Without exception I have multiple conversations each week with dealers and managers about how to avoid wholesale losses created by dumping inventory in the wholesale market as they have aged out.
The first point I always make when this conversation comes up is that if you have cars aging on you and you are dumping them in the wholesale market and losing money then you are totally on the wrong path. If you are paying attention to the right things and if you understand that you are in the retail automobile business there should be very few units you blow out and lose money on. It’s about retailing cars before they get to the end of the cycle.
5 Keys To Eliminating 99% of Aged Units and Wholesale Losses:
1. It starts by selecting the right inventory. Unless you are an exception to the rule, most of those aged units are purchase cars. Therefore, you are obviously buying the wrong stuff. I continue to be fascinated at how many overage cars have been purchased from the likes of Enterprise Rent-a-Car. If you were using tools like vAuto, Auto Trader and Auto Count USA then you wouldn’t be buying some of that stuff that’s killing ‘ya.
2. Tackle my "Life Cycle Management" concept like your life depends on it, because it does. You will never get your inventory under control as long as you allow all units to have the same number of days on the shelf. You have to identify and acknowledge what each car is on day 1 not day 61. Can’t you spot a Zebra in a herd of horses? Acknowledging what you are dealing with is a major step towards improving your used car turn and eliminating problem cars. Why is it so hard to understand that your most profitable car is a 20 day unit and that it goes down in value every day it sits after that?
3. Making smart and quick decisions on trade-ins you bury yourself in. Happens all the time. You step up for whatever reason, but since you don’t use "Life Cycle Management" you treat these units just like every other unit. Look Einstein, if you buried yourself in it on day one it’s only going to get worse. The best thing you can to is price that unit below market and make it disappear.
4. Don’t get too excited about a successful short term run. It will kick your butt every time. Stop it. All of a sudden you have a strong 30 day period when you sell 10 XYZs. For whatever reason they were hot. So, what do you do? You run out and buy 20 more of those bad boys. And guess what happens? They sit and they sit. And now you have some more huge wholesale losses staring you in the face.
If you go back and analyze those first 10 you popped out like hotcakes you will probably find something unique and special about those units. Might have been miles, might have been color or it might have been the price of gas during that stretch that influenced those sales. I’m not saying you shouldn’t get excited and try some more of those hot babies, but you need to be smart enough to keep your enthusiasm under control. You have much more control when you take them in small doses rather than choking yourself to death.
5. Understand that you are in the retail business. I mentioned this briefly back in the second paragraph. You need to make sure you are pricing your cars to market early enough and attractive enough to find a retail buyer early in the life cycle. In most cases, if you analyze your aged units you will discover that for whatever reason you overpriced them too long. Key words here are "too long." Sure you might have them priced correctly now, but they are now stale, the sales staff knows they can’t make any money on them so they walk around them.
Bullet point five takes me to my favorite subject CarMax and the reference in the title of this article to 99%. The quote below is directly from CarMax’s 2012 Fiscal Year Annual Report:
"Our proprietary inventory management and pricing system tracks each
vehicle throughout the sales process. Using the information provided by this system and applying statistical modeling techniques, we are able to optimize our inventory mix, anticipate future inventory needs at each store, evaluate sales consultant and buyer performance and refine our vehicle pricing strategy. Because of the pricing discipline afforded by the inventory
management and pricing system, generally more than 99% of the entire used car inventory offered at retail is sold at retail."
Re-read the last sentence. Has it sunk in yet? It’s all about figuring out how to retail a car. They retail 99% of what they put on their retail lot. They figure out how to find a retail buyer. When you are retailing your retail pieces you don’t have to worry about aged units and wholesale losses. That’s all I’m gonna say. Tommy Gibbs