Making More Money with the Right Inventory Metrics
vAuto Founder Dale Pollak recently told a group of dealers: “We’re not in the car business, we’re in the business of making money.”
And he’s right.
One of the biggest influencers on new car dealers’ profitability in 2019 has been the health of their new vehicle inventory. In the latest Haig report, it was highlighted that franchise dealer expenses are growing faster than grosses, with new car holding expenses identified as the primary culprit for this trend.
It’s hard to fathom that in 2015 (per NADA Dealership Financial Profile), the average dealer booked nearly $110,000 in floorplan profit and in 2019, floorplan will be a $93,000 hit to the bottom line. That’s a $203,000 swing in the wrong direction. Using NADA’s guideline that dealers make approximately 2% net profit on every $100 worth of sales, dealers will need to find an additional $11,000,000 in sales revenue to make up that net profit difference.
Most dealers I meet with don’t have many $11,000,000 ideas lying around, so increased attention to managing new vehicle inventories has become increasingly urgent.
One of the biggest challenges in monitoring this aspect of the dealership’s operation is that the industry lacks good inventory measurement targets or benchmarks. NADA’s Dealership Performance Benchmarks Guide provides ONE recommendation for new vehicle inventory control: maintain a 45-60 days’ supply.
It’s interesting that parts managers have more inventory performance benchmarks and spend a lot more time analyzing their $400,000 parts inventory than a new car manager does for his $8,000,000 new car inventory.
If “making more money” really is the name of the game, dealers will be wealthier and wiser by managing these two critically important new vehicle inventory metrics.
% Inventory Under 90 Days
Maintaining a high % of units under 90 days is vital for three reasons:
1. Mitigates exposure to rising holding costs, because in most cases the factory floorplan credit covers the first 90-120 days.
2. Dealers with fresh inventories are typically those with higher retail sales turn, which means more trades, more recon, more F&I and more floorplan profit!
3. Grosses are BETTER! In a recent analysis Dealertrack conducted with 400,000 sales transactions, retailed units with 0-30 days in stock had an average front-end gross (transaction price vs. invoice, not including F&I, factory bonus or doc fee) of -$230, while retailed units with an age of 90-120 days in stock were -$750 and units over 365 days were -$1,690!! I don’t think many dealers realize the extent to which they pay a holding cost premium for worse grosses!!
Performance Targets
Domestic Stores 70% under 90 days
Import/Luxury Stores 80% under 90 days
Dealer Days’ Supply by Model/Trim
Monitoring the relationship between your dealer days’ supply and the overall market days’ supply allows managers to quickly identify model lines and trims where their pricing strategy, mix or online merchandising is off.
Most OEMs only provide the individual dealer days’ supply with no comparison to the overall market. This would be like analyzing your stock portfolio performance without having the S&P as a benchmark.
The devil is usually in the details, and this is certainly the case when it comes to the enormous complexity of most model/trim/option/color combinations. The overall dealer days’ supply at the model line level might look fine, but when you drill deeper into the trim mix, that’s where you’ll often find the problems. I recently saw a dealer with a 45 days’ supply of 2020 Camrys, but a 223 days’ supply of red Camry LEs.
The sooner dealers become aware of issues like these red Camry LEs, the sooner they can begin taking corrective actions to reduce their exposure to holding costs. This granular vision of your inventory will also highlight stocking opportunities of combinations performing well in the market, which are not currently in your stock.
Making More Money with Better Inventory Control
Making money for franchise dealers has become a lot more challenging over the last eight years, as return on sales has fallen from 2.8% in 2011 to 2.3% this year (per NADA). The major underlying cost structures are not likely to improve – rent factors/mortgages are not becoming less expensive, attracting and retaining talented employees is not getting cheaper and advertisers are not looking to charge less.
New car inventory control remains one of the single biggest opportunities for dealers to root out unnecessary expenses and drive incremental sales.
Dealers who are managing their inventories with a high % of units under 90 days and monitoring the dealer days’ supply by model/trim will be well-positioned to improve the health of their new vehicle inventories and the health of their bottom lines. Remember, “We’re not in the car business, we’re in the business of making money.”