With a record-breaking 2015 under our belts, and 2016 shaping up to be another strong year for new-car sales, many dealers are feeling confident for the coming months.
If you’re in the used-car business, however, April’s showers may not bring May flowers unless you have the right tools and strategies in hand.
Profitable trade-ins and eager buyers will begin to disappear as the traditional tax return-driven sales cycle comes to a close, while diminished profitability and increased inventory are forecasted.
Proprietary data collected from more than 2,000 dealerships shows that average total gross profitability for used-vehicle sales peaks in March and declines through the remainder of the year — a trend that will be exacerbated by the more than 800,000 lease maturities hitting the market. A prepared dealer will have plans to take advantage of this inventory influx.
As the dealership network weathers this influx of lease maturities, it’s likely that as supply rises and dealers are forced into a period of heightened competition, gross profits will decline.
To best position themselves for success — and, in some instances, survival — dealers must rely on compelling data from their technology partners to shape strategic plans, identify lucrative remarketing opportunities and develop profitable exit strategies for each vehicle they acquire.
The key to maintaining front-end gross is to evaluate historic and market data at the point of appraisal. Your priority should be identifying “core” vehicles: the models that sell fastest, most consistently and most profitably. These vehicles are prime remarketing opportunities, ensuring quick and profitable sales and reducing overall risk of wholesale losses.
A top-performing dealership’s inventory is composed of 40 percent to 50 percent “core” vehicles. An average dealership’s inventory hovers around 29 percent and drops lower when accepting non-core trade-ins in exchange for closing new-car sales.
In addition to using technology and data to identify a store’s — or group’s — most lucrative remarketing opportunities, dealers must resist the urge to succumb to tunnel vision. Too often, sellers commit to a one-size-fits-all approach and stock only their store’s brand or only vehicles that have done well in the past.
As the “traditional” customer continues to evolve and has significantly more choice, it’s critical that managers leverage a fully integrated inventory management platform to ensure that science, rather than anecdotes and gut feeling, is driving their vehicle-acquisition strategy.
In today’s fast-changing market, a fully integrated inventory management platform is a requirement. Use a fact-based approach: Analyze purchase behaviors not only at stores, but also across brands, group partners and geographic regions.
Build a data-driven strategy
The average dealership close rate was 49 percent in January, and after rising to 51 percent during tax-refund season, it declined steadily — as was the case with front-end gross — through the end of the year, dropping to 46 percent in December. Often, this close-rate decline is preventable by ensuring vehicle pricing is aligned with market trends.
Many dealerships stocked up for the planned increase in used-car business in February through April. As such, now is the time to consider an exit strategy for those remaining surplus vehicles by building an aggressive plan to divest inventory as sales begin to slow. Data demonstrates that used-vehicle front-end gross and dealership appraisal close rates decline in the second half of the year.
As a means of developing an inventory reduction strategy now, before the inevitable pressure of lower sales volumes hits, dealers should aggressively develop a data-driven plan. Dealers can use technology to determine each vehicle’s profit level per day and then carefully monitor it throughout the month.
To prevent significant wholesale losses, dealers should develop a 30-day strategy for moving inventory and plan to keep vehicles on the lot no longer than 40 days to avoid wholesale losses. If a store typically doesn’t do well with a particular model it acquires, sellers can lean on technology to achieve a balance between discount and profit based on current trends.
As sales begin to decline, aggregated inventory management data demonstrates that reconditioning costs will begin to rise, aside from a dip through the summer. To effectively reallocate assets and make use of free cash flow during that temporary dip, dealers should more actively pursue the use of digital marketing to highlight both core and non-core vehicles that may be approaching that 30-day mark.
By using a data-driven strategy to price vehicles in line with prevailing market trends, sellers protect themselves by increasing vehicle turns, reducing the likelihood of profits eroding from wholesale losses.
As the “perfect storm” of second-half stagnating sales, increased in-market vehicle availability and a slackening in consumer demand hits the market, smart dealers will increasingly look to data to assist in:
a) Monitoring reconditioning costs to keep them down in order to free cash for marketing-related activities
b) Leveraging market data to make solid retail or wholesale decisions at appraisal
As wholesale losses increase in summer months, dealers should rely on data to make smarter inventory decisions and to take in core vehicles or create an exit strategy for newly acquired vehicles, such as transferring them to an affiliated store that sells a particular model more effectively or evaluating those tagged for wholesale accordingly with wholesale pricing in mind.
Pricing vehicles appropriately — and in line with market, brand and group trends — needn’t carry the same level of “accuracy” as the average five-day weather forecast. The use of inventory management tools creates visibility across dealerships, positioning them to turn vehicles for a profit faster and reducing the likelihood they’ll hold onto vehicles too long, negatively impacting grosses.
Technology is the great enabler: It allows dealers to seamlessly link across departments and empowers them to integrate complex data sets, nurturing customers and prospects throughout the sales process.
Following heightened first-quarter sales, inventory levels rise by a total of 10 percent through year’s end. Use a technology platform to:
a) Decrease the amount of time vehicles remain in inventory
b) Devise an exit strategy for vehicles that are sitting on the lot
c) Maximize front-end gross profits
Careful examination of a vehicle’s daily profitability is a dealer’s secret weapon.
By using technology to seamlessly link and drive profitability across departments, dealers are able to more effectively generate greater revenue on the sales floor and in the sales drive. For example, with a data-mining platform that constantly scans a dealership’s DMS for customers in a position to spend money at that store, a dealer can match a customer interested in a particular make and model and sell the vehicle to him or her prior to making it available to the public. This is an extremely powerful tool that significantly reduces the time and resources expended during the sales process.
To prevent significant wholesale losses, develop a 30-day strategy for releasing inventory. Consider transitioning inventory to a group partner. If a non-core vehicle has lingered too long, parse data to create an exit strategy, achieving a balance between discount and profit based on current trends.
Effectively engaging a comprehensive analytics suite that leverages technology not only to capture data, but also to make informed decisions is how the best-performing dealerships weather the storm. Inventory management technology should be integrated with CRM to ensure matches are made and potential buyers are engaged before competitors have a chance to engage them (data mining) and also to nurture them through the sales process (CRM).
The storm is predictable
Lease returns are forecast to flood the market in 2016, and used-car sales will be the key to weather the storm. Dealers who effectively use the data and the technology available to them will be better positioned to maintain volume and gross.
The approaching down cycle is predictable, but if a dealer is properly prepared, it can do better than hunker down and ride out the storm. Inventory management, vehicle merchandising and market-facing strategies are all individual aspects of creating a strong and effective strategic plan. By preparing with core modeling, smart inventory purchases, exit strategies and data-driven decisions to maximize profits, your store can emerge stronger than before.
Mike Waterman is DealerSocket’s divisional vice president and can be reached at email@example.com. The full Market Action Guide can be downloaded at dealersocket.com/MAG.