Page 17 - GIADA-Dec 2017-Final

INDUSTRY INSIGHT

with dealers. More and more, it’s increasingly This is the water that dealers should really be potential profit resides in a vehicle. I
common for dealers to have a large number worrying about. Here are two best practices recommend that dealers strive to maintain
of vehicles with Cost to Market ratios at 90 that I recommend dealers follow to mitigate an overall inventory Cost to Market
percent or higher. The ratio suggests the the water’s ongoing erosion of their front-end average of 85 percent. This benchmark
dealers might make a 10 percent front-end gross profits in used vehicles: allows for the realities of today’s market.
gross profit, given the spread between the • Maintain at least a minimum of 55 percent Some vehicles, with a low Market Days
vehicle’s costs and retail asking prices. But, of your used vehicle inventory under 30 Supply and other unique characteristics,
in reality, the vehicles will likely transact at days of age. If you want to keep a block may be perfectly fine to acquire at a Cost
less than their asking prices—which means of ice from melting, you need to insulate to Market ratio higher than 85 percent.
the front-end margin for dealers will be or protect it from heat. For dealers, your They may cost more, but they’ll sell fast.
significantly less than 10 percent. best protection is a faster pace of retail Meanwhile, other vehicles, such as rental
sales. If the cars sell faster, you minimize car purchases, should have Cost to Market
I often tell dealers that “30 is the new 45 or 60 the profit loss that occurs as vehicles age ratios considerably lower than 85 percent,
in used vehicles”—a saying that captures how in inventory. I tell dealers, “30 is the new even below 80 percent, given they are less
margin compression has shortened the viable 45 or 60 in used vehicles” to underscore special, and more abundant, in the market.
retail shelf-life of most vehicles. how inventory age has a direct bearing on
a used vehicle’s investment quality—the I’m not suggesting that dealers ditch the
I also share an analogy: Suppose your longer it sits, the less you get. conventional view of inventory water. But I
inventory was like a block of ice, sitting in • Mind your Cost to Market metrics. The do think dealers will need to more vigilant
the middle of a room that’s 100 degrees and Cost to Market metric is useful to dealers about managing their inventory investments
getting hotter. The longer the ice sits, the in two ways. First, the metric tells you, in an era of margin compression.
more it turns to water, runs down the block, from the moment you acquire a vehicle,
spreads across the floor and loses its original what your likely retail gross profit margin As the old song goes, “you don’t miss your
purpose. will be. Second, it helps you monitor, on water, ‘til your well runs dry.” n
an individual vehicle basis, how much

GIADA Independent Auto Dealer DECEMBER 2017 | 15