#16 - Inventory Sourcing

Hello, and welcome to this episode of the Independent Dealer podcast here with Luke and Jeff. Today, Luke, you are going to enlighten and educate us on inventory.

Oh, inventory acquisition. It's amazing. The hardest part of our business is getting the product to sell to the consumer. Are we making mistakes? Are we not making mistakes? Are we not sourcing properly? Guys, sit back, relax. This is going to be fun.

It's going to be great. Luke's going to educate us on the evolution of carbine, Some of the technologies that are out there. You know, we talk about booking and we talk about, you know, getting your operations straight. All sorts of great stuff. So stay tuned. Welcome to the Independent Dealer podcast, the podcast for auto dealers to learn and grow together. Here are your hosts, Luke Godwin and Jeff Watson. All right, Luke, so start us out here. Let's talk about inventory acquisition. Where do you get them? How do you get them? What do you find in. That's the best route right now. And I'm gonna give the disclosure that I don't buy cars here at our lot, so I'm not gonna be a whole lot of help. But I know you're a pro at it, so help the people out there. Help us understand where. What are you doing these days? How are you finding them?

Well, let's talk about the evolution of car buying for the independent dealer. You know, my family's been in car business since the 50s, but my dad started this lot in the 80s. And back then, we could buy every single piece of inventory we ever wanted from the new car store because they weren't, you know, they weren't selling our units because they didn't want to. They didn't see any. Any need to do that. So if we needed cars, you know, my dad would. Would depend on wholesalers or himself would go buy cars at the store that was next door to us. So it was simple, right? Just a very easy process. Well, as the car business has evolved and new car compression has happened, it's gone to where the new car stores were when they would go to 20 group or talk to other dealers. Oh, get rid of that inventory. Now it's like, okay, we're making so little on the new car. We've got to figure out a way to make more money.

And.

And what happens is they've gone into our business and they've taken a lot of the business from independence. And so that means that we've got to find new ways to buy cars. And I guess this really started happening to us probably in the late 90s, early 2000s, where we found that the only way to meet the demand of our customers was to go to the auction to buy cars. And so essentially, since probably 02, we've been buying a vast majority of our cars from local auctions. And then in the last five years, we source cars from all over the country. So it's become increasingly hard to do what we need to do to buy cars.

Yeah. So help me understand that again. So as the evolution comes down, the new car stores are getting more pressure. You know, their grosses are getting cut by the manufacturers. So they're looking at these used cars and these certified pre owned programs and near news and they're keeping a lot of the nicer stuff. Are they keeping the cheap stuff? So if you're a buy here, pay here, or if you're dealing in some older models, are you still having a hard time finding those?

I think yes and no, Jeff. So they have found that the cars bring more money at the auction typically than they would wholesaling the car.

So the competition at the auction is so strong because of reduced inventory there, they would rather just send it to the auction, roll the dice, instead of wholesaling it off to some dealer who is going to try to undercut them or. Sure.

And you'll see this, that wholesalers, not all, because I don't want. I love wholesalers. I still buy a few cars from them. But what happened, I think, in the new car store is a lot of times the wholesalers were hitting the cars way undervalued. So the new car stores were missing trades, number one. Number two, they had this extra person that was just kind of hanging out at their dealership all day long. That created an issue. Not all wholesalers are bad, but, you know, who needs an extra person just hanging around the dealership? And also there was an ability for some dishonest actions to go on. And I think those three, and mainly those three, led to the wholesaler being cut out of the mix. And I think that was a big issue.

Mm. So if your used car manager is. Got some sort of a side agreement with the wholesaler, it does create opportunity for dishonesty or backdoor deals or things like that. So, Luke, as an independent, what are we supposed to do? How are we supposed to meet the volume demands in our own lot and at the same time get quality cars? Because I do remember the days, or at least I feel like I remember the days back in 2005, 6, 7, 8, I could go to the auction and my local Manheim was running, you know, 2000 units on a Friday and another 1500 on Thursday. And yeah, they were, they were picked over and they were a little rough, but at least I could get them. And that's not really the case much anymore.

Well, yes, 08 through 11, man, you could buy as many cars you want. I can remember running out of money before I could stop buying. You know, I don't have that problem anymore. It seems like it's not because I have any more money. It's because there's not enough cars out there. So, you know, repos have helped. But the problem with 08 through 11 through 12 maybe was there's too many repos and not enough buyers. Now there's not enough repos and way too many buyers. But what it's done is it's expanded the way you have to buy. So where maybe we used to source our cars from 200 miles away, typically in the Southeast, maybe, maybe some people even 50 miles away could source most of their cars. Today, I think, I mean, I buy cars routinely over a thousand miles away. So it's just expanded the horizon of what we do. And also what's happened is you have inventory sourcing software now that has allowed you to pinpoint exactly what you need and be able to get it within days. So I think that's. That's changed the model drastically, Drastically also.

So the technology is really. Should be our friend. Right, because you're able to find high demand markets and low demand markets and adjust accordingly.

Oh, for sure that there's some amazing software out there. Now I'm not, I wasn't an early adopter of one of the software companies, and I like the product. Unfortunately, I don't think my volume was high enough to really need the product. You know, if you're spending 500 to $1200 a month on a, on a piece of software, it should be worth. It should be worth that. Right. And there's some amazing software out there, so don't let me tell you not to do that. But selling 30 to 35 cars a month, not necessarily sure that the dealer that size needs that extra help. Unless you're very specific on what you buy all the time.

Yeah. So here's my thing. I have a really hard time. You know, we were really thorough when we go to the auction. I mean, I would go down the day before and preview everything from my short list and narrow it down again and drive everything and climb in and out of it. I just, I don't, I have a hard time buying stuff online. How do You. How do you get over that? Are you just buying everything? Green light guaranteed. How do we get late model or older model stuff?

Very good question. You have to get comfortable with it. So I've been buying online essentially since it began, and condition reports have come a long way. I'll buy as is cars all the time at auctions. If the condition report looks good to me and I know the reason why the auction is saying it's as is, I'll buy it all day. Mmm. So I think. I think there is an issue with buying maybe, you know, those cars $2,000 and under. I'm not necessarily sure that I would be all that comfortable with doing it, but I'm sure there's a ton of people out there doing it. I'm not a believer in post sale inspections, but it's a very good product for someone who. Who maybe has that little apprehension about buying it. I look at it as I'm spending $110 for every post sale, and I'm buying, you know, let's say 500 cars a year. I don't think that the math makes sense because let's say, you know, let's say you're spending that 110 a car and you're buying 500 units at the sale. That's $55,000 a year. Well, my thing is, I don't think I'm gonna make $55,000 worth of mistakes that year. Right.

Ah.

So I think it's a numbers game there.

Yeah. And now tell me this, does that pan out when you're talking about shipping or additional shipping costs? I mean, how do you reconcile the fact that, well, I got the car I needed, but unfortunately it's gonna cost me an extra 500 bucks to ship it here from halfway across the country. I mean, is that still making sense?

It does. And the reason is, is because I'll have cars that other people don't have in my area, so I can ask a little more premium for it. And that really goes with trucks and things like that. My average shipping cost, I think last year, it probably ended up being in the $315 range total. But that's buying cars where sometimes the shipping was $43, and I think probably the highest I paid in shipping last year was probably $1,000. And that thousand dollars was something from the West Coast. But I tell you, Central Dispatch is a. Is a really good product. And they're owned by Cox, and it's. It's a real easy product to use. And there's A lot of shippers out there that can get you, I mean, it's amazing to me, sometimes I can buy a car and ship it from Texas faster than I can mail a, mail a letter to Texas, you know, so it's amazing how quickly, quickly that dispatch service works to get the car to you. But yes, you do have to, you have to anticipate that it's going to cost you an extra, extra amount of money to get the car to you.

But what we're finding is with the increase in technology, they're creating networks so not only to connect buyers with sellers, but also all the logistics along the way, how to get them paid, how to get the car shipped, all those things. So technology is really, it's bringing the auctions closer to us. You know, it doesn't have to be a day's drive, it doesn't have to be within a couple hours for sure.

That's, you know, Manheim, Manheim's a, you know, if you like it or not, it's, it's, it's part of, it's part of what we have to use every day. I mean, some people may don't, may not, but it's something that we have to use. Cox is really making our business easier and harder in some ways. But I can buy a car in, you know, in LA today, I, I can pay for it through ACH or floor plan or however I want to pay for it within seconds. I can request a post sale inspection if I want to. Within seconds. I can have it posted on central dispatch within seconds and I can have it heading this way and it'd probably be here within five days, you know, all within an hour of purchasing the car. So there's so many great technologies that help us do this.

It's interesting. So from a sheer volume standpoint, and this is a point I've made before, I think you've. This is my philosophy and tell me if I'm wrong here or if I'm hitting it right. You know, we talked about there was a bit of a glut of inventory back in, you know what, I don't know, 0806, something like that, right.

We had 08 through 12. That was the glory.

Yeah, we kind of had a, we had a combination, right? We had new cars coming off lease, we had an increase in repos and a slowdown in demand. I think 2009 there was only like 10 million new cars sold or something like that. Lowest there's been in modern history. So now that has kind of trickled down and the fact that not as many new cars were coming off lease and we've got a strong economy that makes for a really sparse auction situation in 2013, 2015, you know what I'm saying? Those areas now what I see happening is we're back to, I think we're selling 17 million new cars every year for the last couple years.

Yep.

We're back to the highs of new cars. Those are going to start coming off lease and off rental return and all the fleets. Now if you time that with a slowdown in the economy and an uptick in repos, which I think is also on the map, you know, I'm pretty sure a lot of the subprimes have noticed a higher delinquency and charge off happening. How does that look? I mean, does that become the perfect storm for a rise in auction inventory? A lot more new cars coming off fleet lease, a lot more repos hitting from the subprimes and maybe a slight retraction in lenders wanting to lend. I mean, what does that do for us?

You remember Chuck and you and I and Chuck talked about this either on the podcast or not.

Yeah, yeah, that must have been it.

Yes, that's happening. But the interesting thing that Chuck brought up that I hadn't really started thinking about was the increased price of the new car. And if that hat, you know, if that continues the climb in new car price, it forces so many people into the used car market, so it's still putting a great demand on used cars. So I don't know what's going to happen, but something, something's got to give somewhere. Either the new car price has to fall back a little bit and get depression in that price or used cars are still going to be very valuable.

But do you think that's an overall picture? Because I mean again, this is anecdotal for me because I'm not in lanes every day, but I'm really surprised at how cheap some of these new cars are. Some of these commodity cars, let's say it's not loaded, it's not a crossover, but for a four door sedan, couple years old, I mean that's, it's pretty crazy. I mean, am I wrong or is that just.

I think so. I think if you look at the. Yes. Are they still. Are they. Is a commodity sedan a cheap. Yeah, it probably is on the used car market, but if you have to buy that car new, it's. It's probably double what it was 15 years ago. If you look at the price of a let's say a base model Camry new today compared to a base model Camry new in.06 or.05. It's a big difference. It may not be double, but it's darn near it, you know?

Well, I guess my other point would be, does it really matter what it's sold for new? Because doesn't the used car market operate independently in theory of itself, just based on supply and demand? So even if it sold for 30 grand originally, now it's hitting the market with, you know, another. A million others. Doesn't that just naturally create a supply and demand issue?

Well, it doesn't. It doesn't because what happens is you get residuals from the lease companies, so the new car companies can still control the price on the used car market. And when I say new car companies, I'm talking about Toyota and Ford and Chevrolet, your huge companies. If they say, you know what the used car market is telling you the price of the. The camry should be $15,000, two years old and 30,000 miles. But our residual says that can't work, then they can hold those cars for a certain point. Now, they can't hold them forever, but they can hold them a lot longer than we can and force the market until the market forces them. So I think there's, you know, there's a bit of a breaking point that they can have.

Yeah, yeah, that's really interesting. Me, I would be surprised, and I'm really excited to see this play out. You know, we talk about, you know, people come on your lot and they want the $3,000 car, and you just laugh at them. You say, I'd love it too, man. If you find a running car for three grand, you bring it here, you know, or a truck, you know, they're worth five grand until they're worth nothing.

Yeah, that's interesting. You say that. I had somebody yesterday, I mean, honestly get mad at us because we couldn't sell them a certain call for $7,500 out the door. And I just said, you know, you may think that car's worth $7,500, but that's almost what I have in the car. So I feel your pain, but, you know, it is what it is there.

So maybe that's a question, and this may be going down the wrong road, but when you talk about that, help me understand the relationship between the reality on the street and the guys that control book values. The Nadas, the KBBS, the MMRs of the world. Why is there such disparity? Because I look at these things. And I'm like, you're telling me wholesale on this thing is five grand? Where in the United States is this car being sold for five grand? How did you find that number? Because I know I just paid 75 for it, and I do that every single week. So, I mean, is it a racket, Luke? Is it a racket?

So I can't necessarily answer that question, but I do know how NADA is formed. NADA takes the sale of the used cars from the new car stores to come up with that value.

Correct.

So they pull all the data from all the franchise dealers in the country and separated by regions to get the loan value and the retail value. So we know that's how it's figured. Now, there are some discrepancy in some book values, for sure, just to name a few. Ford Mustangs have a horrible nada value. You essentially, to buy that car, have to pay almost retail at the auction to get it right. Dodge Chargers, same way. And there's so many of these that there's no space in between. So I'm not sure how those are valued. MMR pulls Mannheim's market report to get that value. You know, every day I see cars bringing two grand over mmr, so I'm not sure how that's how that plays out. I'm not sure how it works now, you know, I see cars bringing retail to auction, and big companies are paying retail carvana drive time. They almost pay retail for certain cars. So I don't know how it works, Jeff, but I can tell you the markets you see at the auction don't emulate the market. You see, with Cargurus saying, this is. This is a great deal.

Oh, geez.

So. So I don't know how. How it works, but I know how it works. You got what I'm saying?

Yeah, yeah, yeah, yeah. And that's the. That's the perception that you battle every single day with the customer, right? Is. Well, this is, you know, because they all have their smartphones, and everyone says, you know, an educated shopper. And they've all booked it out and looked at it, and, well, this thing says it's a $10,000 car, and you're trying to charge me 11, you know, or 115 or something. And so we battle those things every single day, don't we? How to. How to build value and explain the difference between what they're seeing on their phone and what you've got on the lot.

For sure.

Luke, tell me one other industry where, when I'm in the Store making the purchase. I can research what exactly that vendor paid for their product.

I don't know. I don't have a clue. I don't. I don't think it's. I don't think there is another industry.

So why. I mean, this is a whole nother philosopher. An issue or debate we could have and shouldn't have. But I guess I don't understand that, man. If you knew what that guy made on your wife's ring, you. You knew the markup in that ring. If you knew the markup in that sandwich. If you knew the markup in that. I just flew this weekend, and I was in the airport, and I had to buy a bottle of water, and it was $4. I'm like, what, are you kidding me? Like, that is so. Everyone else can do this, but when you come to a car lot and they want to mark it up 25% over cost, all of a sudden, you know, they want to burn your place down.

Every day, buddy. Every day.

And not only that is, then you're also responsible for it. So not only are we selling a product that we didn't manufacture, we didn't make, and is a used car that is a miniature explosion a million times over and over and over. You know.

Yeah.

And then we're expected to guarantee it and stand behind it. Whereas if you go and buy, you know, geez, I don't know. Name anything that you're going to purchase today.

It's just a gallon of milk.

Yeah. And I think grocery stores may not have that kind of markup, but maybe the guy who made it. But, I mean, they talk about some of the industries like jewelry, mattresses, the markup that's in some of those products that you just think, whoa, how does this guy get a gig? He gets away with it. No one questions him.

Yeah, it's.

It's.

We're an interesting industry, for sure. And it's. It's getting harder every day. You know, we. You and I may have gone off on a tangent here, but. Yeah, you know, inventory acquisition, back to what we started with. You know, there's many ways to do it. I'd rely on. I rely on Manheim, I rely on Odessa. I rely on Carmax, and I also rely on my independent auctions. There's tons of great independents in the. In the country near me. You got Rawls Auto Auction, Greensboro Auto Auction, and there's a ton of them in South Carolina, North Carolina, and in the Southeast. And we also rely on wholesalers. But you've got to Figure out your process. For people who buy just, you know, 10 and 20 cars a month, they can probably source them pretty easily within their market. People who are buying 30 to 150 cars a month, they really have to work hard. They probably have multiple buyers. And that's one thing, you know, you talk about, you have some buying cars for you. There's ways to find people that work auctions every week that you can pay a minimal fee. They're pros, they're professionals at buying cars. So that's also another an idea for someone who doesn't. Who maybe got into the business like you, Jeff, that maybe doesn't know a ton about cars, but you know a ton about business. That might be an option for people out there as well.

Yeah, that's one thing we did. About three, four years ago, my business partner and I decided that inventory acquisition is so essential, it's so important to get a good car that runs right, that drives right. That's gonna be less than recon. That's gonna be less headache down the road. That it was worth the commitment to have him full time buying. You know, not a half and half, not a, hey, you operate it and you buy on Thursday, or you do this and maybe Fridays you hit the auction. He's dedicated full time to buying because in my brain I thought, well, I mean, you save. If we only saved $100 a car or $200 a car because he had a little more time to be a little more thorough or maybe make a slightly better buy or have a fishing hole that was giving us a little better quality car, I mean, that pays for itself right there. So if you said, I'm gonna find a guy who I'm gonna give him a salary or per car, whatever your situation is, it's. I mean, it's not like an afterthought. It's not like a, hey, I run a car lot and you know, I'm gonna also wash the sidewalks. You know, it's like, yeah, that's such an inventory acquisition so crucial. I mean, it's the number one thing. If you don't start with a good car, it really doesn't matter how good your reputation is, your reviews, your underwriting, any of that stuff, it doesn't matter. And that's what we got to is we were just getting so. Just beat up at the auctions because of the junk and the manipulation from other buyers that we said, hey, we're gonna just dedicate full time. He spends a lot of his time at new car stores building relationships with wholesale, you know, used card managers and wholesalers. And it's, it's been, it's been really good for us. We get cars we would have never gotten.

There's something you hit on there that people really need to understand. So. I've always been a car buyer. Okay. That's, you know, I'm a, I'm a technician and a car buyer. That's what I, that's what I am. That's what's in my body.

Right.

But let me tell you this. The more you get involved in running your business like I've done in the last 10 years and move so, so far away from, from buying, but I mean, I'm still the only buyer. And I say that, but I can tell you how most of my bad months start. You know how they start, how I don't have enough inventory. And you know why I didn't have enough inventory?

Because you were putting out fires.

Cause I was putting out fires and I wasn't taking care of business. So keep that in the back of your mind. I'm lecturing here, but I'm probably the only, I'm probably the biggest one that needs to listen to that.

Yeah, I would think if everyone just really stepped back and did the math and just said what does it cost me to either what am I passionate about? I'm passionate about the operations of the business or am I passionate about buying cars and do I have the stomach and the time to be on the road or to be in my laptop buying, then I need to delegate these other responsibilities or I want to be in the business. I'm okay setting up a structure for a buyer or hiring someone full time at I don't know, three, four, five grand a month maybe. If you got someone really good, depending on your market and he's just a full time guy and he just drags the auctions and the onlines and everything else. I mean, what are you gonna save in one engine, one mission, one, you know, geez.

Think a good way to look at this is, you know, I think around here your average buyer gets about 150 a car, let's say. So just think about how many cars you sell a month and how many you need to buy. Multiply by 150. That kind of give you an idea of what you need to pay a buyer and what it would cost you to pay a buyer. And some of y' all may be paying that already in a psi. So, you know, it's an idea just, just to think about that. What's More important to you, like you said, Jeff, I think the other thing we need to just to touch on. So when I talked about the products out there that allowed you to kind of set your parameters on what you buy and it tell you where the car was. One thing I did instead of spending that extra money on that piece of software is I went into Manheim and as well ADESA and I set the parameters on what I know I buy every week.

Right.

So all I have to do is click that Save Search and those cars come up. It doesn't cost me any extra. It's part of Manheim's platform and also part of Adses platform. So I would also recommend doing that. You can build searches within a bunch of these mobile auctions as well, and also your independence. So I would say if you're not ready to go out there and spend money to get Auction Genius or Auto Reborn, not Auto Revo, Auto v Auto are these type deals. You can still build your, you can still build your searches within these platforms. So try that before you jump into one of these softwares.

Yeah. Use what you've got. I think a lot of people don't really understand the services that are both built into their current software and their Manheims and you know, just so many things that you don't know. You don't know. Talk to your rep, you know, find out what they can offer you in shipping discounts and hotels and things like that. I know there's a lot of perks. They do.

Oh yeah. When I used to travel to auctions every week, if I bought a certain amount of cars, which I always did, they paid for my hotel room. So there's, there's a lot of ways out there to, to have good relationships. You know, people, people like to complain about some of the vendors we use and I see it more and more every day. But remember, the vendors only make money if it works for you. So make sure you have great relationships with your vendors. Don't always complain about them because you might be complaining about a service that they provide free of charge. So make sure you find out, talk to your reps, build that relationship.

And I think that's it, Luke. I mean, if there's one thing I take away from this, and to wrap it up in summary is you use the technology. That is our biggest weapon as a used car store is the tech is out there. I mean, the amount of vendors and tools that we have at our fingertip and you'll see it. I mean, I think someone posted something about the Digital Dealer wrap up. You'll see it at the NIADA conference in Vegas. They're out there, you know, get familiar with them and use them.

It's such a great point, Jeff. Come to a convention, guys. I don't care if it's your state convention, if it's Digital Dealer, if it's nada, if it's Niada, which I recommend, come to the convention, talk to these. To these people in the expo hall, and these vendors are really there to help. Use it, use it, use it, use it.

All right. Thanks a lot, Luke.

All right.

Sa.