By James A. Ziegler, CSP, HSG, Ziegler SuperSystems, Inc.
The Shell Game of Used Car Values
Dealers, fasten your chin straps, check the security of your seat belts, and prepare for a roller coaster ride, as used car values fluctuate wildly in the coming months. Can you guess which shell the pea is under? Do you hang onto unsold pre-owned cars for 60 or 90 days, maybe 120 if you're betting on the long shot? Nobody knows anymore, and that's the correct answer.
Dealerships are in for a turbulent ride as used car market values become more unpredictable than ever. It's akin to the classic shell game, where predicting the whereabouts of the pea is an elusive feat. You might be thinking, "Well, our dealership used to have a strict policy of turning over inventory every 60 or 90 days," and that was sound advice I gave at the time. However, the paradigm has shifted significantly.
With 49 years in the car business, I've learned to read the tea leaves and pivot when necessary. I've always been able to go with it and stay on the wave's crest before it broke. When it comes to used cars, my go-to source for predictions and trends is my friend Jasen Rice at Lotpops. Combine that with insights gathered from communication with more than 100 industry peers through various channels, and you've got what I call "Experiential Intuition."
But let's shift gears and focus on a pressing issue: Recon.
Recon Delays: Revealing the Truth
Dealers pay attention here. Your GM, your service manager, and your used car manager are all lying to you about the speed in getting vehicles from trade-in to frontline-ready. Oh, they don't mean to, but they are.
Okay, maybe I was a little harsh. It's not deception but rather a case of 'mass delusion.' Your managers have said the big lie so many times that they believe it themselves. The big lie is when they tell you (and they tell each other) that they have every car from trade-in to frontline-ready in less than three days. Now, granted, they believe that because occasionally they actually do it.
In reality, the average time is closer to seven days, sometimes even longer, and the delay can lead to a hidden loss in the value of the vehicle, affecting your bottom line.
Optimizing Recon to Maximize Your Profits
In the past, successful dealerships turned around vehicles in 72 hours. Watching and studying the Van Tuyls back in the day, and my friends at Lynn Hickey Dodge when they were setting world record numbers, the best players in the business were turning every car from trade-in to frontline ready in 72 hours, even if it needed a paint job. The only exception was if it was waiting for parts.
But still, it's a profit opportunity often overlooked. Why's that? It's because Customer Pay and CPO are perceived as greater profit opportunities for service. It's why it takes three hours to get a simple oil change at a franchised dealership's 'Quick Lube' that's anything but quick. The inverse example is that a customer is in and out of a Jiffy Lube in 30 minutes without an appointment.
The solution is to consider adopting similar strategies to some of the top dealerships. Some have dedicated techs and facilities for reconditioning, while others have implemented a third shift to utilize available resources efficiently. A third shift for reconditioning, utilizing part-time techs with full-time jobs elsewhere, can help expedite the process without overloading your main technicians.
Tesla's Rollercoaster Ride... Elon's Messing with Us Again
Now, let's talk about Tesla's rollercoaster ride. Imagine this: You purchase a Tesla Model X in January for $180,000 only to read the same model is now selling for $125,000 shortly after. Like many Tesla owners, you financed your socially correct ride, and now you’re unhappy, but worse yet, it's causing huge ripples in the industry. Every Tesla model has had similar price cuts proportionately. You bought a Model S Plaid yesterday, and they’re selling for $20,000 less today. Across the brand, Tesla faithful are screaming 'Bloody Murder,' fearing more price cuts as perceived equity erodes.
As if to intentionally insult the faithful, Tesla not only cut their no-haggle nonnegotiable sale price by huge chunks at a time but now they're cutting prices on optional paint colors and accessories like 'Full Self-Driving Software,' which saw a $3,000 discount. There's no telling what price drops are next.
EV Price Volatility: A Broader Perspective
The rollercoaster ride is not limited to Tesla alone. The entire electric vehicle market is subject to volatility, with domestic and imported models feeling the impact. As weeds grow under and around the EVs in stock on the lot, you'll have reps begging dealers to take EVs. And that's almost every brand. These executives are losing billions, but still, they are doggedly sticking to the script and pursuing the false narrative.
So, that would definitely reflect on future values in the BEV arena. As I wrote last issue, consumers have voted on EVs with their checkbooks, and they are overwhelmingly saying 'No' with a loud voice.
All of the self-proclaimed pseudo-experts are saying there is a lot of pent-up demand, and that should mean sales should be up, but truthfully, is that what we're experiencing?
Factors Contributing to Auto Loan Rejections
According to the Federal Reserve, auto loan rejections have reached an all-time high. According to BankRate.com, a leading authority I rely on for stats about finance, 'Affordability,' 'High-Interest Rates' and the 'Price of Cars are major reasons for loan rejections in this market. The Federal Reserve said that 'debt as a percentage of income' was also a major factor in loan rejections. That stat has increased nearly 6% year over year.
In the past, we've always assumed it was about 'Poor Credit.' Well, delinquency and repossessions are also at an all-time high, which compounds the reasons finance sources are rejecting and conditioning so many loans. It's not just the car business, as home loans are also seeing a similar trend. According to the Federal Reserve, loan rejections have increased 21.8% since they started keeping records in 2018.
Many, or actually most, of the factors causing our customers' loans to be rejected have actually been created by our manufacturers. So, Instead of building more entry-level cars and trucks, our OEMs have gotten clever with subscription accessories (a trick Elon Musk taught us), which consumers are also rejecting. With interest rates soaring and lenders withdrawing from the subprime market, it's no wonder F&I profits for many of the big public companies have taken a hit.
The Vanishing Supply of Quality Late-Model Pre-Owned Vehicles
And exactly where will we get quality late-model pre-owned cars and trucks? Oh no, there aren't any of them.
In the past, there's always been an adequate supply of used cars. It wasn't that long ago I was advocating that family-owned dealership needed to start their own used car centers without manufacturer involvement. Of course, the stars were lined up differently then. Take a clue from the Big Publics. Two years ago, they were all bullish on standalone used car dealerships, exemplified by Sonic's Echo Park or Lithia's Driveway. I was also pedal to the metal back then, thinking, what a great idea. Even the manufacturers sought a piece of the dealers' profits with initiatives like Car Bravo and Blue Disadvantage. However, it's a bad idea; I caution dealers against allowing manufacturers to encroach upon their pre-owned profits and data.
But now everyone's slamming on the brakes, and used cars are drying up. Even Penske was dabbling in it but has now closed at least one of their standalone stores, CarShop. Echo Park has likewise closed several of their standalones. I just read that 8.1 million less cars were produced during the pandemic, chip shortage, and subsequent inventory shortages. So, that's 8 million less late-model pre-owned cars and trucks now.
It's the perfect storm because we were selling these cars at premium prices because of short supply and, in my opinion, because of manufacturers' greed, loading them up with accessories and producing top-line vehicles. We were selling them for $10,000 - $20,000 over MSRP and financing a lot of cars and trucks for 84 months. Of course, the captive lenders and the banks were in a situation where they felt obligated to 'over-advance' heavily on these loans, rolling over negative equity from their trade-ins into the new loans as well.
These people that bought cars during this period are so screwed. They're so upside down they can't dig out of those cars for a couple more years, if ever.
Of course, during a pandemic, there's a greatly reduced need for rental cars. There went our program units. CPOs from the manufacturers are in short supply as well.
Well, at least we still have off-lease units coming to maturity, right? Well, yes, and no. According to everything I've read and sources are telling me, people are exercising the 'buyout option' at lease-end and keeping the leased units.
As a matter of fact, my lease is up next year, and for the first time, I'm buying out the lease at the end of the contract. I will not pay $35,000 more for a new than I paid for the identical vehicle three years ago. My car only has 20,000 miles. I'll buy an extended service contract and drive it for a while longer. I am like most lessees, affluent but not stupid. Right now, the average car on the road is over 12 years old. I might join that number.
I don't want to spread any more doom and gloom, but I did want to wake you up because most dealerships are acting like we can ignore it and it will go away. That's true. It will level out and return to some semblance of normality long after the current crop of manufacturer executives have retired or otherwise been removed.
Counteract These Challenges
The answer is to get aggressive buying cars from the public.
You can look at my textbooks from the early '90s, and I was advocating buying cars from the public long before it became fashionable. I was in New York working at a dealership I was consulting back in the mid-90s, and I came across a trainer named Jerry Linsky, who was teaching a really good class on buying cars from the people on the phone. I wouldn't be wrong if I described him as the party animal, but the guy could 'cold call' previous owners or virtually any list and sell five or six cars daily, just using that technique. Remember, the internet wasn't even a thing yet, not back then anyway. I was amazed that this guy, Linsky, was doing what I was teaching as a trainer.
So, that's the answer. You have to double down and get serious about acquiring used inventory from the public. Everybody's advertising "Sell Us Your Car." It used to be just CarMax, but now everyone's doing it. CarMax, Carvana, all of the Publics, and your biggest competitors are out there on the hunt.
If I owned your store, I'd advertise FREE Oil Changes with a 32-point inspection of your car just to get them in and have a chance to convert them to sell or trade. I have dealers say, "I won't give away a $20.00 oil change, but I will spend $75.00 on a third-party lead."
There are many programs out there to buy inventory from your current customer base, but because you are probably understaffed in that department, you don't seriously do it as you need to.
They're not trading them in when they buy. They are selling them to somebody, even though, in most states, they lose the tax advantage. It had better be you.
You have the resources. You need to hire the staff and put them to work wringing out social media, working every lead to buy their car, every opportunity on the service drive, and every lease maturing. The competition is all over it, and you can't afford the auctions.
You need to rethink what you stock. Remember, the dirt lot that sold the car for the sixth time made more than you did when it was a $60,000 car brand new. There's gold in older inventory. Go back to the top of the page and reread the part about recon.
Grab a bag of popcorn, because the circus ringmasters have lost control and have no idea how to fix the mess they've created.
The best dealers have already left the 'Big Top' and are out there scouring the streets to buy inventory.
James A. Ziegler, CSP, HSG, of Ziegler SuperSystems, Inc., for 45
years, has been a recognized industry leader, writer, magazine columnist,
professional speaker, and super performer following a record-setting sales
career as F&I manager/director, and GSM with some of the top automobile
dealerships in the country. Jim has worked with more than 15,000 dealerships
nationwide, and over 125,000 dealers, managers, and factory executives have
attended his automobile dealer management trainings.