The Art & Science of Dealership Inventory Management
Industry experts reveal how to have the right vehicle at the right time and the right price
Managing inventory has always been more challenging for new car dealerships than most other retail businesses. Except for real estate, vehicles are the most expensive purchases most consumers will ever make—and because so many have to finance a vehicle over a number of years, the decision to buy or lease a vehicle is rarely made lightly. And unlike most expensive consumer goods, vehicles come in a near-infinite number of flavors because of colors, models, options, and accessories.
Rarely are customers willing to shell out five or even six figures for a compromise. If you don’t stock the exact top-of-the-line crossover in the shade of red the customer wants, well, if the dealership across town carrying the same make does, you probably lose a sale. Anticipating a customer’s individual needs and wants is much less of a problem for Best Buy when stocking smartphones or high-end 80-inch plasma-screen televisions.
Managing and marketing a dealership’s inventory of new and used cars has been made even more complex by changing technology and the rise of Internet research and shopping by consumers. On top of that, the trend toward lower profit margins per vehicle necessitates selling more cars than ever to sustain the overall revenue dealerships have enjoyed in past years. As a result, the always-difficult equation—having the right vehicles at the right time and at the right price—is more difficult to solve than ever.
To address the challenges of dealership inventory management in today’s market, we’ve assembled four experts to share their experience and insight on this critical aspect of every dealer’s business: Jonathan Ord, CEO of DealerSocket, Dale Pollak, founder of vAuto, Chad Bockius, chief marketing officer of CarStory, and Joseph Tomaszewski, CEO of Carzilla. Thanks to all for their astute analysis and valuable advice.
Dealer Marketing Magazine: In today’s market, what are the biggest challenges dealerships face with their inventory management strategies?
Jonathan Ord: With the undersupply of inventory in the last several years, many dealerships have been lulled into a false sense that it’s all about pricing and marketing. Buy it, price it right, and customers will come. Barring glaring issues, this model works when supply is tight.
However, with supply coming back, some dealers are getting a rude awakening. A myopic mindset centered only on pricing and marketing has led some dealerships to become complacent and neglect their fundamentals: appraisal process, stocking decisions, retail strategy, and effective management of their aged inventory. Many dealers spend a fortune on advertising but are left wondering where is the ROI. While operations can’t replace marketing, marketing certainly can’t fix operations. Dealers need to do an internal health check and make sure they are managing their whole inventory process effectively.
Dale Pollak: Perhaps the biggest problem facing dealers in both new and used vehicles is the ongoing compression of dealership margins. NADA has reported front-end gross profits as a percentage of transaction prices has declined by 31% in new vehicles and 20% in used vehicles between 2009 and 2014.
Many dealers understand, or at least sense, that they’re selling more expensive vehicles and making less money on individual transactions. However, the year-over-year increases in new and used vehicle sales volumes have tended to mask this margin compression. Dealers still make about the same money, in pure dollar terms, for the vehicles they sell, but their cost and risks are greater.
The best dealers address margin compression by adopting efficiency-focused inventory management strategies that enable them to optimize their new and used vehicles to meet market demand, bring their vehicles to market more efficiently (e.g., less lost time for reconditioning, photos, pricing, etc.), and retail them more quickly to mitigate the effects of margin compression.
In the months and years ahead, the ongoing pace of margin compression will effectively force all dealers to become hyperefficient in the way they manage their inventories to realize a sufficient return on investment.
Chad Bockius: We believe that poor merchandising of inventory listings is one of the biggest challenges to effective inventory management, and this includes lack of attention to the details and vehicle features that are most important to consumers. Sadly, dealership inventory listings tend to be rife with errors and out-of-date, inconsistent, and incomplete information. And, the problem starts with the dealerships’ most powerful tool—the actual images of the vehicle.
Image presentation is a critical, yet largely ignored, tool. Good vehicle images and robust information are critical to engaging consumers and, ultimately, driving them to purchase at your dealership. Still, many dealer sites use stock vehicle photos, and most dealers give no consideration to the order in which those images are presented to the consumer. Not only that, but many listings—about 25% on our marketplace—do not include vehicle pricing, and a good deal of them are either entirely missing a vehicle description, [or] offer only the most basic VIN info or less-than-complete information. A picture may speak a thousand words, but once a consumer has decided they like what they see, he or she needs the right information to help prod a sales decision.
So why aren’t more dealers paying more attention to images and the info that accompanies them? Probably because they do not realize that their images are lacking, and therefore have not instituted a vehicle images best practices protocol with their staff. And, by the way, this is not just about the dealers—many contracted website management providers and/or contracted photographers are either unaware, or ignore, key best practices.
Here at CarStory, we conducted in-depth research that illuminated key practices for elevating dealership vehicle image effectiveness. For example, our research shows that the magic number of photos for the best conversion on marketplaces is nine. We also discovered that showing the full exterior shot followed directly by the dashboard photo is most effective. Our CarStory Market Reports were developed based on this research and include dynamic and real-time consumer preference data that helps dealers write relevant and compelling vehicle descriptions.
Joseph Tomaszewski: The biggest [issues] regarding inventory management are technical inabilities due to older inventory management software, and lack of pure manpower needed to manage inventory in real time. As technology develops and things like RFID [radio-frequency identification] and beacons become more accepted at dealerships, that will improve. But there are still many instances where dealers don’t know if a car is still on their lot, where that car is, if it was sold, etc.
DMM: What do consider the most common, yet avoidable, mistake dealerships make regarding inventory management, and how do they avoid it?
JO: The most common mistakes are made on day one: Owning the wrong car or owning the right car for too much money. We all know that cars are a depreciating asset with a finite window in which to make you money. Know the car you are buying. Walk the car. Review the CARFAX reports. Review your sales history and the market data both retail and wholesale. There is no substitute for a strong appraisal process. If you take in a trade and it’s not a fit, make that decision on day one. Don’t pour money into recon and then arrive at that conclusion on day 45.
DP: There are many things that can go wrong in new/used vehicle inventory management—stocking the wrong cars, overpaying to acquire a unit, pricing vehicles too far above the market to attract buyers, allowing overage inventory to accumulate, and failing to retail every unit in a predetermined time frame.
In most cases, the root cause of these mistakes is inattention. Today, most dealers have sophisticated inventory management tools that tell them the correct vehicles for their market, how much to pay, a “fair price” for a unit, and days in inventory.
The challenge, however, is exercising the discipline to consistently heed the data these tools deliver, and make the necessary decisions that drive a positive retail outcome, based on current market conditions.
There’s no question that new and used vehicle managers are extremely busy. But most would agree, I believe, that the inventory management mistakes that hurt the most are rarely surprises. More often, these mistakes reflect an accumulation of decisions avoided and unmade.
CB: The most common mistake is settling for generic, automated vehicle detail descriptions, which often provide redundant, irrelevant, and unimportant information. This is not user-friendly for today’s busy, on-the-go consumer who has limited patience for irrelevant details. For example, most automated descriptors give color, but if you have taken a picture of the vehicle, the color is obvious to the consumer. And rather than a random laundry list of every detail, push air conditioning, power door locks, vanity mirrors, etc., to the bottom (or eliminate them altogether) and showcase the most valuable and relevant features, such as Bluetooth or new tires, at the top.
Of course, the first step to powerful relevant descriptors is to understand what consumers are most interested in. For example, our research shows that consumers are very interested in reconditioning information even more than pricing information, yet few dealers highlight any reconditioning they’ve done to used vehicles. In fact, over half of the dealer-posted inventory we looked at on used car marketplaces didn’t take advantage of adding any seller comments to their listings—a great place to tout the things buyers really care about—such as reconditioned brakes, batteries, or tires.
JT: The biggest mistake that dealerships make [is] general latency. Typically there’s a time gap from the time that it takes to get a car that just arrived on the lot into their inventory management system and thus, populated in online marketing platforms like Carzilla. Every dealer is different—some move faster than others—but there are time lags, some as long as seven days. That’s a week that a car is sitting there.
In addition, the cars that have been sold are also coming off their inventory management system slowly, so a customer might be looking at a car at 8 a.m.—he or she might be planning on stopping by the dealership at 5 p.m. after work. That vehicle might have been sold at 1 p.m. to someone else, so that person might be coming in to look at a specific car that’s already been sold.
The only way to avoid this is to have a dedicated team working on actively managing the inventory on an hourly basis. New software and other technologies will help, but ultimately someone still has to take pictures of the car and upload that to an inventory management system.
DMM: Given the current state of the market, what are the key factors dealers need to consider in their new vehicle pricing strategy to obtain the best balance between front-end gross profit and volume?
JO: The number one way is to make sure you are giving someone else’s money before your own. Take full advantage of manufacturer incentives and rebates.
Separate from that, if you have a new car pricing strategy, be clear and consistent with that strategy both in terms of execution and how you market yourself to consumers. Is it a “one price, no haggle” strategy? Is your strategy to offer the best price? Pick a strategy, and consistently execute it. If you give up the gross on-line but you’re not consistent in your marketing message, you may not see the benefit of a volume lift, or you may find your sales people negotiating off your already discounted price.
DP: I would list two key factors—a recognition that aged new vehicles are not OK, and that a proper new vehicle pricing strategy can be used to better optimize a dealer’s inventory mix and profitability.
On aged new vehicles: Traditionally, dealers have not made inventory age a management priority in new vehicles. In recent years, ultra-low interest rates and rising sales volumes have made the task of minimizing inventory age an even lower priority.
Dealers who have made it a priority to minimize age become more market-attuned in their pricing, enabling them to strike a better balance between maximizing front-end gross profit and inventory turns. These dealers also become more transparent in their pricing strategies, which helps them attract more buyers and retail opportunities.
On inventory optimization: At some level, every franchise dealer carries new vehicle inventory that may not be right for their market. This reality owes to factory allocation and production decisions, as well as the dealer’s own ability to outfit orders with the proper colors, equipment, and trim levels to meet market demand.
The best dealers accept this situation as part of doing business, and adopt inventory management and pricing strategies that help them quickly retail less-desirable vehicles and obtain more of the units the market truly craves. For example, a Ford dealer might set an aggressive, volume-focused price strategy to quickly retail Transit Connects and earn a larger allocation of F150s.
CB: Many dealers adhere to a velocity philosophy, meaning they are trying to find the fine line between pricing vehicles in a way that yields them a reasonable turn with a reasonable margin, rather than specifically pricing for high turn or for high margin.
But without market context, it simply doesn’t matter what the price is. We have to understand that consumers are not determining if a price is reasonable solely based upon its placement in a rank on an inventory listing site. Without “proving” the value in your pricing, you will always have trouble making the sale. Looking at the price vehicles are selling for in your local market—i.e., what consumers are paying for them—is critical to arriving at the correct market price . . . but this is not just a lesson for dealers; consumers need to understand that context as well.
It is the dealership’s job to ensure that their customers understand the value in their pricing. How? Leverage independent providers who offer real-time assessments of where each vehicle’s price sits within the local market, among similar models, and share with your customers. This will not only bolster your vehicle pricing credibility, but also build the kind of consumer confidence and trust that will lead to sales.
JT: We believe dealerships need to be willing to price their cars competitively with similar cars regionally, rather than locally. For instance, with the tools that are currently available to consumers, they can easily determine that the price for a car might be $500 or even $1,000 cheaper 250 miles away versus 25 miles away. Consumers are willing to make that 250-mile trip to save money. It’s important that dealers understand that today’s consumer is willing to go out of state to buy a car if it means a significant cost savings.
DMM: With analysts predicting that used vehicle supplies will continue to increase, what steps should dealers take with their used inventory to keep turn rates high and avoid depreciation?
JO: Be smart about what vehicles you buy and choose to retail. Don’t just look at mileage, condition, age, and history. Pay attention to supply, particularly off-lease.
Be thorough and attentive in how you merchandise the vehicle and price it in market, particularly if it’s in high supply. Don’t price yourself way out of the market on the high side or the low side. On the high side, consumers will question your integrity, but on the low side, they’ll think something is wrong with the vehicle.
Stay on top of aged inventory, and move swiftly. Increased supply is not a short-term problem. Look at tightening up your aging policy. Institute one if you don’t already have one or have been lax enforcing it. The longer you wait to deal with an aged unit, the bigger the wholesale loss.
DP: As used vehicle supplies increase, it’s typical for values to decline. This dynamic makes it ever-more imperative for dealers to meet two key inventory management objectives.
First, maintain at least 50% of your inventory under 30 days of age. This standard creates a “time is money” culture that ensures vehicles get acquired, reconditioned, merchandised, and priced in the shortest time frame possible to facilitate faster retail sales.
Second, strive to retail every unit before 45 days. This should be a no-exceptions standard, which means a car either sells before 45 days, or it gets wholesaled at day 45. When dealers hold themselves and their managers accountable for this standard, they are maximizing both gross profit and inventory turn while minimizing the risks of depreciation.
CB: Merchandising, merchandising, merchandising! Each unique used vehicle has an owner out there somewhere. The trick is to make sure that vehicle gets in front of the right owner—i.e., one who is looking for similar model and features—in a compelling way. Online, dealers should be using the best (real) photos in the right order, pricing the car with credibility, and including relevant descriptions. On the lot, salespeople must be educated on the uniqueness of each used vehicle—including those that are off-brand.
And we are not talking about generic Kelley Blue Book or Edmunds-style content (although that content plays a critical role in consumer research), but the kind of content that, for example, our CarStory Market Reports provide: real-time data on features for each unique vehicle based on consumer preferences in your specific market. [This content] helps to ensure that salesperson and consumer are equally educated, leading to a better experience and faster path to sale.
JT: We think dealers should consider investing a little bit of money on their used inventory that has nagging things that are broken. By that I mean easy little fixes that dealers currently don’t want to make a small monetary investment in. For instance, I’ve noticed some really nice late-model luxury cars that pre-owned dealers have been selling with things like a broken mirror, a broken door handle, [and] broken weather stripping around the doors. Investing even $100 in fixing these nagging little things on a pre-owned vehicle could mean a higher sale price, and a quicker sale. In addition, many buyers won’t be as turned off to a vehicle that has something like a broken side mirror.
DMM: How has the dramatic increase in Internet research by customers prior to contacting a dealership affected the ways dealerships need to market their inventory?
JO: Consumers often choose the vehicle they intend to purchase online before they ever walk into a dealership. Make sure that everything that is worth knowing about your vehicles is stated online. Most consumers will assume that if specific equipment isn’t mentioned, it isn’t there, and they will move on to the next listing. It’s easier for consumers to look at the next vehicle in the search results than to call or chat with your dealership to ask questions, particularly when there are lots of similar cars for sale.
For used cars, consumers judge the condition of the vehicle by its photos. If you are light on photos, consumers will assume you are hiding information. For the photos you do provide, pay close attention to detail. Make sure the vehicle is clean and appropriately lit, and pay attention to the surrounding area to make sure it’s clean and professional. The image of the dealership impacts consumers’ perception of your vehicles and shopping experience as much as the vehicles themselves.
DP: At the most fundamental level, the rise of the Internet has forced dealers to adopt a higher level of vehicle merchandising and pricing transparency. It wasn’t all that long ago that dealers wouldn’t post any vehicle prices online; today, most dealers understand a vehicle online without a price or proper merchandising isn’t really for sale.
The Internet has also been a blessing for dealers. By tallying consumer behavior online, we now know that custom photos/videos and merchandising work best when they tell the story of the individual car and its value proposition. The data also reveal the price points for new and used vehicles that are most likely to maximize exposure to buyers and drive showroom traffic. Through these types of data and insights, the Internet has made auto retailing a more predictable, transparent business.
I would also add that as consumers have become accustomed to researching vehicles online, there’s a growing number who are increasingly interested in completing some, if not all, portions of a vehicle purchase online. Broadly speaking, this trend follows consumer desires for a more convenient and efficient way to buy cars.
For dealers, the challenge will become how best to facilitate the transactions in the manner customers prefer, and how to turn the inherent convenience and efficiency you provide into greater competitive advantage.
CB: Recent reports are citing a 60% walk-in rate with no prior contact with the dealer. In addition to the online marketing strategies we mentioned before, it’s now, more than ever, important to make the best use of customers’ time once they arrive on your lot. This includes being ready to immediately address a specific vehicle’s unique features. When a vehicle no longer suits a consumer or is no longer available, dealers must be ready to offer smart, relevant alternatives on the lot and on the fly. Today’s savvy consumer will expect the salesperson to pivot quickly and intelligently, or they’ll go elsewhere.
JT: Today’s consumers are smarter and more knowledgeable than ever. With information and independent car reviews one click away, the majority of [them] essentially know the exact make and model, color, and even option packages that they want.
Our market research has showed that [they] are looking for things like navigation systems, Bluetooth, and backup cameras. Also, with gas prices falling, there seems to be less of an emphasis on MPG as it relates to purchasing decisions by consumers. So I think dealers need to market and highlight the tech features and option packages a car might have over what they’ve traditionally marketed—price and mileage. Today’s consumer will choose one car over another simply because that car has Bluetooth and the other car doesn’t.
DMM: What developments in inventory management tools or technology do you expect in the future, and how will they benefit dealers over currently available products?
JO: We will continue to [see] integrations evolve between inventory, websites, and CRM. While the industry has brought some integrations to market, most dealerships still manage these as distinct processes. The integrations are generally centered on reducing data entry or providing additional reference points that are somewhat ancillary to the process.
The reality is that in practice, today’s inventory management systems generally don’t care which customer buys a vehicle, today’s CRM systems don’t care which vehicle customers buy, and today’s websites are all about driving leads. This is not a very targeted approach. As data sharing and integrations evolve, expect to see more targeted activities connecting consumers to specific vehicles.
DP: While I can’t divulge too much in the way of specifics, vAuto is working on a tool that will fundamentally change the way dealers and their buyers acquire wholesale vehicles from auctions. The solution is intended to address four key problems dealers continually face in the wholesale marketplace—what are the right vehicles for my market, how can I find those vehicles more quickly, how can I buy those vehicles at a fair price, and how can I make the entire process easier and more efficient.
Our vision for this solution, which we’ll unveil at NADA 2016, is that it will complement existing inventory management systems at dealerships, and help dealers become more efficient and profitable used vehicle retailers.
CB: In the future, consumers will expect even more online information. Consumers want to be able to discover the right vehicle through predictive search and suggestive technology—like Spotify and Netflix are doing for music and movies. Not the right car for you? How about one of these three similar alternatives? Can’t afford the luxury vehicle? Why not consider a lower priced vehicle with your required features? The benefit to dealers who embrace this new form of search and discovery is a better buying and selling experience for both dealer and consumer—everyone wins.
JT: I think the biggest thing is mobile—getting current PC-based solutions onto mobile phones and tablets. As the CEO of Carzilla, a mobile-first car search platform, I can tell you firsthand that our dealership partners are hungry for solutions that untether themselves from desktop PCs. Processing power in phones and tablets is increasing every year, and many of the tasks that required a PC can now be handled on a mobile device. It’s going to be interesting how legacy inventory management systems evolve, and how new mobile-first solutions will be introduced. I’m excited about how Carzilla can play a role and have an impact.