Avoiding Overpaying for Used-Car Inventory

LAS VEGAS – Dealerships often pay too much for used-car inventory at auctions because in recent years commonly used software has provided similar shopping lists of the most sought-after cars to dealers from the same market, says Brad Kokesh, general manager of software provider DealerSocket’s Inventory+ product.

“I’m not a Wall Street expert but buying high and selling low is not a good business model,” Kokesh says in an interview. That is, dealers armed with similar shopping lists bid up the prices and pay too much for inventory. Then they have trouble selling it profitably because so many other dealers in the same market have similar inventory, he says.

Besides relying on data for the entire relevant market, dealerships shopping at auctions should account for their own transaction data more closely, Kokesh says, because individual dealerships may have significantly better or worse results than the market average.

Wards interviewed Kokesh at the National Automobile Dealers Assn. convention and exposition here. The following are edited excerpts.

Wards: What’s up with used cars?

Kokesh: Margin compression started hitting used (cars) in 2016. We were coming out of 2015, when used was up, new was up, everything was up. CPO vehicles were extremely high, and there was a lot of availability.

Wards: What changed?

Kokesh:  The reason why we went into a market spin, why our used-car margins flipped upside down, is because these tools are driving thousands of dealers to auctions, for dealers to buy the same vehicle buy-list – based on each other’s sales. Everyone was being given the same shopping list.

Wards: What’s the alternative?

Kokesh:  Our system does not look solely at market sales and screen-scrapes of what else is out there. We feel like those things are an important part, but we are also looking at data coming from the dealer’s DMS. We express it as profit per day. That is, what’s a hot car at your dealership is based on how much profit on a given vehicle vs. days to turn.

Wards: All dealerships could be analyzing their own margins, and everybody has access to market data, right? So, what’s new and different? That the software now makes it convenient to do both and integrate both?

Kokesh:  Yes. A dealer would have to hire somebody to analyze those numbers for the dealership, which would probably be expensive.

Wards: And even then, one system might not talk with another system?

Kokesh: Exactly.

Wards: And fundamentally, the advantage is based on the variance between how one individual dealership does vs. the average for their market?

Kokesh: Right. We score cars based on our recommendation of how close a car is to the core of what you want, from zero, for not at all, to five, for exactly what you want. Dealers are always looking for something they can buy and profitably bring it back to the dealership, but that process has got to be efficient.

I just did this exercise with a dealer, here at NADA. We looked at his actual inventory, his actual figures, and something that might be a 2.1 out of 5 for the market could be a 4.7 based on the dealer’s transactions. The market might not be as good for that vehicle, but for your dealership there’s a great opportunity here.