Profit margins and car profit are an extremely important aspect of being a successful used car dealer. In the past few years, it has been nearly impossible to increase margins. It has even been difficult to hold margins steady. However, now is the time for a used car manager to hold margins, and even try to increase their margins. There are several reasons for this. First, we are entering the summer months when demand historically increases. Second, we are dealing with a significant used car shortage within the used car marketplace.

Properly managing a used car inventory involves several supply and demand basics. The used car industry is experiencing and will continue to experience an increase in demand and a decrease in supply. Quite simply, this means a used car manager should hold margins steady or increase them.

There are only a few times in the used car industry when you can hold a used vehicle for a substantial period (3 months or so) and NOT lose a significant amount of money. We are currently in one of those periods.

However, there is a significant problem that every used car buyer, wholesaler, and used car manager needs to follow closely. I am referring to the impending debt crisis within the Euro Zone.

Why should I care about Europe?

I know, I know. I can hear many small town dealers saying “what does a debt crisis in Greece have to do with selling used Ford trucks”? It’s simple. When managing a used car inventory it is important to project supply and demand as far into the future as possible. Used auto sales have been steadily increasing in the United States since the 2008 credit crisis. This is due to several macro trends that look like they will remain intact for some time. However, there is one thing that will quickly derail the used car industry again, and that is another credit crisis.

Americans need credit to buy cars. This fact can be: sugar coated, covered up, displayed by fancy statistical analysis, or ignored. However, Americans entered this recession with very little savings and too much debt. Without credit, the American consumer simply can’t afford to purchase a new or used vehicle. If the credit industry quickly dries up, so will used vehicle sales. Needless to say car profit will also fall.
We live in a highly connected global economy, and the current events in Europe threaten that economy. The debt crisis in: Greece, Portugal, Italy, Spain, and Ireland are extremely severe. Each country will have to endure significant tax increases and cuts to their budgets if they are to meet their significant debt obligations. In other words, these countries have to earn more and spend less or they won’t be able to make their payments and the IMF will step in and force these changes.

$1 Trillion can’t buy what it used to

This debt crisis has recently placed significant pressure on the Euro and the European Union. In an effort to reverse the decline in the Euro, Jean-Claude Trichet and the rest of Europe’s Central Bank recently implemented quantitative easing and essentially dropped nearly $1 Trillion on the financial markets. What did the markets do? They continued to sell Euros and other risk assets, showing a lack of confidence in the central bank’s plan.

If the European debt crisis spirals out of control, American banks will be significantly hurt. In our derivative based financial world, if there is a significant problem in Europe, our banks will also suffer. This comes at a time when our banks are barely recovering and just beginning to increase their automotive lending. If the banks are forced to reduce automotive lending, used car sales will significantly slow and car profit will plunge.
No one is saying you should get a subscription to an European newspaper and follow every move in Portugal, but the car buyer who likes to see where the market is headed would be wise to keep one eye on Europe and watch closely for the word contagion. If this debt crisis intensifies and begins to touch American banks, it will be time to cut margins and reduce your inventory.

The bottom line is this; now is the time to hold and even increase margins, but if Europe unravels, cut margins and reduce your inventory exposure.

As Always, Good Luck and Good Selling.

Steve Hosaflook is the Author of Used Cars 101. He is also a contributor to the Used Car Voice.