Inventory Management For The New Economy
With pre-owned inventory becoming essential to the survival of many dealerships, the need for effective inventory management is greater than ever. A dealership can no longer afford to stock its lot with the vehicles that come in on trade and wholesale whatever doesn’t move. In today’s market it is essential to have the right inventory, at the right time, at the right price, otherwise you’re sending business to the dealership down the street.
The right vehicles
The first step in finding the right inventory mix for your dealership is to examine your dealership and your market. The cars that sell well in Miami don’t necessarily sell as well in Chicago; and what flies off the lot at one dealership may sit in inventory for three months at another. The important thing is that you make a careful examination and keep an open mind. What was once considered auto dealership industry dogma may now be outdated.
Traditionally, dealerships have stocked their lots with used vehicles of their own brand and supplemented their inventory with trade-ins from their customers and the wholesale lot. This has worked well in the past, however, the problem with this way of stocking your used car lot is that it limits your ability to supply the used vehicles customers want if they happen not to be of your brand. As Dale Pollak, founder and chairman of the board of vAuto says, “It’s important to understand that there is no franchise today that holds a monopoly on all the hot used cars in the market.”
Not too long ago, before the advent of the Internet, if you were a Chevy dealer and the hot car in your market was a Subaru Impreza there was little point in stocking that car because very few customers would come to a Chevrolet dealership looking for an Impreza. The Internet has changed all that. Now, when a customer in Denver searches for a Subaru Impreza they go to a search engine, such as Google or Yahoo!, and type in “Subaru Impreza Denver” and the search engine finds all the Imprezas for sale on the Internet in the Denver area. “That search engine pays no regard whatsoever to your franchise brand. Your Subaru Impreza will show up right next to all the other Imprezas from all the other Subaru dealers, and everyone else that has one,” explains Pollak.
There are pitfalls, however, to stocking your lot with vehicles that are not of your core brand. Pollak calls it the “gotcha moment.” As he describes it, “Every dealer’s had one. They’ve gone out to buy a vehicle that’s not of their franchise brand understanding it to be hot. Only to have the bitter experience of learning that it didn’t have a certain trim or equipment that it really needs to have, like a navigation system or rear entertainment.” Technology, however, has made it possible for any dealer to find out exactly what are the hot cars in his or her market, regardless of make or model. “Today there’s technology out there that will allow a dealer to see what are the hottest vehicles in their market in real time and see those vehicles at a level of specificity of year make model trim and specific equipment that greatly reduces the ‘gotcha’ risk,” continues Pollak.
While technology has made it easier to be sure that you are purchasing the hot cars in your market, there are other risks that cannot be solved simply through the use of technology. Tim Zierden councils that if dealers veer too far away from their core inventory, “they lose the focus on what works for them all the time and they end up with nothing that works for them at all.”
The right mix
Exactly what is the right mix of vehicles? That is a tough question to answer. To begin with, no one brand dominates the used vehicle market. The top 10 selling vehicles on eBay Motors over the past six months are:
- Ford F150/F250/F350
- Ford Mustang
- Chevrolet Corvette
- Chevrolet Camaro
- BMW 3-Series
- Jeep Wrangler
- Honda Civic
- Ford E-Series Van
- Cadillac DeVille & DTS
- Honda Accord
Every market is different, however, and every dealership is unique so there is no one size fits all solution for finding the right inventory mix for your dealership. There are, however, some guidelines that dealers can use to help determine which vehicles will bring them the greatest profit. Here too, however, there are different philosophies.
One philosophy of inventory management believes that there has been a fundamental change in the pre-owned vehicle segment. This philosophy holds that the pre-owned vehicle market has become a commodities market such as steel or oranges. Dale Pollak characterizes it as, “an efficient market. And by an efficient market [he] mean[s] one where there’s a free flow and an equal share of knowledge between buyers and sellers.” He goes on to explain that, “The used car is no longer an individual, one-of-a-kind, unique item. It’s more like a commodity; in other words I could take any used car and type it into a search engine and find multiples of them in every market.” Further Pollak believes that this has a profound effect on how you should stock your used car lot. “The used car market today by its nature is volatile, much more volatile than it ever once was and it will continue to be volatile. It’s just the nature of an efficient market…you must reject the notion that what might have been good inventory for you 60 days ago should be good inventory for you today. It’s possible that it might, but you should reject the notion that it is likely to be.”
When it comes to filling your lot Pollak advises not to concentrate too much on your home brand. He advises that you, “draw a line at 50 percent of your used inventory being of your franchise brand and somewhat being driven by your past. No more than 50 percent. The other 50 percent needs to be based on what is hot right now in your live market.”
Others in the inventory management field, such as Dealer Track’s Tim Zierden, maintain that commoditization of pre-owned vehicles has not happened yet. As he explains, “There are some people out there that preach commoditization of the used vehicle market. I don’t believe that this has happened yet,” because of several factors, “One is the reconditioning standards from dealership to dealership do vary, even within the certified programs. There’s also a pricing difference. Some dealers may be able to offer a better deal than another because their margin targets are different.”
Zierden advises that dealers should “be true to their core vehicles and focus on the segments that really work well for them all the time. And then augment around that with some of what they can read about what’s happening in the marketplace.” He continues, “What they can’t do is get caught up trying to jump back and forth chasing the market because they end up really in a bind and always behind. And they lose the focus on what works for them all the time and they end up with nothing that works for them at all.”
While there is disagreement about whether or not the pre-owned vehicle market has become commoditized, inventory management experts agree that you must stock your used lot with the core vehicles that consumers expect you to have. As Dale Pollak explains, “You do need to have some vehicles of your franchise brand. You need to have what dealers understand are switch cars and a certain representation of your franchise brand because people are going to arrive at your dealership expecting you to have those.”
The right price
Once you’ve decided on a strategy for filling your pre-owned inventory, the next step is to decide how you are going to price those vehicles. Before the advent of the Internet, this was much simpler, but with all the information available to consumers today, it is essential to your dealership’s survival that you price your vehicles correctly. Consumers no longer have to go to the library and flip through the pages of the Kelley Blue Book or the NADA Pricing Guide. Now that information is available at the click of a button and what’s more, today consumers can not only look at pricing guides for comparison, they can look at all the dealerships in your area and compare your price to theirs.
There is an art to pricing, however. You can’t simply have the lowest price and expect customers to come rushing through your doors. “The dealer needs to spend some time educating the consumer about unique offerings that they have. Whether it’s their service offerings, their loaner offerings, their certified offerings, their dealership location, their sales process, it’s the things that they do that are unique to the way that they do business that’ll provide the consumer with a better buying experience,” says Tim Zierden.
When it comes to educating your customers about your dealership, there is no better place to do it than your Website. As Zierden advocates, “[Dealers] need to have a very strong Website presence that talks about their dealership and their unique attributes and tells a story about their store and what they can bring to the consumer.”
Clayton Stanfield, eBay Motors director of dealer training, adds that when addressing Internet customers, “The misconception is that they’re still treating people who call in separately [from Internet customer]…I think everyone is an Internet customer…If 85 to 90 percent of people do Internet research before they show up and the average person looks at six to eight Websites, why do we still call them Internet customers? Everybody’s an Internet customer.” Tim Zierden agrees, but adds that, “[Dealers] also need to distribute their listings as broadly as they possibly can to try and bring in traffic from outside of their Website.”
There are a number of Websites with auto classifieds, such as eBayMotors.com, Autotrader.com, cars.com, and others. Sites such as these not only replace the old classifieds section in the newspaper, but they also allow dealers to search for customers outside of their immediate area, which greatly increases their odds of selling a vehicle for a profit that they may have had to wholesale at a loss a few years ago. As Clayton Stanfield points out, “If I buy a giant truck here in San Diego, I might not sell it, but there’s a guy in Reno who will.” That is one of the great advantages of the Internet; it allows you to sell vehicles that you might otherwise have to wholesale or sell at a loss, because it makes the whole country your market. Not only does the Internet allow you to make a profit on vehicles that you wouldn’t have before, “if you can take in more trades, then you can make more deals which means you can get more people into your new cars or certified cars,” counsels Stanfield.
Not everyone agrees on the best strategy for filling your pre-owned lot. While people may disagree on which strategy to use, everyone does agree you must have a strategy. The old method of stocking your used lot with whatever cars you took in on trade and wholesaling the ones you couldn’t sell will no longer work with the new reality of shrinking margins and waning customer loyalty. The advent of the Internet, changing demographics, the economic downturn, and many other factors have all contributed to this new reality. The old way of doing business might have been easier, but you can’t turn back time. So examine your dealership, investigate your marketing data, use technology, and create a plan. If you need help with your plan there are a lot of educational opportunities and vendors who are eager to help you.