CARY, N.C. -

Used supply may be improving, but the inventory situation for many used dealers is still a cause for concern and will most likely remain so during 2013.

In light of this, industry experts offered their tips for how dealers should best capitalize on improving pre-owned supply.

“Many dealers won’t need to change a thing.  Their existing solid processes will be rewarded with increased volume and profitability.  Others are a long way off.  In fact, it could get uglier,” said Les Abrams, academy instructor for NADA University.

“Typically, increased supply is associated with a drop in prices.  Dealers who have ignored their inventory will be facing even larger losses to get it right.  Fortunately, it is not too late.  Start now and you will be primed for success.”

Black Book managing editor Ricky Beggs explained that with loosening supply, dealers should begin to consider increasing their total volume available, as well as “expand the types of offerings with additional brands, ages of units, segment types, etc.”

Which segments should dealers consider ramping up the most?

NADA Used Car Guide executive automotive analyst Jonathan Banks noted it will be particularly important this year to “understand the segments where supply is set to improve and those where it will remain tight.

“This will play a pivotal role in determining how aggressive to be in bidding at auction or in settling on a trade-in value,” he added.

NADA shared it predicts late-model supply will increase the most for the following segments (relative to calendar-year 2012):

—Luxury compact utilities (e.g. Audi Q5, BMW X3): 31 percent
—Subcompact cars (e.g. Honda Fit, Ford Fiesta): 30 percent
—Compact utilities (e.g. Chevy Equinox, Toyota RAV4): 16 percent
—Luxury midsize utilities (e.g. Acura MDX, Mercedes ML): 16 percent

On the other hand, late-model supply for other segments, such as large SUVs, large cars and midsize pickups, will improve by less than 10 percent, or it will actually decline, according to Banks.

Where units up to eight model years in age are concerned, subcompact cars, luxury compact utilities, and compact utilities are the only segments set to see supply grow this year (29 percent, 28 percent and 7 percent, respectively.)

For these older units, “Midsize utility, large pickup, large SUV supply will remain relatively tight,” Banks added.

Banks also cautioned dealers not to “lose focus on selling older units, as there will still be strong demand for these vehicles.”

“As new sales continue to rise, so will trade-in volume, a significant percentage of which will be older than 5 years in age. As employment continues to gradually improve, so too will the release of pent up demand for hourly wage consumers.  These folks will most likely replace their current vehicle with a more affordable pre-owned unit older than 3 years in age,” he continued.

Also, according to the J.D. Power and Associates’ most recent Vehicle Dependability Study, the report returned the lowest problem rate since the inception of the study in 1990.

“Older vehicles don’t carry the same degree of reliability concern today that they did just a few years ago because of continuous advances in quality and dependability which will also naturally improve demand,” Banks concluded.

‘Preparing’ Your Dealership

But getting the right inventory on your lot is only the first step to truly cashing in on the improving supply situation.

NADA University’s Abrams offered Auto Remarketing a few strategies dealers can employ to prepare for the forecasted improved used-vehicle supply this spring.

First, Abrams stressed that pricing will remain particularly important this season, especially when being used to reduce or eliminate aged inventory.

“Price them (inventory) at a profit but be committed to do whatever it takes to get them gone in 30 days, no matter what the loss.  If not, when the new-car supply returned, you would have an unsellable vehicle.  To make matters worse, as the used supply loosens up, you will be in no position to ‘stock up’ for the spring market,” Abrams said.

vAuto’s Dale Pollak stressed dealers should “make pricing a primary focus,” as more inventory becomes available.

“In today’s market, retail pricing must maximize a vehicle’s appeal with buyers while preserving its profitability potential. As a unit ages, these can become competing objectives. This is why dealers should align their used-vehicle prices to the current market at least once a week. This best practice helps dealers retail cars more quickly and achieve their ROI and profitability goals for every car,” Pollak further explained.

Abrams went on to stress that though this issue may not be top of mind for dealers, “Dealerships with aged inventory will be severely hampered,” as used supply loosens.

For example, Abrams explained “the holding costs to stock a vehicle will surpass the profit opportunity somewhere between 45–60 days.”

Furthermore, managers or buyers may be hesitant to take advantage of a well-priced used unit in the lanes if they already own one or more on the lots, Abrams explained.

These tendencies may make dealerships less competitive while buying in the lanes.

On the other hand, Pollak noted that with softening wholesale values and more inventory, dealers may think “used cars are cheap, so I’ll stock up,” but the vAuto founder strongly cautioned against this mindset.

“This can be a dangerous impulse that overlooks the time-sensitive nature of a dealer’s investment in used vehicles. In general, dealers should evaluate every vehicle based on its ability to deliver maximum return on investment and profitability in a retailing window of 45 days,” he said.

Also, there may be a way to help avoid this problem all together. This spring, it will be particularly important to monitor the market days’ supply on used vehicles, says Pollak — a practice that may help dealers turn their lots faster.

“This metric helps dealers recognize the amount of competition they face to sell a car quickly. A higher market days supply means there are a greater number of competing units available in the market than a vehicle with a lower market days supply,” Pollak said.

Pollak suggested dealers aim for a 65- to 70-day market days’ supply average for your overall inventory.

Also, though with used inventory increasing, dealers may be focusing on their sales team, they may also want to consider their service department.

Abrams explained that a slow reconditioning process many hinder a dealership’s preparedness for a better used-car supply environment, as well.

“Examine your reconditioning processes.  The NADA guide is three days including cleanup. Do not allow it to take longer.  Request/demand service staff to work after hours if needed,” Abrams said.  “Add a dedicated used-car tech.  Do whatever it takes.  Do not take no for an answer.   Slow recon will debilitate a used-car department and leave it unprepared to compete effectively.”

Lastly, the NADA University instructor touched on a hot topic as many new Web-based inventory management solutions hit the market.

Abrams said dealers must “embrace technology” this spring.

“The Internet has transformed used-car retailing.  Shoppers have access to vast amounts of information.  They are conducting online research and are no longer driving from lot-to-lot. Technology can help dealers tap into customer demand,” Abrams said.   

Also, with potentially more used inventory to sell, a dealership much be prepared to ramp up its marketing efforts.

Abrams said Internet visibility is key.
    
“The right car at the right price will shine on the Internet.  Make sure you cover the basics: quality photos, robust descriptions, compelling videos and quick response times,” he noted.

Lastly, economic factors, such as high gas prices, will most likely have a direct affect on dealerships in the coming months. Factors like these also have a direct connection to which used models dealers should keep an eye out for.

“Rising gas prices could put a crimp on demand in less fuel efficient used-vehicle segments. Dealers who typically bulk up on SUVs and trucks prior to the summer may find diminished demand if gas prices continue to climb,” Pollak said, cautioning dealers to mind outside economic factors.  

“The good news: dealers can readily see when retail demand for vehicles tapers by tracking buyer demand and interest via data from classified sites like AutoTrader.com and Cars.com,” he concluded.

Sarah Rubenoff can be reached at srubenoff@autoremarketing.com. Continue the conversation with Auto Remarketing on both LinkedIn and Twitter.