There has been a noticeable spike in activity in the wholesale market, but I advise caution ahead when buying cars at auction. The sudden spike in wholesale liquidity could create a false sense of urgency to begin re-stocking your used inventory back to the levels you were stocking prior to the market decline.
Wholesale markets may have increased but the retail market is still 10-15% below the year to year comparisons. With consumer confidence still lagging due to the massive amount of the U.S. population filing for unemployment compensation, retail demand will not support re-stocking your used car inventory back to its previously levels.
- My suggestion is to stock your inventory at an 85-90% of your rolling 30 days sales. Take into consideration how many trade-ins you normally take in every month. Subtract your trades and that will give you the total number of cars you need to source at auctions.
Let’s do the math:
- 115 rolling 30 day average
- 85% is 98 units
- 35 trades per month
- You need to source 63 cars per month
Now break down the 63 cars you need to source at auctions by the week. Now you have 15 cars a week you need to source at auction. Using this weekly strategy promotes 3 best practices.
- Buying weekly eliminates recon overload
- Avoids inventory bucket overload by spreading out your purchases evenly
- Allows you to be more precise in targeting the most profitable cars for your inventory
Pro Tip! Mining cars from your service drive will reduce the number of cars you need to source at auction.
Monitor Your Look to Book Ratio Daily
According to most automotive industry experts, the benchmark for your look to book ratio is 50% or higher. Monitoring your previous days appraisals every day will continuously increase your look to book ratio and eventually will lower the number of cars you need to source at auctions.
When your able to trade for more cars at 86-88% of cost to market, instead of 90-91% that most auction cars demand, you increase your margins by 4 to 5%.
Pro Tip! Monitor your look to book by manager and salesperson. This will find areas of improvement
I must admit that buying cars at auction is my favorite part of the business, but I still advise great caution ahead buying cars at auctions. We may see other dips in the wholesale market valuations as the large captive finance companies like GM financial, Ford Credit and rental car companies like Hertz and Avis begin to liquidate their massive amounts of depreciated inventory onto the wholesale market.