[bobwaycott]

In it's simplest form, non-excessively peppered with financial terminology and equations:

Floorplan is a line of credit dealers use to purchase their retail inventory. Each vehicle on the lot subjects the dealer to finance charges that begin accruing from the moment the dealer takes possession of the vehicle. So, say that the floorplan fees and interest are $100/day per vehicle (for simplicity's sake). The longer a car sits on the lot, the more profit the dealer is losing on that vehicle per day. Make sense?

Why do dealers care?

If you're being charged by the number of days a car is sitting on the lot, and a customer comes in an looks at a brand new, green car that arrived yesterday, and there is an identical twin in every way that is 400 days old, the salesman is going to push you to check out the older one and say they can make a special deal on it for some reason or another (sometimes they'll just say it's because it's been on the lot for a long time if they're really desperate). If you're paying interest on every product by the day, you want to get that out of your inventory as quickly as possible, because that's where you maximize your profit potential.

Often, you can find vehicles on lots that are marked down lower than other similar/identical cars. This is almost always due to floorplan age (I'm assuming we are only talking about new cars here, because used cars bring in a lot of other variables).

Some dealers operate in a way that they seek to capitalize on volume sales vs individual car sales as a way to both be more competitive and mitigate floorplan costs. These are often the best dealers to purchase from (and these are almost never luxury brand dealers) because they will typically sell every single vehicle at invoice price (or several hundred above), and build their profits instead around manufacturer incentives that pay out to the dealer $N per type of car in a graduated fashion where the payout increases as #s of types of cars sold increases. If you have a dealer in your area that advertises (and shows you the proof) that they sell at or near invoice, especially if that is their standard practice, you can safely assume they are a volume dealer. The salespersons are going to be focused on selling as many cars as they can because they are also making their income based on the number of cars sold, not a percentage of per-sale profits.

Can you use this on the lot to your advantage? Sure. Just ask the dealer/salesperson how long the car has been on the lot.

[refurb]

A question about floorplans:

Is the floorplan cost flat? I ask because if you take into account both sunk costs and the fact that two identical models would have the same floorplan cost per day, why would they care to sell the older car first?

Let's say you have two cars on the floor: Car A - just arrived Car B - sitting for 100 days

The cost of the floorplan is $10/day (let's say)

If a customer comes in and buys car A and then car B sits for another 10 days, how is that different than a customer coming in and buying car B and letting car A sit for 10 days? In the end it should cost the dealership the same. It's all about moving inventory, not necessarily moving specific inventory.

I assume I'm missing something here, can you explain?

[bobwaycott]

Well, floorplan financing is a finance vehicle like any other, so terms are different among participating providers. Also, I'm a bit unsure of what you mean by "sunk costs".

Each vehicle ordered into inventory is an advance on the line of credit that has repayment fees and interest. Each vehicle sold then translates into paying the floorplan provider the advance amount + fees.

In your example, I'm unsure of how you fail to see that Car B is already costing the dealership more money. But let's work it out anyway.

Car A just arrived. Car B has been sitting for 100 days.

Car A cost $20,000 and is on the lot for 0 days @ $10/day. Total repayment? $20,000.

Car B cost $20,000 and is on the lot for 110 days @ $10/day. Total repayment? $21,100.

If you were the dealer, would you want to lose that additional $1,100? I'm willing to bet it would matter to you.

Complex case:

You're in a floorplan agreement that requires repayment of advances in full (including accrued interest and fees) in n days. You damn well better sell enough specific inventory to cover this without losing profit. The longer specific inventory stays on the lot when you're repaying each period, the more screwed up your numbers become.

It is about both moving inventory and moving specific inventory when that inventory is costing the dealer as much money as 10 other cars that sit on the lot for 20 days each.

Moreover, the typical expected time-on-lot tends to be between 30-90 days. Floorplan terms are usually negotiated for these typical cycles. If a dealer is in a floorplan setup that is built for a 90-day max turnaround, and then has vehicles that sit around for 200+ days, that can add up to significantly higher fees per old car that eats into the profit margin. This is especially important with dealers who are selling based on a profit-per-vehicle basis, as opposed to the profit-per-level basis in use by volume dealers. Last thing you want to do (as a dealer) is strike a deal on a 200-day-old car that you had to strip to invoice price or below to sell, and then repay a floorplan advance + fees that exceed the sales price. It happens, but you still don't want it to happen.

More important still, if a dealer is unable to keep moving inventory off their lot (whether through consumer sales, fleet sales, or dealer trades), then they have more inventory eating up their floorplan, diminishing the amount of inventory they can continue to purchase to replenish supply.

Now, to balance all this out and try to create new profit centers that both put more cash in the bank and provide another opportunity to make money off a potentially negative car sale, we have the Dealer Finance Officer. An absolutely disgusting professional. But that is a different kind of discussion. You may already be familiar with how finance officers help increase dealer profits-per-sale.

[wwweston]

> Car A just arrived. Car B has been sitting for 100 days. > Car A cost $20,000 and is on the lot for 0 days @ $10/day. > Total repayment? $20,000. > Car B cost $20,000 and is on the lot for 110 days @ > $10/day. Total repayment? $21,100.

I still don't know if I see the difference between the two. We're at Day N (where Car A has been there 0 days and Car B has been there for 110 days). If we sell Car A but not Car B, on Day N+1 we will pay an additional $10 in financing. If we sell Car B but not Car A, on Day N+1 we will pay an additional $10 in financing.

It doesn't matter which bucket we put the additional marginal cost of keeping a single car on the lot, it's the same overal expense to the dealership. Unless the marginal cost increases for a car over time, which, for all I know, it might.

[bobwaycott]

The point is that it matters very much to a dealership and they see a significant difference between the two.

Dealer staff aren't usually trying to look at overall expenses--that's for the accountants to bother with--but the profit/loss per vehicle. This is enforced by nearly everyone's income (on the sales and finance side of the business) being determined on a per-sale basis.

Simplistically, each car on the lot represents a loan. The longer it sits there, the higher the fees & interest paid. Dealers want to move each unit as quickly as possible to keep the repayment fees as low as possible, and to prevent eating up dealer holdback, floorplan assistance, and other incentives. Nearly all of these are calculated on a per-car basis. If it did not matter to dealers, they (and their salespeople) would not know how long the cars stay on the lot--because it directly tells them how much money they're losing per day on that vehicle. Moreover, nearly every salesperson and manager at the dealership know exactly which cars are the oldest cars on the lot, in rough (if not exact) order of age.

The various ways dealers make money--holdbacks, incentives, rebates, floorplan assistance, inflated MSRPs, documentation fees, etc.--all exist to offset the expected costs of doing business--floorplans, commissions, taxes, regulatory fees, etc.

When Car A hits the lot on Day N, the dealer is sitting on 100% profitability from the sale (let's just assume 0 haggling & they get sticker price + all their fees, etc.). Each day the car sits on the lot, they drop further from 100%. The dealer and salespeople are highly incentivized to sell for as close to 100% as they can.

Beyond that, a dealer is in a very unhappy position when the cost of having Car B on the lot is high enough that it begins decreasing the profitability of other cars sold. How does occur? In simplest terms: Car B is on the lot long enough that it's actually eaten through all the cash assistance available to the dealer for Car B, and is now eating through the cash available on Car A.

Let's say the dealer loses 1% profit per day on the lot. It takes 100 days to reach 0, obviously. On day 101, the dealer is now at -1% profit, and that has to come from another car on the lot. It's not unheard of for a car to be on the lot for 300-400 days. I've rarely seen much over 400, but it happens (especially with oddly configured models). In our simple, imaginary scenario, that 400-day-old car has eaten through not only its own profit, but that of 3 other cars.

When you arrive on Day N and Car B has already been there for 100 days, the dealer is significantly further from 100%, and is going to be more willing to bend further to move Car B than s/he is to move Car A, which is sitting on 100%, and whose profit the dealer is strongly interested in preserving.

There are further factors often at play here, as well. Say you are a Sales Manager at the dealership. You have a salary, but on top of that, let's suppose you are paid bonuses based not only on number of cars sold (like salespeople), but also on average days-on-the-lot. The better you are at moving your inventory, the more you make. Have a few cars sitting on the lot significantly longer than the others? Well, now your bonus is fucked up.

The longer a car has been sitting on the lot, the higher your possible chances of working out a better deal purchasing that car. Once a car hits a certain age on the lot, the dealers may even dip into their holdback and other assistance dollars to get the thing moved.

Note: I am not attempting to suggest that the dealers are behaving entirely rationally. I'm just pointing out that these things matter to dealers, who typically look at everything on a profitability-per-car basis.

Disclosure: I know enough about bonuses from selling the oldest cars on the lot to feel confident in saying that lot age matters very much to dealers in a number of ways--enough so that they're willing to pay a salesperson more to sell the 400-day-old car than the 20-day-old car. It matters. The 20-day-old car might make you $300. The 400-day-old car could make you $1,000. When John and Jane Doe walk on to the lot to find their new sedan and you have almost exactly what they're looking for in a 400-day-old model and exactly what they're looking for in a 20-day-old model, which one do you suppose you will try to sell them?