3 Best Practices To Manage Used Vehicles As Investments

By Dale Pollak

Auto deal­ers need to  man­age their used vehi­cles as invest­ments. Their num­ber one goal should be to max­i­mize their return on invest­ment (ROI) with­in the short­est amount of time and the least amount of risk.

This invest­ment-dri­ven retail­ing strat­e­gy is hard­er for some deal­ers to accept (and in some cas­es, acknowl­edge) than oth­ers. The rea­son: Deal­ers are not accus­tomed to man­ag­ing their used vehi­cle inven­to­ries with the degree of dis­ci­pline and ratio­nal­i­ty that true-blue invest­ment man­agers would apply to their client port­fo­lios.

Here are three best prac­tices deal­ers use to man­age their used vehi­cles as invest­ments:

1. Fol­low a firm 45-day invest­ment time hori­zon. 

My finan­cial advi­sor believes that retire­ment-ori­ent­ed invest­ments require at least a three-year min­i­mum hori­zon; any­thing less, he believes, invites fear- or greed-dri­ven spec­u­la­tion. In used vehi­cles, the oppo­site is true—a short-but-firm retail time hori­zon of 45 days is the max­i­mum win­dow today’s mar­ket allows for used vehi­cles. By def­i­n­i­tion, this invest­ment time peri­od focus­es a deal­er on the prin­ci­pal invest­ment goal of max­i­miz­ing ROI in the least amount of time, with the least amount of risk.

2. Main­tain at least half your used vehi­cles below 30 days of age.

This inven­to­ry age stan­dard ensures deal­ers focus their atten­tion on cars when they’re fresh and stand to deliv­er the best ROI and prof­itabil­i­ty poten­tial.

Here’s an exer­cise: Com­pare the gross prof­it of vehi­cles that sell in the first 30 days com­pared to those you retail in the last 15 days (assum­ing a 45-day hori­zon). For most deal­ers, the dif­fer­ence between the gross prof­it aver­ages for fresh cars runs 5 per­cent to 10 per­cent high­er than the aver­age for old­er-age units. This dif­fer­ence is why invest­ment-mind­ed deal­ers seek to con­sis­tent­ly cap­i­tal­ize on retail­ing fresh units fast rather than “hold­ing out” for a gross prof­it that prob­a­bly won’t mate­ri­al­ize.

3. Align pric­ing to the mar­ket and each car’s ROI/profitability poten­tial. 

Some deal­ers regard invest­ment-mind­ed used vehi­cle pric­ing too sim­plis­ti­cal­ly: It is not, nor has it ever been, about pric­ing vehi­cles below the mar­ket from day one to sell cars quick­ly and rein­vest the pro­ceeds in anoth­er unit. Such an approach would unnec­es­sar­i­ly under­mine the ROI and prof­itabil­i­ty poten­tial in every car. By con­trast, invest­ment-mind­ed deal­ers know if/when the mar­ket sug­gests a car mer­its go-for-gross pric­ing right away, and when it doesn’t. They also mon­i­tor the mar­ket to make pre­cise pric­ing adjust­ments as a vehi­cle ages to bal­ance a unit’s wan­ing mar­ket appeal and its remain­ing ROI/profitability poten­tial.

There’s no ques­tion these invest­ment-focused best prac­tices require a greater deal of pric­ing and process dis­ci­pline than many deal­ers are accus­tomed to apply­ing in their used vehi­cle oper­a­tions. How­ev­er, as my friend and used vehi­cle con­sul­tant Tom­my Gibbs likes to say, “you can either suf­fer the pain of dis­ci­pline or the pain of regret.”

Read the entire arti­cle by Dale Pol­lak, founder of VAu­to. Dale can be reached at dpollak@vauto.com

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