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December 2009, F&I and Showroom - Cover Story

by Gregory Arroyo - Also by this author

As predicted, 2009 was the year of the used car, but not for all the reasons the industry expected. Instead of putting the industry’s know-how on display, the volatility that struck the used-vehicle market revealed just how little control dealers have. Industry insiders say dealers will have to be quick studies if they hope to succeed in the new order that is the used-vehicle market.

The inventory management game is not what it used to be. With the margin-compressed environment taking its toll on everything from average income to F&I profits, dealers found that the one department they could rely on was riding its own rollercoaster. Dale Pollak, founder and chairman of vAuto, says it’s symptomatic of the new order for the used market.

“There’s a new order to the used-car market, and that’s volatility,” says Pollak. “And I don’t believe this is a temporary condition. This old dog’s got to learn some new tricks, because it’s not just about working harder, it’s about working differently.”

Despite supply and demand pushing wholesale values in dealers’ favor, the retail market has been unable to respond — either because of skittish consumers or unwilling lenders. Overreactions to gas prices, increasing unemployment, and a more transparent used-vehicle market have also played into the volatility. It’s an environment where a little luck can go a long way.

Gut Instinct and a Little Luck

Despite lenders pushing more consumers into the used market, Massachusetts-based Stoneham Ford didn’t flinch. Touting the highest-volume fleet department in the Northeast, the dealership maintained its four-to-one, new-to-used ratio. It was a decision that rewarded the dealership through the Cash for Clunkers months, as the dealership became Ford’s No. 2 dealership for July and August sales in New England.

“Over the last two years, there have been a lot of Ford dealers who were little more than used-car dealers, and Cash for Clunkers punished a lot of them,” says Mike Warwick, the dealership’s Internet director.

Tiger Shaw, director of inventory for DealerTrack, tells a story about another Northeast dealer who took on pickups in trades during the gas crisis two summers ago. Having dumped $5,000 to $7,000 into the vehicles, he refused to take a loss at auction even though he was losing money every day the vehicles sat on his lot. His patience, however, was rewarded.

“He really took a big risk, but by the fall the market swung and he was making $2,000 to $5,000 front-ends on these trucks,” Shaw recalls. “We’ve analyzed a lot of dealers’ data and we really don’t see the seasonality swings that everybody tries to capitalize on, but you hear stories.”

The consensus among dealers is the used-car guides don’t work like they once did, especially in this constantly changing environment. A good example of that is the National Automobile Dealers Association’s Used Car Guide Update. Aside from showing that wholesale-to-retail spreads crept back to their historical levels, the report says the 2009 Official Used Car Guide did not reflect the wholesale price premium many vehicles are experiencing because it believes the gains to be short-term, overcorrections in the auction lanes.

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