In the age of increasingly educated and demanding customers and extensive internet research by car shoppers, managing dealership inventory (never an exact science in the best of times) keeps getting more complicated. It’s not going to get any less so in 2017.
Potential buyers are spending more time online and less on dealership lots in the hunt for their ideal vehicle. And in an era of immediate-gratification consumerism via the web and mobile devices, it’s increasingly likely that if your dealership doesn’t have exactly the vehicle (model, color, options, etc.) consumers want at the moment they’ve decided they’re in market, they’ll move on.
That’s one issue. Another is the ongoing reality of lower per-vehicle margins that come from the consumer demand for greater price transparency, manufacturer rebates and incentives, increased marketing costs, and more. For most dealers, this means higher sales goals need to be set and reached to hit their desired revenue targets.
In addition, dealers must consider the complications of manufacturer allocations and rebates; the evidence that the demand for new vehicles is slowing down after a period of sharp growth the past several years; the need to find the ideal new/pre-owned balance; the ever-present volatility of financial markets; and regulatory considerations, especially with a new U.S. presidential administration taking office in 2017.
There’s no one set of right answers or surefire formulas when it comes to inventory strategy, of course. Going into the new year, however, we wanted to find out from a group of industry analysts and experts what they consider the most important issues and strategies for dealership inventory, both now and in the coming years.
We went to Scott Fanelli, the vice president of dealer sales at Edmunds.com; Bill Wittenmyer, partner of ELEAD1ONE; and Jahon Jamali, director of marketing and communication at The Appraisal Lane, to get their thoughts on a series of questions related to a number of inventory topics. Here’s what they had to say.
Dealer Marketing Magazine: What current economic, auto industry, and consumer-behavior trends should new-vehicle dealers be most concerned about with regard to managing their inventory?
Scott Fanelli: There has been an increase of buyers abandoning the car market in favor of crossovers. In October, 62% of new vehicles sold were a light truck (SUVs, pickups, and vans), which was the highest point in history.
As a result, cars are becoming a harder sell, spending a longer time on dealership lots, and having more aggressive incentive programs. Dealerships have had to change their assumption about what sells, and keep their inventory aligned with market demand.
This, however, could change dramatically if gas prices were to increase or interest rates were to skyrocket, and demand for larger vehicles fell. Car inventory can’t change on a dime, and forecasting macroeconomic changes is tricky.
Bill Wittenmyer: With the current trend of overproduction, as well as increased and complicated incentive offers, dealers must be selective with their product mix, with a primary concentration on quickly turning inventory—an essential component for strong and well-performing dealers.
Additionally, some manufacturers tie heavy “stair step” dealer incentives to the volume which makes for a risky proposition. It’s a costly gamble to weigh volume goals, low margins, and in some cases, losses, to bet on the achievement of the goal and reimbursement via the incentives.
It is crucial that inventory selection in the selling process is well communicated with internal teams, and focused on with each business opportunity.
Jahon Jamali: Dealers need to take advantage of tools that use transparency to better synchronize inventory management to their sales efforts.
Successful inventory management really starts as early as winning that retail deal at the curb. New-car inventory has an element of predictability, but successful dealers are using newly introduced wholesale tools to get their dealership connected—from sales to inventory sourcing.
These mobile technologies allow dealers to deliver a transparent appraisal experience to their customers, receive on-demand wholesale purchase offers, and gain real-time insight into the flow and sourcing of their inventory.
DMM: How are the recent slowdown of the pace of new-vehicle sales and the ongoing compression of dealership margins affecting dealers’ current inventory strategies?
SF: The new-car market is still hovering near 2015 levels, which was a record year for sales, so we are seeing a high plateau.
[There are] two ways to help margins: [First], sell larger vehicles, and [second], sell vehicles that are fully loaded.
Either will increase dealership margins, and it looks like buyers are comfortable with more expensive vehicles, since transaction prices are at a record high.
BW: Inventory management is as important as lead generation and customer follow-up.
Even more important is that dealers are turning down allocation from the manufacturers, and not just accepting every piece of iron sent to them.
Of course, there is pressure to continue allowing increased allocation amounts, pushing dealers into a corner of making difficult decisions based on the slowdown in growth. It becomes a creative strategy to limit the pipeline of new inventory and keep it at pace with turn.
JJ: The continued compression of sales margins has placed more importance on discovering opportunities for optimization in other areas of the dealership.
The great thing about car dealers is that many, by nature, are highly adaptable. Increased sales revenue often starts with the right inventory, and dealers that have benefitted by adapting to this new market environment have done so by implementing new wholesale processes.
Dealers can now dispose of wholesale units with a click, and quickly source upstream inventory—all in more cost effective ways than traditional wholesale outlets—with mobile and online technologies.
DMM: What are the most common, but avoidable, dealership inventory management mistakes you see, and why do they happen?
SF: I’d say the high volume of dealer trades. Most frequently when dealers order inventory, it’s based on sales history, or what their current inventory management system says is selling in the marketplace.
However, this doesn’t fully represent the picture of what consumers are seeking. This results in a high volume of dealer trades in the marketplace.
On another note, they often purchase what the OEM is pushing them to purchase.
BW: Product mix and volume in allocation, along with quick turn, continues to be a common yet avoidable mistake for many dealerships.
Proper planning, timing, and keeping the right product mix based on your geographical region are key. For instance, if you live in an area with heavy winters, staying away from two-wheel-drive vehicles going into the fall and winter is crucial.
And keeping that product flow in mind while ordering or accepting allocation can alleviate most of these issues. It seems like a common-sense item, but too many times dealers don’t look far enough ahead and plan accordingly.
DMM: How is the increasing consumer demand for pricing transparency influencing inventory management strategies?
SF: Most dealers who are adding multiple dealer-add accessories are struggling with price transparency today, and their current inventory management systems aren’t helping to resolve the issue.
This cascades to their marketing sources, as inventory feeds are often limited to invoice, MSRP, and sale price. It’s difficult for dealers to accurately represent in their listings and advertising exactly why a sale price would be higher than MSRP, for example, or higher than other vehicles, which may or may not include add-ons.
The rise of leasing is another factor. Dealers should be searching for vehicles that specifically fit lease offers being advertised in the marketplace, assuming those vehicles fit the demands of searches happening in a marketplace.
BW: Pricing and consumer transparency have not had much effect on inventory management—those factors have always been in place, and it’s important to have the product that consumers want.
In most cases, vehicles that are popular are also those most researched, so dealers need to ensure inventory is available to make the deal in the first place.
The most important area a dealer can control, maximize their opportunity, and limit the liability is in the turn of that inventory and taking advantage of low floor-plan cost by moving it quickly.
DMM: Is the growing number of online car shoppers who want to find exactly the vehicle they intend to buy at a set price before they make contact with a dealership changing the ideal inventory balance between new and pre-owned, and why?
SF: Yes. Dealerships now have to predict, and therefore procure, vehicles to represent a better mix of new/CPO/used inventory.
The availability of choice, fueled by the amount of information at a consumer’s fingertips on mobile devices, is making this process a lot more complex. Dealers today not only have to battle competitor pricing, but also availability of product in every combination.
[This is] all the more reason for dealers to find the right balance between available product (on-hand inventory), and the most efficient vehicle to put that said inventory in front of the right customer at the right time.
BW: The growing number of online shoppers has affected new and used inventory balance, but for many dealers, this has always been a challenge.
For the last few years, dealers of traditional brands face consumers that are less likely to switch to alternative vehicles. Another aspect is dealers have less of an opportunity to offer an alternative vehicle in the selling process if it’s not provided initially during the online experience.
As we all know, the number of actual showroom visits is considerably down, even from just five years ago. With the majority of decision-making done during the research phase, the solution is to present consumers alternative selections in your digital strategy, as opposed to guessing the inventory mix on any given day.
Options are always better than obligations and limitations.
DMM: What new and emerging inventory management technologies will be most important for the industry and beneficial to dealers, and why?
SF: Dealers can benefit from technology that determines which vehicles they should stock, based on which vehicles are being searched for in the marketplace, taking into account both purchase and lease.
Today, dealerships often seek out inventory to stock based on their sales history. Those sales are often less profitable because the dealer is selling the consumer on a vehicle they had in stock, rather than the exact vehicle that the consumer might want.
This frequently results in having to discount the vehicle to convince the consumer to make the purchase, especially if the vehicle has been on the dealer’s lot for a considerable amount of time.
By including the search/inquiry history, as well as the vehicles consumers are searching for, dealers would be able to sell a vehicle on the spot to a consumer who was more eager to pay a fair price for their purchase.
BW: Data and execution. Dealers have their choice of some great technologies, but it’s about actually using data to execute your strategy and achieving sales goals.
It takes constant evaluation and time—two concepts for which our business does not always afford us. Ours is such a now business, with short cycles that force dealers to make gut or reactive decisions, rather than those based on planning and evaluating derived from data.
The consistent use of tools and the data give dealers better insight and decision-making opportunities.
JJ: There’s certainly no shortage of emerging technologies, but the ones that will be most important for the industry will have two key characteristics.
The first is a focus on mobile accessibility. Smartphones can place complete control and insight at the dealer’s fingertips, so mobile-first solutions stand to benefit.
The second, and perhaps most crucial, characteristic is the inventory valuation approach. From appraisal tools to online auctions, there’s a stark difference out there.
Dealers need to understand the difference between solutions that simply deliver a computer-calculated value versus community-based technologies that deliver rapid valuations that are also backed by a cash/purchase offer.
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