June has been a remarkably interesting month in the automotive industry, specifically sourcing used car inventory in today’s bipolar used car wholesale market. With all the auction houses like Manheim and Adesa moving to digital selling platforms only, it has been a challenge for a lot of dealers that have never bought cars online before. 36% of current wholesale transactions at Manheim were sold on simulcast to buyers who have never bought online before. That is a huge learning curve to tackle in a short period of time for new simulcast buyers. Before the Covid-19 pandemic, only 48% of sales were made on simulcast which obviously now has turned to 100%.
One of the most compelling statistics is how the MMR index dropped to an all-time low creating exceptional values for savvy car buyers and suddenly rebound to an all time high within weeks creating a wholesale to retail bipolar marketplace. The issue that concerns me the most is wholesale prices in June increased 5% and the retail pricing only increased 0.5%. With the current increase in Covid-19 cases spiking nationally, are we going to see another huge drop in wholesale pricing. This would reset current used car inventory values back to inequity we saw at the onset of the pandemic.
Better Used Car Sourcing Ideas
So what is the answer to sourcing used car inventory in today’s Bipolar used car market? The answer is you cannot source cars at auction right now unless you absolutely have to. I posed the same questions yesterday on Dale Pollock’s blog and here was his response.
Thanks for the question. “Weird” is the best descriptor for what we’ve seen in the automotive markets during this COVID experience. There’s a myriad of things that are hard, if not impossible to explain. Most notably what would cause retail sales to be the strongest in memory during conditions of high unemployment, social distancing and rising infection rates.
Like you, all of us have been wondering how it could be that wholesale prices have risen so much, and yet we’ve not yet seen a commensurate rise in retail prices. It’s interesting to note that a 2017 model year today has the same wholesale value that it did at the same time last year in 2019. I’m not sure we’ve ever seen a phenomenon like that.
One explanation for the asymmetry between retail and wholesale prices is the fact that there has been an odd mix of vehicles in dealer’s inventory. Some purchased pre-COVID, some purchased in the middle, and some most recently. Each one of these periods represents three distinct wholesale valuation levels. Therefore, what we’ve had on dealer’s lots is a weird mix of vehicles with cost to market’s on individual vehicles being very disparate. This leads to inconsistent pricing patterns within and across dealer operations.
Now with respect to the second part of your question about how are you expected to pay wholesale prices that approach retail levels, the answer is that you don’t unless you absolutely have to. My concern is that retail sales will soon soften at the same time that dealers believe they can sell any car that they can get their hands on. The risk is that you may soon find yourself with inventory that is both long and wrong. Unfortunately, dealers tend to project the next 30 days based on the outcome of the previous 30 days, and the data that I’m seeing on a daily basis strongly suggests a deceleration of retail sales through July and into August. In other words, temper your enthusiasm, buy only what you need and price them aggressively to move fast. This is my best advice to avoid the perils of a transitioning market.”
That made me feel a little better. I thought I had missed something in the market that everyone else knew.
Your Service Drive is a Gold Mine
Sourcing used car inventory in today’s Bipolar used car market at auction is just a bad business plan.
My suggestion to dealers is to go full throttle in developing your service drive purchasing programs and street purchases. Every CRM has a service mining portion so you can go after the low hanging fruit to get you started. Once you have a grasp on that part of the program dive deeper into hundreds of customers coming through you service lanes that purchased at other dealers.
At my store we service an average of 150 cars a day. If you just scratch the surface with that kind of volume you can source a minimum of 36-40 cars a month at much better cost to market numbers. Not to mention your probably going to sell an additional unit.
Make sure these purchase programs are displayed on your website and with banners in your service lanes to attract potential customers to inquire about the program. Another idea is to send an email blast to your service customer base and tell them the story of how they could take advantage of historical wholesale pricing which may narrow the gap on a car they couldn’t have previously afforded.
This takes a lot of effort to develop, but once you’re on the right track you will see your front end profits soar and retail sales dramatically increase. You may never have to source cars at auction again.