The report below first appeared yesterday on LinkedIn as a market update report posted by Rapid Recon, from an interview with preowned performance improvement consultant Ed French to address midsummer market perspectives. Ed is president and principal consultant of AutoProfit, and he is also a member of the Board of Directors for used car retailers TruWorth Auto in the Indianapolis, Indiana, area.
The market's adjusting, for reasons of affordability, which has squeezed out a large segment of customers with prices up now between 15 and 25% since January. The No-Sale rates at auctions are rising to where they were in the high 80% and now have adjusted to the 50 and 60 percent range. As cars moved through the wholesale channel, of 10 that went to auction 60 days ago, eight to nine sold. Now five to six are selling, so the No-Sale rate is increasing. Mostly this is because the quality of the cars going through auctions is dropping.
Part of what we see at auctions is because dealers have developed other channels of supply. But frankly, what’s happening is a generalized flattening of sales rates; they couldn't continue to rise. For example, retail listings are increasing as the number of vehicles listed for sale nationally across third-party sites is up. That's a function of availability. When dealers source from a broader spectrum, sales rates are not increasing. They're flat or declining slightly in specific segments.
Regarding new vehicle inventory, the SAAR is projected to be above 16 million, only down two million from the all-time highs. OEMs are building vehicles, and dealers are very resourceful in selling them before they arrive, therefore keeping the new vehicle inventory at an exceptionally low days’ supply.
The used car sales increases we had were from a lack of new car inventory. And that is where the market is the most volatile. The current wholesale market price versus the market reports are the devil.
The current wholesale market price versus the market reports are the devil.
Here’s what we must watch: Because auctions don’t count No-Sale activity, it’s not reported in their market reports; we see what’s been sold – not the volume that drew no buyers. That’s incomplete data, as far as I, as a dealer, am concerned.
Today we’re seeing fewer bidders on the same inventory. The sample size of a market report might have been 20 vehicles like yours now, with perhaps two or three as No-Sale units. That tells you that your late model inventory is at risk of a higher market day supply than 60. So if I bought a load of cars with a 90-day market supply, I’m in trouble because prices will tank.
And the 90-market day supply was based on a 30-day turn, which is creeping up. If the turn goes to 40, your market-day supply just went to 100. I see dealers who bought vehicles in April and May that we’re identifying at risk in July. We couldn’t have recognized that earlier because the market was so hot, but now it’s cooling. Dealers need to get ahead of the vehicles with a higher market-day supply with costs of $25,000 and up because they present the most risk. Dealers and used car managers should be looking at strategies for working out of this inventory.
Act promptly, today
This is not the time for a slow response. It’s time for radical adjustments, some major price-cutting, some major merchandising. If you cut a little here and there over time, hoping to the sweet spot in this market, dealers will bleed from a thousand papercuts.
For example, a car you bought for $25,000 in April when the real market for it was $22,000 is by June worth $23,000. The market is declining faster than the sales rate. I’m encouraging my clients to identify their highest risk cars and act now to stop the thinking they can still get premium dollars for the vehicle; you can no longer get April and May retail money in July.
Have your cash availability ready to go when the market softens even further than it is right now. The market will continue softening until we get to where it was at the end of 2020.
As we advance from July, new-car inventory volume will increase. Inventory will be sold on a just-in-time basis. Speaking specifically about used cars in Q4, that inventory will mirror the market of 12 months ago, which is the target to aim for now.
How to advantage their sale
Finally, you must get these cars sale-ready, presenting well to shoppers – and today’s buyer is asking about reconditioning as they never have.
Did your reconditioning increase the propensity for you selling that car? Did every dollar spent for
reconditioning return $1.50? Does your pricing strategy, including reconditioning, return $1,100 to $2,500 in gross because I spent $750 on recon? That’s 1.5%.
Dealers do well to ask whether their reconditioning investment is helping sell that car, or is it hurting its saleabillity? Look into these variables: Does everyone, meaning customers, that touch the car know what you did to recondition it? Insist that your recon and its merchandising be transparent in the virtual world. Does your pricing strategy reflect that the vehicle is reconditioned? Lastly, if you did not fully recondition the car because you paid too much for it – and I see this happening too frequently – that’s a problem.
But if you spend another $1,000 now to recondition the car as you should a $23,000 car – and as a percentage of that car cost, that investment is negligible -- you’ve now built value into that car and it becomes saleable. How can we ask premium money for vehicles that aren’t locked down and ready? Customers will walk.
Reach Ed French via autoprofitllc.com.
Visit Rapid Recon via www.rapidrecon.com