market has seen nine consecutive weeks with a decline in prices over the past 2+ months, according to Black Book's recent market insight report.
Retail Prices are Sticky & Display Very Little Volatility
Take 2020 for example. If there was ever a year for retail prices to fall off a cliff, this would be it. Yet in March when the country shut down due to the pandemic, the average weekly retail price only dropped approximately $900 over the 87 day period that represented the retail market's peak to trough.
More recently, over the last nine weeks when wholesale values consistently declined, Black Book reports that retail prices actually went up! The takeaway: it's clear that a decline in wholesale values has not necessarily led to a decrease in retail listing prices. At least for 2020. In fact, the correlation between the two markets has been weak.
What Does it All Mean? It’s a Buyer’s Advantage...
My position is that, due to uncertainty caused by COVID-19 and this year's election, the wholesale market is feeling significant overreaction that has created a great disparity that savvy buyers can take advantage of.
Remember when some industry experts advised dealers to convert pre-owned inventory to cash, only to advise the opposite 30 days later? This great overreaction caused dealers to panic sell, pushing wholesale values so unreasonably low while retailers held firm on the retail pricing. This dynamic created a buying opportunity that allowed substantial front-end profits on auction cars.
I sense we are about to find ourselves in that same position if we aren't already there.
An Opportunity is Arising for Substantial Retail Profits
Since we serve retailers at CarOffer, we track the wholesale and retail market and watch as the two markets move independently. Interestingly enough, our data shows that the average margin that exists between our dealer's internet sales price and average auction prices are as wide as we've seen them since early May. As of mid-November, our dealers are seeing a 16.3% margin between average wholesale prices and the internet sales price. In rough numbers, it represents approximately $3,900 in the available margin on a $24,000 vehicle.
Given the consistency and pace at which we have seen retail prices change this year, as well as the spread that we are seeing between wholesale and retail, buyers have an opportunity to buy cars at auction that generate substantial retail profits. Dealers that focus on sourcing their core inventory and managing their days supply by model and price band will be pleasantly surprised.
Those dealers who are more concerned with depreciation risk should not stop buying cars at auction, but should instead focus on lower price point cars as they have significantly less downside and will see greater ROIs. Remember that a 2% decline in the value of a $15,000 car is only $300. Furthermore, those less expensive cars that age will be sitting on the lot come the new year and the beginning of tax season.
An Optimistic Year Ahead
As retailers, it can be difficult at times to see the forest from the trees especially when you have to keep tabs on two different and ever-changing markets. From closing car deals to managing staff, cash flow, and payroll, it can be hard to find time to think strategically and act boldly.
But remember this: dealers that can be opportunistic when others are on the sidelines are staring at a rare window of opportunity. My advice? Don’t get caught overspending for cars and underperforming when the market is at its peak.
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As Vice President of Dealer Relations at CarOffer, Nick Gerlach brings experience, expertise and thought leadership with his 10+ years in the industry.