Readers of my column and listeners of my weekly radio show, “Earl on Cars,” have heard my “Mystery Shopping Reports.”
For 20 years, I have sent a secret shopper to various car dealerships looking to buy or lease a car that is advertised and reports on the experience. Based on their experiences, dealers are listed as “Good Dealers” or “Bad Dealers” on my website, www.EarlOnCars.com.
Last week my buyer visited the Car-Max used car lot in Royal Palm Beach. CarMax is the largest used car retailer in the United States with hundreds of locations and has always been at the top of our “Good Dealer List.” They have a simple pricing policy, pay their salespeople a salary and offer a seven-day money-back guarantee on every car they sell, with reasonable terms.
Recently, however, CarMax’s sales and profits have plummeted, and I sent a mystery shopper to find out why. The wholesale expert at my Toyota dealership told me that CarMax was not buying many cars at the wholesale auctions, which was surprising since they are usually the biggest buyer.
My buyer chose a 2021 Toyota 4-Runner advertised on the CarMax website for $40,998, which was $7,000 above the current wholesale price and $3,000 more than my dealer’s retail price. The seller told my buyer that the vehicle had been transferred from another CarMax lot because it had not sold. This confirmed my suspicion that CarMax’s sales and profits had declined because they had not written down the cost of cars acquired during the used car bubble that had recently burst.
The microchip shortage ended, new car inventories increased and prices fell, leading customers to buy more new cars and fewer used cars. Dealerships, including Car-Max, were left with an inventory of overpriced used cars. My dealership took a huge loss and wholesaled close to a million dollars worth of used cars in order to bring our inventory in line with market prices. Dealerships that ignore overpriced inventory will have trouble selling these cars profitably. The smart move is to take the big loss quickly and replace the inventory with new cars at the lowest and truest wholesale market.
This situation means that used car buyers need to be even more cautious and price shop.
My buyer could have saved thousands of dollars by buying the Toyota 4-Runner at another dealership that had the sense to get rid of overpriced inventory. ¦
