As you are all aware by now there’s quite a bit of unease looming in the air with the one-two punch of COVID-19 and the current Oil Price War. We’ve taken some time to pull together information that we thought could be useful for your planning process as we navigate these shaky times.
I know I don’t need to remind most of you what we went through back in 2008-2009, but there’s no more resilient group of people in the world than the automobile dealers in the USA. We will push through this just like we’ve always done.
Our thoughts are summarized below.
Dealers across the nation are reporting that demand is on target with prior expectations at the moment, but it is a much different picture in localized regions and likely to move downward. Local areas that have been more affected by the spread of coronavirus are seeing a decline in sales. Seattle, for example, saw a 20% decline in auto sales last week.
We expect these localized trends to continue as consumers will be likely to exhibit behavior change when things get “close to home”. Also, on a national level, as more celebrities/influencers contract the virus and more organizations/governments take measures to contain it, media coverage will expand and consumers will likely take it more personally, even if it is not yet local. This will likely help propel a downward trend nationally.
Morgan Stanley analyst Adam Jonas says he expects the outbreak to send U.S. auto sales down 9% this year as consumers delay large purchases. Prior to the virus he expected a decline of 1-2%.
It’s unclear at this time whether this will be a quick event or something that plays out over a longer period of time.
Recommendation: Plan for a Range of Scenarios
Right now there is a ton of uncertainty and doom and gloom in the media. Don’t get too caught up in the worst-case scenario and remember to think rationally. Good leadership should plan for a range of scenarios, not just one. We recommend reading the attached report published by McKinsey & Company. This report does a great job of briefing the current situation and range of possible scenarios at a global economic level based on the current facts.
Also, stay informed and pay attention to news and trends for your local market around containment efforts impacting your customers like school/work closures or remote work mandates. Let your leading indicators, like floor traffic, help guide you in your decision making.
Recommendation: Be Hyper-focused on Inventory Levels
If things do slowdown it’s important that you maintain appropriate inventory levels and don’t get stuck with too many units that are destined to age out. Similarly, you don’t want to miss out on a quick recovery because you are too short on inventory right at tax refund time.
To help manage this balance, pay particular attention to units sold vs units acquired at a more granular level than you typically would. We’d recommend your team touch base on this daily as long as market volatility is high and be a touch towards the short side on how many units you’re stocking to accommodate for a likely slowdown. The closer you are to these numbers the quicker you will be able to take corrective action if needed.
A good tactic here could be to pay attention to daily sales compared to prior periods and to project 7-day rolling sales, 14-day rolling sales, and 21-day rolling sales into monthly sales rates. For example, if you sold 10 units in the last 7 days, that would translate to 42 units (10/7 x 30) in a month. Similarly, if you sold 25 units in the last 14 days and 38 units in the last 21 days that would equate to monthly rates of 53 units (25/14 x 30) and 54 units (38/21 x 30), respectively.
You would compute these values for every rolling category every day (i.e. 7-day rolling monthly rate, 14-day rolling monthly rate, etc.). You could then plot each of these rolling monthly rates each day to see if things are slowing down. This would be good to review in the daily meeting mentioned above.
A good rule of thumb would be that your current inventory should not greatly exceed those monthly values. So if you 7-day rolling sales equates to a sales rate of 42 units a month, and you currently have 70 units on hand, you’re likely going to experience unwanted aging on at least 20 of these units.
Note that if things are changing fast in your area, it will take time for the longer rolling periods to pick them up, so pay particular attention to the fluctuations in the 7 and 14-day values. You could use even shorter rolling periods as well, just know that they will be a little more all over the place as they could relate to the day of the week and are just generally have more noise as they are a single data point.
Also, if you do see signs of the virus becoming a bigger concern locally (school closures, spike in cases, local quarantines, cancelation of activities), be sure to adjust levels and cut back on auction purchases in anticipation of things slowing down a little. The 20% decline in Seattle might be a good reference point if things start to hit closer to home for you. (Note this number can change over time, so it would be a good idea to keep an eye on places that are harder hit and see what they are experiencing as you are planning to have a concept of the downside)
Recommendation: Preserving Cash is King in Uncertain Times, Be Hyper-focused on Advertising ROI
In times of great uncertainty and fear, retail marketing effectiveness can take a huge hit as consumers can become distracted and too worried about “bigger problems” to pay attention to your marketing efforts. This is a large variable expense that you should become hyper-focused on now. We’d recommend setting up a daily meeting to touch base on advertising spend and performance as long as market volatility is high.
We’ve attached a report from Dealer Teamwork that has some good comments on short-term branding and consumer behavior due to the virus that is worth a read.
While things may slow down initially, we do believe that there will be a post-panic boom. This is likely to be fueled by pent-up demand and historically low rates. Its too early to make any comments on the timing here but do believe these conditions will prove to be favorable in the future. Stay the course and use any downtime to focus on all your basics that have served you so well in the past. Tommy Gibbs & Jarrod Tanton
We’re here to help
We wish you and your team the best during this uncertainty. Be safe, use common sense, and protect your health. Don’t hesitate to reach out if we can be of any assistance in any way.