When your cars have no buyers, how do you prepare for the future? The transfer of new-to-used, used-to-auction, and rental-to-auction has been at a two-month standstill, and the cars are piling up. Just six to eight weeks ago, demand was outpacing supply, and now we have the opposite.
Dale Pollak, an executive vice president of Cox Automotive, which owns North America’s largest auto auction company, wrote in an open letter to auto dealers last week:
“Six months from now, there will be huge, if not unprecedented, levels of wholesale supply in the market, cars are coming in, but they aren’t selling. Today’s huge supply of wholesale inventory suggests supplies will be even larger in the months ahead.”
Manheim auctions are already struggling to find places to park the cars heading to auction.
Nobody, not even the best in the industry, knows which way the wind will blow when the economy reopens. We know not when, nor how the economy may reopen. Another wild card will be how fast the unemployment rate reverses and what the current experience will mean for consumer confidence. Unlike other economic downturns, this one was a giant pause button, so it may be safe to assume that many of the recently unemployed will get rehired.
Dealers are holding onto that hope, and here is the proof: used-vehicle prices at retail as of mid-April are off by just 1 percent, while wholesale values are estimated to be down 10 to 12 percent according to Pollak. It’s an odd gap.
“Generally speaking, there’s a correlation between the movement of wholesale and retail pricing,” said Pollak, Cox executive vice president and co-founder of vAuto software. “But we’re at a strange moment in time where we’re not seeing that correlation.”
One reason could be dealers remain optimistic the economy will reopen soon and so have mostly held steady on retail prices. Some may be leery of marking down vehicles acquired at pre-pandemic prices.
Pollak sees this as an opportunity for dealers willing to mark pre-epidemic purchased vehicles down to liquidate stock while stockpiling cash to be used to purchase fresh inventory at discounted prices.
Conversely, a nightmare scenario for any dealer would be to think vehicles are still worth pre-outbreak values and then take in too many trades they can neither retail nor wholesale for a profit.
With such minute transactional data available, trend-spotting is impossible, and that is the point of frustration for many dealers.
Lease Extensions Could Help Stave Off The Glut Of Used Cars
Despite total factory shutdowns, automakers are doing what they can to limit the damage to the market. General Motors Co. and Ford Motor Co.’s finance units are already offering customers one-month lease extensions. This should help relieve the pressure on both the supply and on the consumers who are reluctant to visit showrooms during a pandemic.
Plug The leaky Holes In The Reconditioning Process
“It’s critical for dealers to recognize what may be an unpleasant truth; it might take all the cash you can gather to sustain your business today and put it in a position to be viable when the market comes back,” said Pollak.
When we all get back to work, be that May or even June, one thing appears certain: used cars will be cheap to buy but possibly harder to sell. In order to get aggressive in your pricing and out-sell the dealer down the street, you need to sharpen the pencil on your reconditioning costs.
Certainly, there will be more clean used cars to purchase, but the margin gains may really come from the ones you can buy for pennies on the dollar. These may have a few more cosmetic blemishes than you are used to buying. Good reconditioning will always add value, so it is a critical element in getting the best return. That said, every cent saved in reconditioning costs is profit on the back end.
Restarting the economy will be a collective effort. Now is the time to work with your reconditioning vendors and employees to plug the holes that leak profit from your reconditioning process. If you are still using a post-it note and whiteboard system, it’s time to get out of the stone age. Though some people may be initially reluctant to learn and use it, software exists to streamline operations and can permanently fix the profit leaks in any system.
When shopping for reconditioning software, consider AMT’s ReconMonitor, a reconditioning management platform built to serve dealers, auctions, and professional reconditioning operations.