Every dealer knows that as your vehicle assets depreciate, your profit margins begin to shrink. The two major causes of inventory depreciation? Age and holding costs. Joining Jim today is Brian Finkelmeyer, senior director of conquest at vAuto. Brian lends us his insight into combating rising interest rates, managing new vehicle inventory, and dealing with margin compression.
VIDEO TRANSCRIPT:
Jim Fitzpatrick: I’d like to welcome to the show Mr. Brian Finkelmeyer, who is the Senior Director of Business Development for VAuto. Thank you so much for joining us Brian.
Brian Finkelmeyer: Hey Jim. How are you? Thanks for having me.
Jim Fitzpatrick: Great, great. So talk to us about all the things that are going on in the industry. I know you got your hand on the pulse of what’s happening in the dealers and their inventories. You guys have announced the new product that we want to talk to you about. Take it from there. What should dealers be focused on for 2019?
Brian Finkelmeyer: Yeah. That’s a good question Jim. I think obviously 2018 was kind of interesting in that there was so much negative publicity in and around new car auto sales. Every time I pick up the newspaper, it’s like, “General Motors is down, or Toyota is down.” But once the dust settled, the industry finished out at 17.3 million SAR.
Jim Fitzpatrick: It was unbelievable.
Brian Finkelmeyer: And a lot of new cars are still being sold.
Jim Fitzpatrick: Yeah.
Brian Finkelmeyer: I think that as we look out towards 2019, we’re probably seeing more of the same. I think Cox Automotive economists are forecasting maybe a slight reduction. But I think that big picture is still a very healthy new car market. I think that dealers increasingly … I see one of the big headwinds dealers facing, is going to be the rising interest rate environment that we’re on. Which is certainly going to have some implications to their bottom line. It certainly speaks to the necessity for dealers to begin managing aspects like their new vehicle inventory with a greater degree of precision and efficiency.
Jim Fitzpatrick: Yeah, for sure. This economy that we’re in, just keeps rolling along. Even in light of the fact that the stock market, basically lost all of its gains for 2018. It didn’t slow down auto sales as we know it. And things of that nature that you would have normally thought, “Oh, that’s going to hurt our industry in a big way.” It didn’t seem to have that big of affect.
Brian Finkelmeyer: Yeah. I think it’ll be interesting, Jim, to see what the implications are of the trade situation. I mean, even Apple is starting to say that some of their phone sales are being impacted by some of the trade situation with China.
And so as that continues to unfold, as the price of new cars goes up, that could certainly have some implications from a budget perspective for many shoppers. But I think based on what we’re seeing right now, most people believe that 2019 promises to be at least another healthy year. Probably not a record breaker, but certainly a healthy industry where plenty of money can be made.
Jim Fitzpatrick: What are you telling your dealers out there to really hone in and focus on to run a more efficient new car and used car department, as we go into 2019?
Brian Finkelmeyer: Yeah. You know Jim, so I’m actually speaking at the NEDA convention coming up here at the end of the month. That’s really the topic that I’m going to be addressing, is the science of new vehicle inventory management. It strikes me that the average dealer is sitting on eight to ten million dollars of new vehicle inventory.
And when I ask a simple question, which is, how satisfied are you with the performance of your inventory investment? Often is the case, dealers don’t really have a great answer to that question. I think part of the reason for that is the industry has really lacked the metrics around understanding, “Am I doing a good job of managing my new vehicle inventory?”
That’s really the premise of my presentation. We’re going to introduce a couple new metrics to help dealers better understand their inventory situation from a couple of perspectives.
I’d the say the first of which is, just very simply, am I stocking the right number of cars at the model line level? So if I’m a Honda dealer, is my dealer base supply high or low relative to the average in the market?
And then the second question is, what is the quality of my inventory mix? Have I done a good job of stocking those fast turning combinations? I really think there’s a ton of complexity associated with new vehicle inventory management.
But the reality is, I think if we can kind of strike on those two key things, do I have the right quantity of cars, and how good of a job am I doing of stocking the right quality? I think we can begin taking steps in the right direction towards having a healthy inventory, reducing our dead stock and being able to turn that inventory much more efficiently and be less exposed to the cost of rising interest rates.
Jim Fitzpatrick: Talk to us a little bit about some of the programs that you’re going to be talking about with regard to VAuto. You’d have to be living under a rock here in the automotive industry, if you haven’t seen the recent ads with Dale Pollak in them talking about a whole new way to look at your merchandise and your inventory. Talk to us a little bit about that.
Brian Finkelmeyer: Yeah. It’s really interesting. Our team down in Austin and obviously with Dale, have spent a lot of time grappling with this prevailing challenge across the industry of march and compression. And for a long time, we’ve certainly felt that on the new car side. But that’s just as pronounced today on the used car side as ever before.
I think Dale was really trying to figure out a way to give dealers a tool to help combat that prevailing challenge. And that’s really where our new profit time solution fits. Is a way to begin looking at each vehicle in our used car inventory based on its own merits.
What struck me about the entire analysis that I’ve seen, is that largely we believe in the car business that dealers price their used car inventory to market. But largely what we saw across analysis of millions and millions of cars, was that dealers actually largely price their cars based on acquisition expense.
So, the way which we are grading cars now, platinum, gold, silver and bronze. Platinum cars are vehicles that we have acquired in an attractive cost to market. Vehicles that have a low market based supply and a healthy sales history.
So, what we’ve seen is on those cars, because dealers largely acquired those at attractive or favorable acquisition cost, they tend not to take as much gross margin as that car might provide for them. That’s really where profit time comes in. Is having a better understanding of the cars that I deserve to make a little more money on and cars, quite frankly, that I can be a little more patient on.
Dale has talked about how that the calendar is sort of a rudimentary tool that we used. And we always set our cadence of discounting based on the calendar. I think our new philosophy is to begin deploying our pricing strategy more based on the individual car. More so than how many days that car has been sitting in our inventory.
Jim Fitzpatrick: So is it you’re saying to dealers it might be okay to have a vehicle that’s in inventory for 65 days or 70 days, so long as it still has the potential to earn a buck?
Brian Finkelmeyer: Yeah. So the market is always changing, right? So this is why it’s not a set it and forget it type of environment. The supply and the market, as well as the demand, is in constant fluctuation. It’s dynamic. I think our belief is to begin paying closer attention to each of those buckets of inventory and then taking the necessary approach.
And it is interesting, Jim, that often times I have seen and talked to some progressive dealers, that on certain merchandise, when they raise price, actually the phones start ringing. It’s crazy. I read an analysis that said a dealer was able to achieve higher grosses on about 65% of the cars that he raised price on.
I know we are and the conventional wisdom is we need to continue with discount, discount, discount. Kind of that race to the bottom mentality. But I think there are certain instances where certain vehicles deserve more. And that’s really what VAuto is trying to bring to bear, is a tool to help you better understand those pockets in your inventory where you should feel more confident to raise price and be a little more patient.
Jim Fitzpatrick: This is definitely out of the box way of thinking that I know the dealers that are listening to us now and used car managers and such, will probably rush to your booth to say, “Tell me the rest of the story. I got to hear this. I got to hear your philosophy on this.” Because for so long we heard industry types like Dale Pollak and may others that said, “It’s all about the timing. Soon as the car hits the lot, it starts … ” As he says, “It’s like a big block of ice that starts melting the moment it hits the lot and therefore, your pricing should be in an accordance with that.”
But I know that he was here on CBT News, he visit us in studio, he did say that we’re asking the dealers to take a whole new, fresh approach and a new look at the way that they view their inventory on an aging basis.
Brian Finkelmeyer: Yeah. I think some of that applies to the new car business as well. Although we don’t have profit time yet for new car, I think that same sort of philosophy holds true. That if I, on day one, take into inventory, a car that the market has 400 of, I probably don’t have much time to be patient.
Jim Fitzpatrick: Right.
Brian Finkelmeyer: But if I understand on day one that I’ve got a unique piece of inventory that there’s significant demand on, that’s maybe a car that I should not look to price so aggressively. So I think some of the same thought process applies to new just as much as it does used.
Jim Fitzpatrick: Let me switch gear a little bit. Talking about 2019, if it was your dealer group and it was Finkelmeyer Toyota, what would you be telling your staff to focus on? And what kind of headwinds do you think we’ll see in 2019? If any.
Brian Finkelmeyer: Well, yeah. I hope I someday get a Toyota dealership. That sounds like fun.
Jim Fitzpatrick: Sounds like fun.
Brian Finkelmeyer: You know, I think, Jim, what I would be thinking about looking into the new year is a couple things. One of which is likely the truck and SUV business by all indications is likely to remain very strong as gas prices have been very low.
In fact, last week, somebody bought gas for $1.89 a gallon. So, all the kind of ingredients still remain very favorable for those bigger vehicles that Americans have increasingly gone too.
Brian Finkelmeyer: So, it kind of poses two things. One of which is I know I have less natural demand for my sedans and so I would say we need to do a much more precise job of making sure that we’re ordering the right sedans because we just know the sheer volume of people coming through the door on sedans is less than it used to be.
Then, conversely on the other side of the equation, we got to make sure that on those hot models like Toyota Tacoma, for example, that are very hot models, I want to make sure that I’m turning that inventory faster than the average Toyota dealer in my market so that Toyota is going to reward me with greater allocations of hot merchandise like Tacoma.
I think that’s one big thing. Then I think the other two things, Jim, really … Really three, is if you look at the expense side of the equation, my inventory holding cost, my advertising expense and then my salary and wage. I think each of those offers real opportunities to get better.
We talked about some of the ideas around the inventory management. Today they say the average dealer spending somewhere in the ballpark of $625 per car in advertising. We have to figure out a way to drive that down.
Then I think on the human capital side, as more and more customers are likely beginning this gravitation towards digital retailing, I think we need to rethink our organizational structure as to whether or not I need 10 guys standing out in my showroom on Tuesday morning.
I think those would be three key areas that I would look at moving into the new year.
Jim Fitzpatrick: And service continues to thrive, right? For the dealers that came out of the recession and they said, “Hey, we’re going to really hone in on service because that’s seems to be a huge opportunity for us.” And it continues to be, right?
Brian Finkelmeyer: Yeah, I mean, I think most dealers who would argue that their service and fixed operations is really the financial backbone. Then obviously we need to continue to have a strong F&I. Used cars is important, but what I always say, bringing it back to new cars is … The new car sale is really the ignition switch that sets off that chain reaction.
Jim Fitzpatrick: That’s true.
Brian Finkelmeyer: These other facets of the business have much higher margins. I get that. But we cannot ever lose sight of the fact that the new car sale and that velocity on new cars, is really the fuel that feeds the entire operation.
Jim Fitzpatrick: That’s right. And chances are, that customer that you rolled out in a used car, wouldn’t have even been on your lot if you weren’t a new car franchise dealer with some brand, right?
Brian Finkelmeyer: I think for sure that that is absolutely the case.
Jim Fitzpatrick: Yeah. Yep. Well, we enjoyed your visit here very much and it’s always very enlightening for our visitors. So, thank you again.
Brian Finkelmeyer: Great. Jim, always enjoy being on CBT and Happy New Year to you and the team at CBT.
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