Don't forget the fundamentals.....
If we aren't careful 2020 and 2021 could turn us into sloppy retailers.
As Vince Lombardi once said, “without the fundamentals, the details are useless.” It has been too easy to be successful in the car business over the last eighteen months without the fundamentals. Of course, it didn’t start off easy in March when the pandemic hit the US, and we had a slight market drop scare in late June through early August, but that didn’t last long. There are many reasons it didn’t last long, and we will address that in another episode.
As mentioned, the used car valuations turned back up in late August and quickly relieved the tensions of dealers who were overstocked or had completely ignored their inventory aging reports. If you’re asking why would they do that, then you probably are not a Retail Automotive Dealer. The answer is, you could be very sloppy and make a ton of money. So, you can’t really blame them when you understand how lucrative the market has been. You could have completely abandoned your acquisition and disposal fundamentals without any penalty. Truth be told, dealers couldn’t buy inventory fast enough, and whatever they bought they sold and sold for a substantial profit. Dealers were even buying cars higher than retail “Price to Market” and holding them longer than ever before to get the most they could for the vehicle. And it was working. In the rare case when a dealer brought their vehicles to auction, they could expect retail type gross profits there too. Dealers were showing real wholesale profits on their P&L for the first time, and in many cases, in the 6-figure amount. Unheard of and according to historical NADA guidelines, a very bad-looking P&L line item. However, the NADA guidelines for operations and financial fundamentals were also being turned on their head. I could go on and on, but you get the picture. We were and still are in a market and industry unlike any we have ever seen before. (See graphs below)
So…. what have we learned? First, we can’t abandon fundamentals. No matter how unusual the market becomes, the fundamentals should never be forgotten. Does that mean you keep your hard turn and aging policy when the market is like it was then and is again today? No, it doesn’t. That would not be sound advice. It does mean you build your business plans to achieve the most the market will bear in the current state while keeping those fundamentals as footnotes to your plan and available for use quickly when needed. We know the market is not exactly like it was, so we must be more mindful in our operating approach moving forward and be prepared for any correction. However, a lot of those lucrative attributes, that are not traditional automotive market dynamics, are here to stay for some time. Early estimates are that used valuations won’t stabilize or see a downturn until we get through tax season next year. Retail demand should stay healthy through the same time period. That is great news. Work with your Inventory Management partners and build a plan to take advantage of what should be a healthy rest of Q4's first half of 2022.
