What if a car was a banana?

In my blog last week, I referred to the challenges that complexity brings to automotive distribution, in terms of the customer journey and being able to match a customer requirement with an available vehicle.  A conversation later in the week with a good friend in the industry, Philip Nothard at Cox Automotive, brought us onto a related topic of improving stock turn in the used car business.  As he said, dealers wouldn’t behave the same way if they were selling fresh food.  Which brings us to the banana in the picture – definitely past its best, and probably now only useful if you’re planning to make a smoothie.  If you were running a market stall, you would be quite pleased with yourself if you managed to sell it at cost.

The problem is that cars are like bananas, not only in the case of used cars, but also new.  If we consider used cars first, we all understand that they depreciate with age – that is one of the primary ways in which we determine value when the car is bought in.  If the car is only in stock for a few weeks, then this won’t make much of a difference, but a few months may mean that it’s perceived age changes – we’ve moved into a new calendar year or registration period, or there are more coming onto the used market, so it is more commonplace.  When interest costs are as low as they are now, then the financing of stock is not such a big number, but the car still needs to be cleaned regularly, and over time you start to get problems with tyre flat spots, batteries and an increased risk of damage as it sits out on the lot.  It’s also more likely that the eventual buyer will experience problems with the car after an extended period in stock.

Those are the obvious costs, even if they are not as visible as the deterioration of the banana.  However it is the less obvious costs – or at least missed opportunities – that represent the greatest damage to the bottom line.  If we work on a simple ‘rule of thumb’ that each used car generates €1,500 contribution, and assume that I can physically hold 50 cars on my lot (or that I have the working capital to finance 50 cars at a time) then if I hold each car in stock for four months, I will sell 150 cars and make €225,000 over the year.  If on the other hand, I see my stock as rotting bananas, and revise the pricing down by a third on average, so that I only make €1,000 each, but sell the cars after two months, then I will sell 300 cars and make €300,000.  Not only that, but I will have generated twice as many aftersales customers, had twice as many opportunities to buy in their trade-ins, and have twice as many satisfied customers out there, spreading positive word of mouth.  The target is not to maximise profit per unit, but to focus on profit per pitch per annum.

The situation is little different for new cars.  At face value, a new car is still a new car if I manage to get a customer into it as the first registered owner, but the pressure to retail the car mounts once it leaves the interest free period of the dealer floorplan arrangements, so discounts start to increase.  The dealer may also have limits on the number of units they are allowed to have on floorplan, so the same principle of not being able to order another car until you’ve sold through the older stock also applies.  Going back to the issue of complexity, some of the slow moving stock is likely to be specifications that do not match the actual customer requirement – they have the ‘wrong’ trim or engine, or have an option that is not required like a sunroof or an upgraded infotainment system.  In order to move the old stock, the dealer will throw the unwanted elements of the specification into the deal – a ‘free’ option or higher trim level.  The sales and order planning systems will show that the unit sold, proving that there is a demand for the specification, but the reality is that the dealer, and sometimes the OEM, had to discount in order to find a customer.

We therefore find ourselves in a position where as an industry – whether new or used – we end up making decisions based on inaccurate information.  In the used car business, we can achieve profit per unit that is higher than the level which will produce the highest total profit for the dealership, and in the new car business that there is a demand for cars that do not actually meet customer needs.  If we could see the stock rotting in front of our eyes – like the owner of the fruit stall in the market – we might make better decisions.