We all know that the book values drop drastically every year at the end of the Summer selling season, and they will continue to drop steadily until December or January, and then level off through Summer, Right? We have all been there. It happens every Fall.
So.. "You have never seen this happen before? You have kept your used car inventory on a strict 60 day turn since 2010 without any problems? How could you possibly have seven hundred thousand dollars of bone-chilling "WATER" in your three million dollar used car inventory?" I could barely believe what I was hearing. Could this really be happening again?
Then it hit me. They really hadn’t seen it before. It was before their time. In reality, many of the managers are now young enough that the new “norm” is all they have experienced. I can assure you that the new or false "norm" experienced during the past 5 -6 years will not last. It has given us a false sense of security that we can gamble carelessly, a little more.. a little more and a little more, with our used car inventory. Then reality returns after a 6 year absence, in which many inexperienced used car managers thrived under "norm" conditions, and now It's over!
Prior to 2008, this was an annual occurrence. However, I don't recall them dropping for quite as long as they have this past year, and the chunks were much smaller. I will never forget the Fall selling seasons of the late 80s - early 90s, and me watching closely as the used car manager prepared the used car inventory for the annual book drop. He would never wait until the first snow hit or the temperatures fell below freezing. He always said "Never go into Fall carrying any dead weight. Get rid of all of the "WATER" or it will freeze up. You always want to run 'Lean and Mean' heading towards Winter." That really registered with me and has stuck with me through the years. The "Fall" book drop was as certain as death and taxes, and, Yes, it happened- Again. That is largely why my used car inventory always ran on a 30 day turn, and why my gross profit on used cars were always super strong.
For many it seems like your used car inventory is Frozen. The pool of "WATER" has risen to the top of their used car inventory at the end of November / December and frozen solid – Again. Like it always has. As usual, after three straight BIG book drops, the phone calls and emails started coming in.. Especially from the younger dealers, GMs and Used Car Managers who have never dealt with the Fall drop. It is certainly a scary time of year for all of us, and a beginner could get completely lost very easily.
The questions were much the same. “Have you seen the new books yet? Can you believe they dropped again? Will they get any lower? What should we do?”
I truly feel bad for these new managers, and dealers, but I have been warning dealers since late April of 2014, and have discussed it at length with many others. Most all ignored warnings concerning the severely flooded used car market on several occasions. The quantity has finally returned and is no longer an issue. The “fall” was coming and if dealers didn’t have their inventories leaned out, standing tall, and priced on the money they were going to get hurt. Maybe they would have listened if I had sent them all a video.
To me, the signs were there, and there was no reason to expect it not to happen again. The lease returns were at near record highs, the rental car companies were flipping their entire fleets at a more rapid pace to cash in on strong profits, and with new vehicle sales volume back to a 17 million SAAR, there were loads of trade-ins coming back to dealers very rapidly. Then you add in a model year change, and new car incentives that have grown once again on the heart and soul vehicles of most all manufacturers (similar models to rental cars). There has to be somewhat of a price gap between new and used vehicles, Right? So figure that in and #BooM. Book values fall at an alarming pace, and in huge chunks like rarely seen before. Welcome to Reality!
What struck me as extremely odd was that so many dealers not only never saw it coming, but they didn’t even consider it a possibility. Some were caught completely off guard. Hadn’t they seen this all before?
Over the past five - six years dealers have become used to a false "norm" – a norm in which there were serious issues with the supply and demand of inventory. There are no longer any issues. All that has changed, and we are back to Reality, and it’s not changing back anytime soon. Please don't wait for the book values to begin rising again or you might go broke. It isn’t going to happen. The new old "norm" had books continually falling also, just not as rapidly.
Now, the vehicles that were purchased only 60 days ago have dropped over 20% in some extreme cases. This is one of those rare occasions that you could possibly lose money while retailing a unit only 60 days after it was purchased. Move the unit and make it up on the trade-in or the next sale. The key is to keep moving towards your goal. I know it's hard, but it is possible
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How do you get out of the problem without losing your shirt?
Unless you plan to move money around on a unit by unit basis, via packs and write down accounts, here are a few things that I would recommend trying first. You may not like it, but the only true way to improve your situation is to sell your way out of it. You can do it!
1. Set your inventory on a strict 30 day turn. It is possible. No, it is not easy. You must get complete and total 'Buy In' from everyone to make it work. You must have everyone working towards the same common goal. Implement the necessary process to enable a group effort, and muster up the discipline to stick to it.
2. Stop Buying Inventory. Logic tells us that there are steals at this time of year, and there are, but you need to adjust (with write-down accounts or pack) any new inventory to current market value and deduct the adjusted amount from your distressed inventory. Additional inventory usually will only make things worse, but there are exceptions.
3. Rally the troops. Authorize your management team to take short deals or even losers based on what the market value truly is on the vehicle being sold. Especially in subprime, where you are limited on what can be financed by the book values. Without large down payments there is little you can do to overcome the fact that your cost is above market value as well as book value. If everyone is working as a team it will make a bad situation a lot better.
Next year when the Fall book drop occurs you will be ready. Now, as for this year, take your lumps and move forward as quickly and efficiently as you can and work to minimize your damage. Hopefully this time didn’t cost you dearly, and it will just serve as a valuable lesson to ensure that it doesn't happen again. Fall Back, Spring Forward!
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