Do you want the good news or the bad news? The bad news is, I don’t see an end to the inventory crunch. I predict shortages will continue through mid-2022. The good news is, dealers are making more gross profit than ever. Margins are high and will remain so for some time. The only hitch of course, is that you have to have inventory to sell.
It’s time to get aggressive with sourcing efforts. Dealers are competing for pre-owned inventory with rental car companies as well as the CarMax’s and Carvana’s of the world. If you’re relying on the same old sourcing techniques you’ll be running out of cars sooner rather than later. Here are a few ideas.
Contact Unsold Customers
Make call lists of unsold customers going back three months. Some bought elsewhere but some did not buy at all. Vehicles belonging to those non-buyers may be worth thousands more than they were two months ago. Reach out to them. It’s worth a try.
Buy Lease Returns
Buy any and every possible lease return you can: whether or not it’s your brand, whether or not it’s from your own customers. Don’t pass on a vehicle just because it has damage. Age means nothing. Advertise and market the heck out of this.
Let customers know they might profit from any pre-set residual value that was set at inception of the lease. For example, if that purchase option was $10,000 and a dealer can pay the customer $14,000 for the lease return, that’s $4,000 cash in the customer’s pocket.
If you can’t sell the vehicles, wholesale them. The wholesale market is getting stupid. The rule of thumb with wholesale is that dealers may break even, lose $100 or make $100. Now dealers are making $3,000 profit on vehicles they would have called junk two years ago. I see dealers making $70K or $80K a month in wholesale profit. It’s a whole new profit center.
Establish a Service Drive Appraisal Program
There’s a right way and wrong way to source pre-owned vehicles from service customers. First, don’t put existing salespeople in the service department and expect them to be successful. Hire someone to work exclusively in the service department and pay them a base salary.
Don’t approach customers in the service drive. You don’t want to scare them away, so place signage in your service drive that promotes your free market valuation. When customers raise their hands, only then can the salesperson engage. For customers who don’t raise their hands, leave an appraisal on their front seat.
Pay More, Sell for More
I’ve had a few dealers tell me they don’t want to spend ridiculous amounts of money to buy pre-owned inventory. Yes, vehicles are way overvalued. But there’s no inventory.
Pay more to get cars that you would have passed on two years ago, but then sell for more. If you don’t pay more you’ll be sitting with no inventory, so get in the game.
Cast your marketing net wider. Customers are willing to drive a long way to get the vehicle they want. Dealers are holding their prices firm and customers are willing to pay. Many stores are averaging $3,000 to $6,000 front end profit per vehicle. Don’t bother looking at market data to see what cars are selling for because it means nothing.
Just keep raising prices, up, up and up. Trust me, your competitors are and they’re being very successful. Many dealers are having the best months they’ve ever had in their history. Cars are routinely priced at 135 percent to 145 percent to market, and customers are paying.
This craziness will probably continue for at least another year, so it’s time to think outside the box when it comes to sourcing pre-owned inventory. Hold free car clinics, leave cards on vehicles in grocery store parking lots, whatever it takes. Gather your team and brainstorm. Inventory won’t drive itself onto your lot.
Darren Militscher has more than 40 years of experience in the automotive industry and currently serves as a Senior Strategic Growth Manager for DealerSocket. He started his career working on the inventory management solution that would become Inventory+.