At this time in the car business when it is getting harder and harder to hold gross on new-vehicles, used-vehicles are becoming more critical to dealer profits than ever before. In spite of these trends, many dealers still do not have a solid grasp on their used inventory.
According to Cox Automotive, New vehicle sales in 2018 are expected to decline, while used vehicle sales are expected to increase. It is time to take a look at your balance of new and used cars and explore opportunities to improve.
What is the Right Balance?
In reference to the right mix of used-to-new vehicle sales, Cox Automotive’s Les Abrams says that a 1:1 ratio is good, and a 1.25:1 ratio is great.
“Used retail unit volume equaling or surpassing new retail volume is a foundational correlation of highly successful used-vehicle departments, assuming the dealership is meeting new-vehicle volume goals,” Abrams wrote in the company’s 2018 Used Car Market Report & Outlook.
“In today’s market, a key driving force is the resulting increase in profitability, which releases some pressure on the new-vehicle department for overall dealership profitability,” He added.
So, in short, your used vehicle department will be instrumental in maintaining profitability. For this reason your used vehicle inventory needs to align with this goal of selling more used-vehicles than new.
Sourcing the Right Inventory
Aligning your used inventory with the above mentioned ratio starts with sourcing the right inventory.
It is understood that new-vehicles have a longer shelf life than used-vehicles. While an overage new vehicle can cost you money in flooring interest, it is not likely to lose value over the course of its stay on your lot.
Used-vehicles, however, can fluctuate quickly in value. Most dealers subscribe to a 60-90 day turn policy for used-vehicles in order to avoid massive losses on stale inventory. If you aren’t sourcing the right inventory, you can spend a lot of time wholesaling overage inventory and amassing large wholesale losses.
It is difficult to sell more used-vehicles than new if you are consistently stocking inventory that doesn’t sell. So how do you source the right inventory?
- Trust your sales data. Look for the used-vehicles with the best gross profits and the highest volume. Also look at market trends for hot vehicles you may be missing. Try to focus on buying more of these.
- Look for niches. Focus on specific niches of vehicle that are popular, but not readily available at other dealerships in your market. Look for market trends that are underserved by dealers in your market. This low-hanging fruit can mean steady, consistent profits.
- Focus on trade vehicles from current customers. If you stock the right mix of new-vehicles, then you can leverage these vehicles into good used inventory months or years after the sale. Look for ways to incentivize existing customers (with hot selling trades) to trade out of their current vehicles early.
This win-win scenario helps to boost new car sales and provides a better mix of used-vehicles as well. Even though selling more new-cars in order to sell more used-cars might not help your overall used-to-new sales ratio, it is a good problem to have.
Maintaining the Right Balance
If your inventory is currently out of sorts, start with identifying your ideal mix of inventory. Use your sales data and market trends to support your decisions.
The next step may be painful, but nevertheless necessary. You must sell off your inventory that doesn’t fit into the new mix. This can mean huge wholesale losses in the short run, but it will be worth it in the end. The goal should be to free up your floor line to purchase the right mix.
Stay disciplined with your new mix, but stay open to changing trends. Always monitor and make adjustments. It will pay off.