What Will Inflation Mean to Dealers?

While inflation may not be inevitable, its likelihood is high enough to merit a discussion around what it would mean to dealers of durable goods and what precautions they need to take.

One of the chief concerns is inventory. Inflation provides a good cover for carrying the wrong products. I say “cover” because your vehicles, cycles, boats, or whatever you carry will depreciate just as fast as they ever did. If inflation is 10% per year (roughly 2.5% per quarter) your vehicle may be worth the same dollar amount 90 days after purchase, but those dollars are not worth as much. They are worth 2.5% less.

Inflation does not diminish the necessity of turning inventory quickly; it simply makes it harder to identify inventory problems. The discipline necessary to deal with slow inventory turn is more crucial than ever.

The ugliest thing about inflation is the need for increased capitalization. A dealer carrying an inventory worth $1,000,000 today may find that the same level of inventory carries a value of $1,500,000 five years from now. Not all of that $500,000 in additional capital is going to come from debt; some of it must be additional equity. Granted, this capital should be available through increased profits, but you will need to pay taxes on those profits.

I watched my grandfather’s dealership struggle through this in the late 1970s and early 80s. He owned every vehicle in his store, but the same number of vehicles quickly required twice the capital. That capital came from increasing profits, which were heavily taxed. The bottom line is that you are going to need extreme fiscal discipline to reinvest in your business. If you take out every dollar of profit, you will be left with a smaller business.

Don’t be surprised if tax brackets are not fully adjusted to inflation levels. Historically, this has been a way of raising taxes without having to say you are raising them. I was once a candidate for the U.S. Congress, although there was little chance of winning (California’s 27th District in 1988). I mention it because I am as partisan as the next guy. But politics have little to do with the fact that the federal government is hungry for cash. Businesses appearing to make more money will unfortunately be targets for one party and fat targets for another. Inflation will almost certainly make it harder to achieve real growth through retained profits.

As the economy emerges from recession, high inflation rates may or may not come. You and I have no say in that. However, it is possible to get the mindset of your partners, family, and other stakeholders ready for the discipline that will serve them well under any circumstance.