Episode EIGHT: Investment Minded Inventory Management
Many dealerships think that branding and changes in company culture are major projects that they just aren't comfortable tackling yet. This week, we cover something you can implement at your dealership right away: assessing your inventory for better turnover.
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Would you trust a car dealer or used-vehicle manager with your investment portfolio? Dale sure as heck wouldn't.
Even though he respects their skills in retailing cars, their general investment mindset leaves a lot to be desired and, as such, aged vehicles continue to sit and margins continue to compress. Dale mentions "history" and "hope" causing aging problems and explains it this way: Historically, dealers were 90-day or 120-day dealers. If a car aged past that, dealers knew they had to do something...a price reduction, wholesaling the unit, something. Even so, these were loose behaviors.
Even though the car was out of money, dealers would hope that someone would come along who didn't know any better and they would buy it.
"Hope" implies that the dealer or investment manager doesn't have a handle on market data to make an informed decision. Can you imagine if your personal investment manager used the word "hope" in your portfolio review?
We're living in different times and today's available market insights paint a much clearer picture of how a vehicle will perform at retail meaning that you really can identify a poor investment from day one. Dale questions why managers wouldn't do anything they could to get out of a vehicle representing a poor investment immediately. That's what any investment manager would do.
Dale blames history and tradition again. Dealers have been taught that losses and low-grosses should be avoided at all costs making it acceptable to hold a vehicle and hope for better. He says that managing inventory across a calendar used to make sense, but today's pace makes a calendar look like a sundial.
From here, Dale proposes two best practices to help dealers be more savvy with their investments.
The first is to manage inventory quality as opposed to age. No two units are alike and therefore should be measured not by age, but by potential return of each unit. Metrics like cost-to-market ratio and market-day supply give dealers an advantage when considering a prospective acquisition on day one.
The second is simpler, as Dale says dealers should put a hard cap on their inventory investment. Most dealers will give you a range for the dollar amount of inventory they're currently carrying. The simple act of putting a cap on it will create an environment that encourages and actually requires investment management discipline. Sure, the markets fluctuate, but Dale sees the loose money-management as misplaced hope as he equates used vehicle managers to trust-fund babies who just tap the trust when they run out of money. If you only have X amount of dollars at your disposal, you make more thoughtful spending decisions.
Dale is looking forward to the day dealers start acting more like investment managers. Maybe then, he'll ask for some investment advice.
Dale Pollak’s ‘Like I See It’