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What should independent dealers consider before liquidating aged auto inventory?

Aged inventory on the lot

Sometimes a vehicle just won’t sell and ends up sitting on your lot for months. It’s easy to get in the mindset of wanting to try to win that battle and sell the vehicle—while that’s an option, there are others to consider.

Some independent dealers choose to wholesale the vehicle, whether through an auto auction or other dealers. But are there other options out there? From working closely with our dealers, we’ve found some tips to share when you find yourself considering aged inventory liquidation.

What’s the current overall economic situation?

One reason we’ve heard some independent dealers keep aged auto inventory is because it’s worked in the past. If they held on long enough, they’d find a good deal and turn a tidy profit—especially if used vehicle prices were on the rise. Waiting it out could potentially be beneficial, rather than wholesaling a car quickly, in that situation.

But let’s look at the bigger picture. According to both the Manheim Used Vehicle Value Index and the Black Book Used Vehicle Retention Index, used vehicle values fluctuated and generally dropped between March of 2022 and March of 2023, after a prior 12-18 months of mostly rising value. We’ve seen this among AFC dealers as well. And while prices may be increasing right now, so are federal interest rates—typically, those two factors won’t co-exist.

Many predict that we should expect more prime rate increases throughout 2023. This has an impact on any dealers that finance, as well as consumer spending—and at some point, it’s reasonable to expect that it will affect vehicle prices.

While holding onto aged inventory may feel right now, things can change fast. Most dealers know that operating under the assumption that the market will be the same in a month as it is today can be dangerous. The market can shift quickly, and it’s important that any business—including independent auto dealers—remain fluid and able to shift with the market. Factoring the current economic situation in with your business model and past experience will help you determine the best choice for your dealership’s inventory.

The market can shift quickly, and it’s important that independent auto dealers remain fluid and able to shift with the market.

Sunk cost: what have you already paid?

You may have heard of the “sunk cost fallacy,” which is the idea that one might continue with a project they’ve invested time and money into because of that prior investment, even when it may not be the best option. It’s easy to fall into this mode after an initial investment in the auction purchase, recon work, and sales efforts. So how do you know when it’s the right time to draw the line and liquidate that unit?

Let’s say you purchased a car at auction six months ago, and it’s still on your lot. It’s been on your floorplan (also called a “floor plan”) the whole time, which means you’ve invested fees and interest, and if you’re on a 60-day term you may also have already paid 15-20% of the vehicle’s value in curtailments. It may feel like if you don’t find a buyer for that vehicle now, all the money you’ve put into it is a waste.

But it’s important to remember that there’s a difference between a book loss and an actual cash loss. If you sell the aged inventory at auction or to another dealer at wholesale, you may have to record a loss on your income statement for that vehicle, but it can protect your cash flow. If you sell the car for more than the amount you still owe, that cash can be reinvested into your business rather than remaining tied up in a vehicle your customers aren’t interested in right now.

For any consumer-facing business, there’s a delicate balance between investing in one product to draw consumers and choosing when to redirect funds and attention to a different, potentially more profitable product. It’s important for independent auto dealers to consider the full investment in a unit when determining its potential profitability.

Opportunity cost: what are you missing by keeping a car on the lot?

Many independent auto dealers have limited lot space, so every space is a precious commodity. Depending on your turn time, you could potentially move two, three, or even more vehicles through that spot rather than letting an aged unit occupy it.

There’s no magic calculation that will tell you which option is more profitable, so every dealer has to consider for themselves what opportunities may be missed when choosing to keep aged auto inventory.

The customer is always right

Use aged inventory as a learning experience—and a way to identify changes in your market. If you’re finding that as interest rates rise, larger or more expensive vehicles are harder to sell, that doesn’t mean purchasing them is a bad idea. After all, the market for them is unlikely to instantly disappear. But its extended time on your lot may be an indication that you should focus on sourcing other types of vehicles now.

As a dealer, knowing your territory and knowing your customers is a job that never ends. Markets shift, people change. The same things won’t be popular forever. When considering what to do with your aged auto inventory, it’s best to keep your finger on the pulse, and be ready to pivot when the market changes.

Disclaimer: Dealers should consult their own advisors to make independent business decisions regarding holding or selling inventory. AFC does not guarantee any business outcome based on the contents of this article.