Automotive News – November 2022
New and innovative strategies that are helping dealers navigate the used-car shortage
By Dennis McGinn & Cam Hitchcock
As new-car sales dropped during the last year due to supply-chain disruptions, so did vehicle trade-ins, leaving dealers to face an unprecedented shortage of used-car inventory. But dealers have been extremely resilient in the face of yet another round of adversity. Here Dennis McGinn, the chief executive officer of Rapid Recon, and Cam Hitchcock, the chief executive officer of America’s Group (which owns America’s Auto Auction), explain how dealers keep putting car buyers behind the wheel of used vehicles by adopting new strategies and technologies.
Q: Elevated wholesale used-vehicle prices and a lack of available used inventory have been lingering pain points for dealers for more than a year. When do you think the market will normalize?
Dennis McGinn: Used-car retail sales have slowed due to consumer confidence, with the average days-to-turn at 42 days, notes Paul Machin, U.S., and international director of strategic accounts at Black Book. Listed used inventory for sale is down 11 percent compared to January 2021. The lion’s share of potentially returning new and used vehicles from consumers is expected to average 7.4 million units from 2023 to 2025. Another 6.6 million units will become available from other sources. From 2017-2019, we averaged 8.4 million units from lease returns, repossessions, rental returns, and other fleets.
Cam Hitchcock: Many factors are in play in today’s market. Considering we have just officially entered a “bear” stock market, it is hard to say. Most likely when wholesale prices return to within 10 percent of “normal,” dealers will have more confidence to carry more inventory. With production challenges and disruptions in the wholesale marketplace, I wouldn’t expect much relief in the next year or more.
Hitchcock: We believe that dealers are the most innovative group within the remarketing ecosystem. They will continue to adapt in order to obtain the inventory they need. One outside-of-the-box method being discussed is what’s known as wholesale/retail blurring in the remarketing arena. At the recent National Auto Auction Association (NAAA) convention, we discussed this phenomenon and how it could affect dealers sourcing used vehicles. This hybrid model is growing internationally and will eventually make its way to the United States. Like the push for electric vehicles, dealers will prepare and adapt.
McGinn: According to Black Book, today’s used-vehicle supply includes vehicles up to 8 years old. The average car on the road today is 12 years old, reports S&P Global Mobility. In response, dealers increasingly turn to buying centers and digital acquisition tools to connect them with private sellers and auctions everywhere. The more afield this sourcing, the longer the transportation time to the dealership, which burdens reconditioning time and expenses for these cars. Dealers will want to keep this factor in mind as they consider reconditioning investment and vehicle pricing. A dealer’s money is wrapped up in acquisition costs and cannot be released until the car is sold. Reducing this time-to-line dynamic, a key performance indicator, becomes more critical when transportation times increase. For locally sourced vehicles, dealers that get them front-line ready within three to five days will reduce holding, internal parts, and labor costs. Speed-to-sale times influence vehicles’ profit potential and consumer affordability in any market.
Q: Does sourcing used cars now require dealers to look much farther afield than they used to? If so, how do they minimize the risks associated with long-distance purchases?
McGinn: Dealers today are buying cars in conditions they would not have considered before. These acquisitions often involve cars in conditions they would have automatically wholesaled months earlier. Now they are considered retail candidates. Dealers we routinely consult with tell us some strange stories. For example, one new-car import dealer that usually turns 400 new and used units a month never used auctions until this summer. Another is sourcing much older cars and investing more in their reconditioning. How deep are they buying? Vehicles that are 10 or more years old, including those with engine and other heavy component replacement needs, are not unusual. From our perspective, the most pressing risk for dealers buying afar is the time required to move those vehicles from the sourcing site to the dealership. There is only so much that car carriers and transporters can do to tighten this time. We have been working with the transport ecosystem to help them better understand the role of vehicle reconditioning and that this necessary process cannot start until cars arrive. For transporters and dealers alike, these efforts help them appreciate their role in reconditioning time-to-line because the clock on this key management metric begins at acquisition.
Hitchcock: This depends largely on the size of a dealer’s operation and the relationship the buyer has with the inventory source. Auctions can help lower the risk for buyers through post-sale inspections and extending arbitration periods. Transportation and logistics companies have excelled in offsetting their challenges by making vehicle delivery more streamlined.
Q: Are dealers being more purposeful/data-driven about the cars they buy at auctions than before the shortage? If so, how are they determining the vehicles – year, make, model, mileage, retail turn-time, etc. – that will sell best in their markets?
Hitchcock: Yes. We believe that dealers quickly pivoted to a higher discipline approach in this remarkably changing environment. They are aware of the numerous kinds of data available and have learned the ways to curate and parse that information to their benefit.
McGinn: Analytic tools to help dealers buy differently at auctions can strategically guide these questions. It is advantageous to know potential reconditioning costs before raising your hand. VinTel, which provides automotive diagnostic reports and integrates with our reconditioning system, gives buyers historical, vehicle-specific data to help them identify potential trade-in and arbitration issues and costs before they become a problem.
Q: Are there any new technologies that can help car dealers find whole¬sale vehicles and/or get them onto lots quicker, thus replenishing inventory faster and more efficiently?
McGinn: Yes. And for specifics, the Internet is an excellent research tool. Jay Wertzberger, the founder of Auto Transport Intel (ATI), an online education platform for dealers, remarketers, transporters, and brokers, points out the need for awareness and education about how dealers can access and use sourcing platforms. Digital auction and online auto-wholesale platforms have also learned the importance of integrating auto-transport services. By using “Ship Now” buttons on acquisition platforms, auto transport service providers, integrated with transportation-management systems, speed up and manage buyer orders and track drivers, loads and bills of lading. The end goal, Wertzberger said, is reducing the delivery gap.
Hitchcock: There are a lot of sources available. Dealers are very good at understanding the logistics side of their sourcing operation and balancing efficiencies with inventory costs. With the paradigm shifts the vehicle remarketing industry has experienced, advancing technologies are more efficient for dealers to source used-vehicle inventory.
Q: How well do you think dealers have adapted to the used-car shortage? Are there any useful takeaways from how they’ve handled this extremely challenging business disruption?
Hitchcock: Dealers have proven that when the need is imperative, they will find a way to fulfill that need. Even new-car dealers that previously didn’t buy much at auctions learned a great deal about sourcing and used-car margin execution.
McGinn: Our best-performing dealer customers saw the handwriting in early 2019 and have readily adopted digital retail tools to reach markets widely and make the purchase process seamless for buyers. They’ve also become even savvier about used-car operations. A Canadian group describes itself now as a used-car dealership that also sells new cars. The adjustment many dealers need to make is two-fold: Lower reconditioning time-to-line days (a 2-1/2-day improvement translates to one additional turn) and watch processes and steps diligently to identify and eliminate process lags, so cars get reconditioned faster. A serious focus on margin compression, the road to the sale and overall customer satisfaction have taken a beating in recent years. Customers have long memories – some dealers will wish they had not treated the last two years as a selling free-for-all. To build transparency and value in the vehicle’s dealerships sell, dealers should refocus on best practices; reacquaint staff with sound, consultative selling techniques; and make available to consumers confidence-building documents, such as a reconditioning-investment report.
Q: The used-car shortage has forced many dealers to sell high-mileage cars they never would’ve considered selling before – even vehicles with more than 200,000 miles on the odometer. What steps can they take to overcome the stigma attached to high-mileage autos?
McGinn: Dealers are proving they can make money on these vehicles. It requires good analytics – buying, reconditioning, and marketing – to ensure they come out ahead. The supply challenge will remain with us for some time, so older and higher-mileage vehicles have become dealers’ bread-and-butter inventory. We had better learn how to transform older vehicles into safe transportation at a fair price. By using repair-history data tools, dealers and their buying centers can know the costs to recondition older models to front-line status before they invest in them. With reconditioning repair receipts in hand (and on-screen), dealers can build consumer trust and value in these older units. Consumers deserve to be confident the 12-year-old model they bought from you is a good investment in reliable transportation for many miles.
Hitchcock: Price points and afford¬ability changed the market in this area. The reality is that most consumers can only afford a certain amount of their income on transportation and that really pushed these types of vehicles into several dealers’ sweet spots. It is less about stigma and more about matching the consumer with the vehicle they need and can afford.