How successful dealers handle a changing auto dealer market – Part 2

We started this conversation a few months ago as the Federal Reserve started raising the benchmark federal funds rate. The effect has been in line with what most experts in the auto world have expected, slowing consumer demand for cars.

However, having just exchanged thoughts and insights between industry experts at the 2022 Used Car Week out in San Diego, we’re learning that macro trends affecting the used car market are more nuanced than “higher rates, less demand.” With supply chain issues still occurring with new cars across the US, used car demand won’t precipitously drop overnight.

As we turn the corner for 2023, it’s clear that we’re entering a more cautious time in the market. At Lever Auto, we work with hundreds of dealers a day to optimize their operations, whether via financing or technology, and we wanted to continue the conversation we started with our previous article. How dealers can best position themselves during a time of slowing consumer demand in the used car industry.

In the previous article, link, we discussed quick actions that can be taken to optimize operations, such as technology integrations and migration of files to the cloud. Now, we’d like to focus on sourcing used vehicles. This is the one thing we’re seeing across all dealerships. Trade-ins and lease returns are slowing and dealers now must go back to their pre-2020 strategy of multi-channel sourcing.

But, as we’re learning through data by OEM orders from car manufacturers, the market is set to normalize. Demand won’t drop off the cliff for used or new cars. Instead of waiting in the wings for the “inevitable drop”, the data suggests consumers will buy cars in the next 24 months.

Dealers now must proactively search for deals and bring these cars in via auctions or other wholesale channels – i.e. returning to the fundamentals of selling cars. However, wholesale pricing has yet to reflect the shifting market. Prices are still very high for used cars at auctions and dealers are, smartly, sitting tight until pricing normalizes.

Discipline is the name of the game for sourcing right now. Market conditions won’t allow auto dealers to overpay for cars that require reconditioning. While it’s common sense to go back to basics and being conservative with buying while wholesale prices remain high, there are strategies that better position dealers.

Dealers should into an aggregate data provider. CarGurus, Edmunds, Autotrader, and True Car offer inventory analysis for dealers. These datasets will allow independent auto dealers to have a data-driven sourcing strategy where they can look at the best-selling types/models of cars in their geographic area. Sometimes these datasets can also help with pricing each vehicle, which is especially important in today’s market as pricing is changing week by week.

It’s also clear that most dealers have been successful with sourcing based on their own know-how and market experience. We call these the “gut” purchases.

While we always advocate more data-driven decisions, if you’re a dealer that buying based on previous sales experience creating a database in Google Sheets or through your inventory/floor plan management system is a smart idea. This can be as simple as plugging in the last 12 months of sales data and adding a handful of columns that categorize type, make, model, mileage, and price for each vehicle sold. You could do the same for any inventory that has been on the lot for over 30 days as well.

Without exception, each time Lever Auto aggregates data for dealers there are a few surprising insights that pop up. Whether it’s the location of car buyers or mileage, that’s moving quicker, these are critical data points at are easy to collect. If nothing else, it builds the profile of the ideal car to buy at auction for each type of vehicle.

The other strategy dealers should consider is bypassing wholesale channels and buying via trade-ins or directly from consumers. In this acquisition strategy, dealers can avoid fees and costs associated with buying at auctions. Margins can increase by 10-20% per car sold with inventory acquired from these sources.

While trade-ins are tied to referrals and previous car sales, there are strategies dealerships can employ to increase buying directly from consumers. In the next iteration of this article, we’ll cover strategies that dealers and their sales teams can leverage to streamline direct car acquisitions.

The last few years have been unprecedented in the used car world. Everyone has heard a story of their friend selling a car back to a dealer above the sticker price they paid for it.

During stretches in the market where it’s hard to keep inventory on the lot, dealers can let operational inefficiencies slide. When you’re selling cars at historic margins, dealers can focus their resources on sourcing and staffing.

But, things are slowing. In most parts of the country, a car purchase is the second largest asset a consumer will purchase. With interest rates rising and car supply stabilizing, consumers aren’t rushing to car lots anymore to buy a high-ticket asset.

How can independent auto dealers optimize as we head for 2023 in an economy that’s becoming more cautious with its cash?

This is an opportune time for dealers to add processes and systems to manage their administration and cash flow. The goal is to add efficiencies that will cut costs and optimize inventory management. Two critical strategies during slower markets. 

The first step for most dealers is looking at their operational workflow, identifying the paper exchange at each interval, and deciding where that can be digitized. Two that tend to take a lot of time away from dealers are tracking titles and audit reconciliation. 

While we’re still a ways away from digital titles, most dealers have an on-hand solution that can be leveraged. Floor plan technologies, such as Lever Auto’s dealer platform, are included for dealers that are approved for financing. These technologies offer title tracking and management for both auction and non-auction purchases. Whether it’s FedEx tracking of the title or digitally releasing of titles, these systems ensure a secure and quick title management process. Also, these tools can manage audits, both digital and on-site, and reconciliation. 

If you’re flooring cars through a provider, make sure to reach out to their account team to see what standard features you can leverage in their portal.

For all other filings and paperwork management, look to the cloud. There are many affordable options for digital file management. 

One of the easiest to implement is Google Drive which requires quick signup with a Google email. Their free tier is usually enough for an auto dealer’s needs.

If most of your paperwork is still, well, paper, consider using a mobile phone scanning app such as ScanNow. It will allow you to scan from your phone and upload to your Google Drive.

While you’re going through a review of your paperwork, why not use it as a time to focus on line items and finances? Successful dealers tend to know the small details of their finances which give them a picture of their cash flow and an understanding of how to cut costs during slower markets. 

At Lever Auto we often speak with dealers that do not know the line items on each one of their floored cars. This is understandable as each car is usually its own loan (if it’s floored with a floor plan provider) with varying terms and costs. As a dealer, you’re focused on buying value at wholesale, selling quickly, and making a fair margin on the car. If you make more than your wholesale costs, you’re happy and moving on to the next deal.

However, what goes unnoticed are those in-between costs that eat into your margin and are hard to identify. Dealers often have had the same floor plan financing for years and do not question what it’s really costing to floor each car. In a slowing market, it’s more important than ever to analyze per-unit fees so you’re increasing your margins.

We suggest pulling an inventory report from your floor plan providers over the last three months and looking at the fees associated with each car. If nothing else, this will give you an understanding (transparency) of standard expenses going out the door with each car sale. 

Given that you’re in good standing, you can also use this review to shop for other plans that are more competitive and will save you costs during slower markets. 

At Lever Auto, we’re aligned with dealers’ business objectives. We offer a flat fee that gives you complete transparency into your costs of flooring. It also allows dealers the liberty to floor and sell as many units as they need during a given month.

Cash-flow management goes hand in hand with inventory management as cars start to sit longer on lots. Inventory management and sourcing are major priorities during slower markets and we’ll discuss strategies in the second part of this series.