Dealers should be on guard in ‘crazy' times

Dale Pollak has words of caution for dealers who have likely experienced one of the most topsy-turvy markets in at least a generation, if not ever. Pollak, 62, is executive vice president at Cox Automotive and creator of the vAuto inventory management software, as well as an author of several books on the used-vehicle market.

He has talked about the market going through four quarters of "crazy" this year, though he was not referring to traditional three-month periods. The first quarter was roughly January and February, when the market appeared somewhat seasonal, followed by the second quarter in about March and April, when Pollak said "it was like a bomb went off" and wholesale prices accelerated at unprecedented rates.

The following are edited excepts from an interview with Staff Reporter David Muller this month.

Q: When we last spoke in May, you had said we're in the "third quarter of crazy" for used vehicles. Where are we now?

A: So we are now clearly in the end of the third quarter. What we know to be true is that the maximum acceleration of wholesale prices occurred mid- to late March, early April. So if wholesale prices took off like a rocket ship, they reached their peak acceleration, straight up, end of March, beginning of April. And then at that time, what we had predicted is that for the next six weeks or so, wholesale prices would continue to rise but at a much more moderate rate. And what we anticipated would happen is about now, that first or second week of June, wholesale prices would plateau. And that is, in fact, what we're seeing in the data. That plateau stage is the first stage of the fourth quarter, which will certainly occur this month in June. And I think these prices will plateau, stay steady — cars will not appreciate or depreciate in any sort of material manner — until late July, early August, which I would consider to be the point in time where we'll start to see a depreciation in values as you would expect to see.

How should dealers approach the way they handle their inventory levels?

I think dealers are very good in operating in stable environments. I think where dealers often get tripped up is in periods of transition. And we are, in fact, in a period of transition. If somebody back in February, early March could have seen what was coming, and that is that wholesale prices would take off like a rocket ship, the smart thing would be, you'd go out and buy every single used car you could, even if you had to put them in storage facilities, under the belief, under the knowledge, that they're only going to be more expensive in the future.

Now, here's the problem for dealers: March, April, May arguably have been some of the three most high-volume, high-profit consecutive months in dealer memory, if not history. They've been almost unprecedented in terms of volume and profitability. So here we are at the beginning of June; dealers are closing out their May financial statements. And no doubt, for the most part, they're going to be extraordinarily high-volume and high-profit. And consequently, it's very easy for them to say, "We got to have lots of cars. We're coming off great months, we can't necessarily let up now, let's go out and buy a lot of cars."

The problem is that we know from the data that the demand is moderating. And if the dealer were to go out today — as they perhaps should have done if they had seen what was coming back in February, early March — and if they go out today, buy all the cars they can, and demand continues to moderate, which we believe it will continue to, I tell dealers you could find yourself in late July, early August, with a lot of used cars that you didn't sell and that you bought at or near the top of the market in the beginning of June. I'm not saying that dealers shouldn't keep their lots stocked. They should. But they should do it with moderation and discipline.

Has your ProfitTime approach to inventory management, which includes labeling vehicles by their values and by how quickly a dealer should sell them, been permanently altered, given this unique market?

No, I think if anything, it's the opposite of any permanent altering. What I counsel dealers to understand is what we've experienced the last six months is not the new normal. In fact, it's anything but the new normal. I mean, this is my fourth decade in this industry, and I have never seen — and I don't think anyone has seen — an extended period of time where vehicles across the board appreciate. I mean, it's like defying gravity, but it's occurred. And we understand why it's occurred; it's occurred due to very unusual circumstances related to COVID.

So I think the risk for dealers is that they perceive that this is an indefinite, long-term "new normal." I would counsel dealers to understand that we went through a very abnormal period. We can see evidence now that it's on its way to normalizing albeit at higher levels of demand and also prices. But the normal forces of the universe are reconstituting themselves. And as such, dealers, to the extent that they may have lost their North Star or their discipline or their strategy, they need to reorient themselves to rational strategies of management and disciplined processes.