COMMENTARY: How used-car dealers can limit risks mathematically

BROOMFIELD, Colo.  - 

Those of you familiar with the book or movie “Moneyball” will know about “sabermetrics,” the use of extensive data analysis to measure players’ performances during the game.

Billy Beane, then general manager of the Oakland A’s, used this approach to build a winning team at a fraction of what the big-market New York Yankees were spending on players. Beane felt that the way baseball players were being evaluated was outdated and did not take advantage of advances in statistical analysis.

Used-car dealers today need to embrace a version of sabermetrics.

Too often, we still see dealers making purchasing decisions based on hunches and preferences rather than hard data. One dealer stocks white, pewter and grey models because the GM likes those colors. Or another dealer stocks a bunch of Mazda 3 sedans because they got them at bargain prices. Those aren’t mathematically sound business decisions.

You know who is using analytics? The big chains like CarMax. And they are kicking the tails of those who aren’t. They can pay employees hourly since the staff just follows the formulas outlined by CarMax.

Hedging your bets

To further the “Moneyball” analogy, think of the best cars for your market as the best players for your team. Use available analytics to determine the best-selling models in your market and then look for them beyond your traditional geographic base. Everyone in a local market typically is fighting over the same units and paying top dollar.

Travis Wise, DealersLink

Dealers in Colorado know that a Subaru Crosstreck is a fast mover in that market. That same vehicle in a place like Arkansas is probably soft. Everyone in our industry says to go to Arizona for a hot, dry car, but that may not be the best place to get the best mathematical — and profitable — deal.

Feedback from our clients indicates that about 50 percent of sales come from new-car locates. But many of those come from purchasing the cheapest cars and trying to force them into the local market. 

You can hedge your bets by searching for and offering models that statistically do well in your market. Expand your available inventory beyond what’s sitting on your lot. If a customer doesn’t see what they want at your dealership, offer to find it and transport it for them. What’s better than pre-selling a vehicle that’s not taking up space?

The customer is hedging their bets because they’re dealing with you — a live human being with a brick-and-mortar dealership — instead of with some anonymous online seller they’ve never met. Your task is to give them a pleasant experience that will lead to referrals, repeat business and ancillary services like parts and repairs.

Flex Inventory

What I’m advocating for is a “flex inventory” that relies on purchasing decisions based on data, but with one caution.

On the wholesale side, the market is live for eight to 10 days, so you have to understand your “turn” (how fast you can sell cars on your lot).

Analytics won’t necessarily help you if market preferences change very quickly; for example, if everyone in your market likes Ford Focuses one month and then Honda Civics the next, due to a new package or trim.

The flex-inventory approach relies on analytics and a quick turn to keep your inventory fresh and desirable. You keep refreshing it as you go and don’t have the expenses associated with keeping soft vehicles on your lot for a long period of time.

Another benefit of this approach is lead generation. Having the hottest movers on your lot brings people in to your dealership. You can sell them one of those models, or you can slow the customer down and show them the wider selection that you have access to. You can remove limits and sell them a Yaris or a Bentley, if that’s what they want.

Kill the curtailment

Some of you will read the term “curtailment” and grumble. I understand your pain.

For those who don’t know, “retail floor planning” is a type of short-term loan that banks give dealerships to purchase inventory. The inventory itself serves as collateral. Curtailment basically is amortization of the loan after a grace period. That means you start paying the differences in book-value drops from a stated marker monthly, as well as interest installments.

If you can sell your newly acquired inventory before the interest kicks in, you’ve avoided extra expenses and can make more profit. If you are not successful in doing so and drag it on, at some point the bank will expect a large curtailment check. If you don’t pay, they can hold up the titles on those cars or lock down flooring completely, thus making it impossible to take trades, floor new purchases or replenish sold units.

Using analytics and the flex-inventory approach, you can purchase and finance smarter, turn your vehicles quicker, and make more money. Floor less, sell more and get the customer what they want. Reduce loses and increase gains. Stabilize your dealership and reduce the amount of risk you are exposed to.

Perhaps this quote from the movie “Moneyball” sums up my thoughts about how dealers can use math to limit their risks: “But if we win, on our budget, with this team ... we'll have changed the game. And that's what I want. I want it to mean something.”

If small to mid-size dealers succeed on their budget, with their inventory, they will have changed the game. It’s time to play ball!

Travis Wise is senior VP of sales with , an automotive systems integration and networking technology company based in Broomfield, Colo..

 

Today's top headlines