The Real Deal: Flip, Flop and Fly?
It is the time of the season that used car prices fall off. I began following the wholesale used car market in 1996. I distinctly recall a dealer friend of mine, Jerry McKinney, explaining it to me this time of year “Son you better get your nuts in the nest, winter is a comin’.” Translation: a dealer needs to convert any questionable inventory on today’s market to cash. Then take a new position in fresh inventory after the flop hits.
I coined the term ‘flop’ because, just like Texas hold em, an unknown set of cards that can drastically change your net worth. Dealers have thousands-millions of dollars invested in used inventory. When the market change arrives (typically around the Texas State Fair) the cash value of the inventory you are holding changes. Just as a lake turns over every year, or the rain comes in April, the flop is coming.
The reason I call it ‘the flop’: it’s sporadic, the severity is unknown, and it can claim victims in a heartbeat. Typically, the more expensive (over 27k) units take the first fall, then the edge mile domestics (over 50k). This market adjustment also tends to occur in segments. One segment of the market will fall, then another, then finally the cars that you thought held their value through the flop take a plunge. Town cars, Devilles, 4×4 late model low-equipped SUV’s take a hit on the chops.
I’ve seen the flop take an immediate $10k of value away from a model, and I’ve seen it take nothing. The difference between the good dealers and the not-so-good: their decision making through this annual rapid run that we navigate.
I think this year will catch many with their pants around their ankles. I think the ’09 flop is going to hit much harder than anticipated. Wholesale loss from the dealer perspective will be greater than most dealers are prepared for. This year’s overly heightened market has been managed by the government. Artificial insemination is for livestock; his season Obama AI’ed the auto industry.
The NADA book increased an unprecedented amount in October versus used car sales being off 40% in September across most of the US. Old timers will manage it well. I think the scientific managers may through their computers out the window this season when the algorithms let them down.
There is an art to managing markets. Computers help, a lot, but they do not outweigh experience.
Read more John Wolfe at wolferadio11.wordpress.com
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It's like any industry - try to be ahead of the curve - if you aren't you better have the resources on hand to take a 'hit' at your profits, or be prepared to pack it in. Very similar to other industries right now, there is too much product floating about out there and not enough buyers.
@macer--no you won't see it in advertsing as much at dealerships, but you will find it on Ebay etc. Example, if XYZ Chevy has a 4x4 sub they own for 30 grand, asking 32.5 on thier site. Then their buyer grabs a twinkie unit to this one at auction for 24k in November they have a dillema. They cost adjust the two suburbans. Take the 6000 difference, and add 3000 to the fresh purchase, and reduce the older one by 3,o00, then price them on the site at the same dollar amount. However, if many cases if an independent web-shop that has limited inventory grabs that same suburban for 24k at the sale, you could see it on their site for 25.5, which is cheaper than the new adjusted cost on XYZ bloated dealers site. But you don't get the safty feeling from buying via a frachise store when purchasing from the indy web dealer. That's the reality. Also, the 10k downward swing is a very extreme example. 3-5 grand is more reality on units that get heavily hit on the flop.