Aging used cars ripen on lots

After years of sermons about how aging used-car inventory loses value, dealerships have gotten religion on the importance of turning used vehicles in less than 60 days.

But now used-car guru Dale Pollak says that old-time religion is out of date. Today, he says, 30 to 40 days is the new 60.

"A used car always has been like a block of ice. Over time, it dissipates in value," said Pollak, founder of inventory management software provider vAuto and now a Cox Automotive executive vice president. "Today, it's like a block of ice sitting on a hot plate."

But not all dealers and used-car managers have gotten that message.

Automotive News asked vAuto to review its data on aging units in dealerships' used-vehicle inventory. Researchers pulled numbers on 11,874 franchised new-vehicle stores and independent used-only outlets.

Of the dealerships reviewed, 16 percent had no used vehicles on the lot 60 days or more. Vehicles that had sat around that long represented no more than 10 percent of the inventory at another 21 percent of the stores.

Those are seemingly good numbers. Five to seven years ago, the comparable figures would have been "considerably worse," Pollak said, based on what he saw then.

But for 15 percent of dealerships studied, more than half of their used inventory had been on the lot 60 days or more.

The numbers suggest that most dealerships get serious about turning vehicles after about 60 days: 58 percent of dealerships reviewed had no used vehicles on the lot 100 days or more. But at 2 percent of the stores reviewed, more than half of their used inventory was 100 days or more old.

That 2 percent may not seem like a lot, but any vehicle in stock for 100 days or more is generally shunned, unlikely to move without deep discounting. An Automotive News staffer has even seen a late-model vehicle that had been gathering dust on a dealership lot for 15 months, or about 450 days.

Pollak said he was shocked by the data: It's "surprising how much inefficiency is out there."

Margin compression — itself a function of Internet-enabled price transparency that lets shoppers know the local-market value of a specific used car or truck — has shortened the time that dealerships should let vehicles sit, Pollak said.

He tracks used vehicles' cost to market. If a dealership owns a used car for $8,500 and the average retail asking price in that market for that car is $10,000, then that car's cost to market is 85 percent. Used vehicles usually sell at a cost to market with a percent range in the high 80s or low 90s, he said.

When vAuto researchers track used inventory at the more than 10,000 dealerships with which they work, they usually divide vehicles into 15-day categories: 0-15 days, 16-30, 31-45 and so on. The clock starts ticking "as soon as you own the car," Pollak said. "The market value of the car doesn't depend on when you get it [retail] ready."

Until about two years ago, Pollak said, used vehicles generally had a cost-to-market figure of about 82-83 percent in the first 15 days. Pollak almost never saw cost-to-market numbers hit 90 percent until 60 days.

That has changed.

"Today, I rarely ever see a dealer's inventory not hit 90 percent somewhere between 30 and 45 days," he said. "After about 30 to 45 days, the car represents no margin contribution capability to the dealership."

Pollak has adjusted his view accordingly of how quickly dealerships should turn used vehicles.

"If 60 days ever once was the norm or accepted benchmark, 30 to 40 has to be the new 60. It has to be," he said.

Some dealers say they understand the theory, but question applying the practice in today's market.

"Do we want to have a turn in under 60 days? Yes. Is it ideal to turn as many times as you can? Yes," said Dustin Walters, vice president of eight-dealership Friendship Automotive Enterprises in Bristol, Tenn. "But when market prices stay as high as they are, I can't go and replace that car for any cheaper than I already paid for it. At some point, I'm marketing the car somewhere lower than wholesale."

And if the dealership sends an aging vehicle to auction just to be rid of it, that means absorbing extra transportation costs and auction fees.

For those reasons, Walters said, "We've relaxed our rules a little bit," keeping used vehicles somewhat longer than the ideal. And if the group's stores need to wholesale a used vehicle to move it, Friendship prefers online auctions for lower fees.

Still, Pollak said the takeaway for dealerships is straightforward: "The sooner they sell a car, the better the chance they have of making a gross profit."