The following is Dale Pollak’s column that ran on his site on Nov. 3.
I can’t help but regard AutoNation’s multi-year deal to service Waymo vehicles as a smart move for the company, and perhaps a telling sign for the rest of us.
My job has me traveling the country, speaking at dealer groups and other events and, more and more of late, talking about the future of the car business.
Inevitably, the conversations land on two factors—that the very nature of vehicle ownership is changing fast, and that fleets of self-driving cars don’t necessarily mesh well with the franchised dealer network’s current ways of doing business and making money. The term disintermediation comes up, time and time again.
But I try to make the point that if the car business evolves into the transportation business, dealers would do well to figure out, and pursue, how their roles may change and how they should adapt. I also make the point that pioneers tend to get the greenest fields in new lands of opportunity.
That’s what makes the AutoNation/Waymo partnership noteworthy.
AutoNation isn’t waiting to see how the evolution and impact of self-driving vehicles might play out. They want a seat at the table, and the Waymo partnership provides it.
Similarly, the partnership starts to answer a big question about self-driving vehicles: Who’s going to fix them? The manufacturers? Dealers? An off-shoot of already-centralized service facilities in operation by rental car companies and others?
I see a couple potential advantages for AutoNation:
—They’ll be among the first to understand how to fix self-driving cars. AutoNation now has an incentive to build the know-how to maintain and repair what are probably the most sophisticated, technology-centric vehicles on the road. The decision to sign up first for this learning curve underscores executive understanding that first mover advantage really matters.
—It validates AutoNation’s size and scale. Waymo recognizes it’ll need a means to keep its vehicles on the road, and AutoNation happens to have the largest owned network of dealerships where the maintenance and other repair work can occur. A dealer with two, three or even 10 stores would be unlikely to offer Waymo a cost- and process-efficient platform to achieve its goals.
—It creates a new, diversifying line of business. The Waymo partnership offers potential fixed operations profit for AutoNation’s dealerships from a fresh source. If done right, the profitability that comes from this work could mean more to AutoNation’s bottom line than many of the new vehicles it retails. What’s more, the partnership may provide sufficient return that enables AutoNation to capture a larger share of new/used vehicle sales, which would often even greater operational efficiency gains.
As I talk to industry media and observers about the future of the business, and the seeming rise of disintermediating threats from as-yet unknown players and technologies, I am always sure to make the point that “I wouldn’t bet against a dealer’s ability to adapt and thrive.”
That’s exactly what AutoNation appears to be doing with its Waymo partnership.
Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column ran on his blog on Nov. 3. For this story and all his posts, visit www.dalepollak.com.
The following is Dale Pollak's column that ran on his site on Aug. 17.
Old beliefs and habits definitely die hard.
Take the way many dealers still think about their new- and used-vehicle prices:
Dealers control vehicle prices
I’m not talking about the obvious point that dealers do, in fact, largely set the asking prices for their vehicles. My point relates to the ever-more powerful influence the market has on a dealer’s latitude to price vehicles the way they really want to. Some dealers have let this one go entirely. They’ll price their vehicles based on what the market data tells them — no more, no less. They recognize they can’t control or make the market for a vehicle. They understand the market dictates if the car’s a winner or loser, or lies somewhere in between, and they should price accordingly.
A higher price is a better price
Some dealers still believe that higher prices lead to higher front-end gross profits. This belief used to be true, before the Internet and pricing transparency gave the market more influence on vehicle prices. Back then, dealers could set their retail asking price as high as they wanted, and negotiate to keep every last bit of gross profit from a customer.
Unfortunately, it doesn’t work that way as much or as well today. Vehicle buyers hunt hard for a fair price, and don’t respond well to dealers with new and used vehicles priced 10 percent to 20 percent higher (or more) than the same/similar cars in their markets for no apparent reason.
Price and age aren’t related
This thinking isn’t as prevalent as it used to be in used vehicles. Generally, dealers recognize that the longer a used vehicle sits in inventory, the less money it makes, due to depreciation, competing units and opportunity costs. As a result, many dealers make the effort to adjust prices as vehicles age to facilitate a timely retail exit. But these same dealers often do not apply the time-is-money principle in new vehicles.
The prices these dealers place on new vehicles on Day 1 often don’t change for months. Other dealers, however, have recognized that age- and market-related adjustments result in faster retail sales, which affords them the right to earn additional inventory from their factory partners.
When you re-price, you lower your price
Dealers affirm that the vast majority of re-pricing decisions result in a lower price. But the most market-astute dealers know this isn’t always true. That’s why they assess each vehicle’s online performance. They ask these and other questions: Is the vehicle’s online listing getting a sufficient number of vehicle details page (VDP) views? Is the online activity increasing or on the wane? Are there more or fewer competing cars in the current market? How do the prices and market days’ supply metrics on these cars compare with mine?
Most of the time, the answers lead to price reductions. But there are times, in both new and used vehicles, where dealers are well-justified to raise a vehicle price, or hold off on a price reduction, because their vehicle stands taller in the market than others.
I’m sharing these misunderstandings because I’ve seen, time and time again, how they impede a dealer’s ability to fully maximize new and used vehicle sales velocity and profitability.
In today’s market, margins are too thin, and time is too precious, to allow these common misunderstandings about new and used vehicle prices to get in the way of tomorrow’s retail sales.
Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column ran on his blog on Aug. 17. For this story and all his posts, visit dalepollak.com.
The following is Dale Pollak's column that ran on his site on June 19.
“It’s life by a thousand little things, or death by a thousand cuts.”
A dealer recently shared this line as we were discussing how the car business has changed in the last 25 years. The dealer’s observation strikes me as a perfect, clear-eyed summation of how efficiency, technology and transparency have made retail automotive a much different environment for dealers.
Consider the following common, everyday tasks and how much the little things matter more than ever before.
Stocking vehicles
For years, many dealers have followed a fairly reasonable strategy as they order factory vehicles: We’ll stock as many of the cars that we know we can sell, based on what we’ve sold. If we get stuck with some cars, it’s OK. We know that, eventually, the factory will offer the incentives that will help us get our inventories back into shape.
But here’s the problem with this strategy today: It’s too passive. It relies too much on past history, and your factory partner. It can ignore, and miss, faster-moving retail trends that help you maintain, if not gain, sales and market share. It’s also imprecise. The task often falls to a single individual, who’s probably relying on guesses, gut and instinct more than competitive market data to determine the best vehicles to order and stock.
“Within a model line, there’s usually one or two specific things that makes one particular combination stand out more than another,” says the general sales manager at a Southeast Volkswagen dealership. “We’ve made it our business to know these specific things, and configure our inventory accordingly. Our goal is to turn and earn cars. We can’t do it if we’re not ordering the best sellers from the manufacturer in the first place.”
The situation is very much the same in used vehicles. Variances in vehicle color, condition, mileage and specific equipment make the difference in determining a vehicle’s wholesale or retail value, and its likely appeal among potential buyers, given competing vehicles in the market. It’s easy for an appraiser or buyer to make costly mistakes if they’re relying solely on what they know, rather than augmenting their intelligence with market data.
Pricing vehicles
It wasn’t all that long ago that pricing new and used vehicles was fairly easy. In new vehicles, you pretty much only needed the MSRP or “Call For A Great Price!” In used vehicles, your retail price was just a standard mark-up away from the cost of the unit. Pricing cars didn’t require much critical thinking and, if you made a mistake, buyers forgave you, and they were none the wiser.
Today, it’s so very different. Many consumers know almost exactly how much they should pay to buy a new or used vehicle, and get a fair deal. They know if your vehicle’s price is in, on or off the market, given the car’s color, condition, equipment and other particulars. They won’t bother if your prices don’t fit their perception of fair purchase parameters for that vehicle.
The environment means that if your prices fit in the context of a consumers’ competitive set, you’re in the game. If not, you’re out. Likewise, if you’re too deeply in the game, you stand a good chance of giving up gross. On top of all this, you’ve got the constant tick-tick-tick of inventory age undermining your gross profit potential. Simply put, it’s impossible to price effectively without some kind of technology or tool to help you optimize each vehicle’s market price position.
Engaging buyers
It’s easier than ever for consumers today to find the vehicle(s) they want to purchase, and the price they think they should pay. It’s also fairly easy for them to find at least one dealer, in virtually every market, who claims to offer a different, hassle-free car-buying experience. We also know that most consumers will only visit one, possibly two, dealers before buying a vehicle.
As a result, some dealers take every customer engagement very seriously. To them, every customer conversation, e-mail, instant chat or text message could be the last.
“We truly believe that it’s almost as if the customer is looking for a reason not to do business with us,” says the COO for a West Coast dealer group. “We work very, very hard to make sure they don’t find that reason.”
Today’s car business may be different, and arguably more difficult, than it used to be. But it’s still a healthy, viable business where success awaits those who properly apply themselves to its pursuit.
My dealer friend is correct. The little things matter more than ever. To paraphrase an old saying, “the devil is in the details, and so is your next deal.”
Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column ran on his blog on June 19. For this story and all his posts, visit www.dalepollak.com.
The following is Dale Pollak's column that ran on his site on June 6.
Dealers often have an “all or nothing” view of digital retailing.
That is, to them, digital retailing represents the full monte of selling a new or used vehicle online. You’d have a “buy it now” button on every vehicle details page (VDP) for every vehicle, customers would work their deals, and dealers would deliver “sold” cars to customers at their homes.
These dealers also often dismiss this concept of digital retailing as unrealistic-as something too few customers are willing to do today. In turn, the dealers then make a critical mistake: They put the whole idea of digital retailing on the shelf until the time comes when they’re fully convinced more customers would actually “buy it now” for their next vehicle.
This viewpoint isn’t necessarily wrong. In fact, the dealers are absolutely correct that a majority of new/used vehicle buyers today wouldn’t want to buy their next vehicle completely online. Studies show that maybe 10 to 15 out of every hundred people might be ready for this kind of vehicle purchase experience. It does seem a bit ill-advised to invest in an end-to-end digital retailing experience when the vast majority of buyers wouldn’t use it.
But here’s the big miss for dealers who shelve digital retailing on these grounds: The “all or nothing” view is a bit short-sighted. It undercuts your ability to serve the remaining 85 percent to 90 percent of customers who are, in fact, receptive right now to taking part in at least a piece or two of a digital retailing experience.
These are customers who want more convenience, and a greater sense of control as they purchase a new or used vehicle. They don’t want to spend hours in a dealership to complete a purchase transaction. They might even pay more for the privilege of completing some part of a deal-whether it’s negotiating a payment or purchase price or trade-in value-from the comfort of their own homes.
“I’m getting an additional eight to 10 deals a month because I offer the option of working out deal terms online,” says the general manager of a Southeast Volkswagen store. “We do things differently than other dealers and we’re getting better at telling the world about it.”
I hear similar stories from other dealers. Even if they aren’t adding a “buy it now” option to their website, they are fostering a different type of engagement that speaks to the needs of today’s increasingly me-focused and time-addled buyers. In other words, they’re working deals while “all or nothing” dealers aren’t getting any of the action.
The general manager for a Midwest Lexus store notes that his dealership continues to see a growing number of customers take advantage of his digital retailing offerings. He adds that every one of the customers who negotiates a payment or trade-in value online still wants to “come in and take delivery in person.”
Such is the nature of digital retailing today. The vast majority of vehicle buyers aren’t really looking for a “buy it now”-based, end-to-end digital car deal. They simply want to carve out the parts of buying a car that they perceive as potentially problematic and time-consuming, and complete them in a way that’s more convenient and easier for them.
The take-away here for dealers is that digital retailing shouldn’t be viewed as an “all or nothing” proposition. Rather, it’s more of a “have it your way” approach, wherein dealers provide the digital retailing tools, and customers use as much, or as little, of them as they prefer.
I understand how and why some dealers have landed on an “all or nothing” view of digital retailing. I would simply encourage them to consider the business they’re probably missing as they hold out for a complete, end-to-end digital retailing solution that the majority of buyers may never want, and might never arrive.
Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column ran on his blog on June 6. For this story and all his posts, visit www.dalepollak.com.
The following is Dale Pollak's column that ran on his site on April 4.
It’s like a leaky faucet.
Drip by drip, the retail profit you make on used vehicles goes down the drain. But unlike a leaky faucet, the fix for margin compression in used vehicles isn’t as easy as calling a plumber.
That’s because, more and more, ongoing margin compression in used vehicles is the nature of the business.
According to the National Automobile Dealers Association (NADA), used-vehicle gross profits as a percentage of transaction prices has been shrinking, bit by bit, for nearly the past decade.
NADA data shows that in 2009, used vehicle gross profits ran 14.3 percent of average vehicle transaction prices, compared to 12.1 percent in 2016. This diminished return may not seem like much, but it’s a significant difference when you consider the average used vehicle transaction price has grown by nearly $4,700 (from $15,210 in 2009 to $19,886 in 2016, a 31 percent increase).
The challenge, and opportunity, for dealers rests in how you contend with margin compression.
The fix isn’t as simple as selling more used vehicles. In a margin-compressed environment, you have to sell more used vehicles more efficiently to maximize an ever-smaller return on an ever-larger investment.
To achieve a higher level of operational efficiency and sales, I recommend the following best practices for dealers:
—A consistent sourcing pipeline. You can’t retail vehicles you don’t have in stock. More and more, dealers are employing full-time, technology-enabled sourcing specialists to maintain a steady supply of incoming auction inventory. The specialists free up managers who previously found themselves lacking sufficient attention and time to selectively acquire the right auction vehicles, with specific Cost to Market and Market Days Supply metrics, to fill inventory needs. It’s not uncommon for these time-addled managers to just buy cars because their inefficient sourcing methods lead to frustration and less-than-optimal decisions. Similarly, the specialists give managers more time to oversee appraisals and maximize every trade-in opportunity.
—Faster retail-ready turnaround. It’s still fairly common for used vehicles to spend five, seven or even 10 days in service before they are reconditioned, detailed, photographed and posted online. A Midwest Chevrolet dealer found that by trimming three days off his dealership’s eight-day retail-ready average, he realized an additional $300,000 in front-end gross profits. The dealer is now working to consistently meet a 36-hour turnaround, and anticipates the improvement will generate an additional $200,000 in front-end gross.
The example highlights the “time is money” axiom of retailing vehicles in today’s margin-compressed market. I would also note that top-performing dealers set aggressive benchmarks of 24 hours or less to complete detail and reconditioning work—a goal that typically requires automotive RO approvals when repair estimates fall within expected ranges, and dedicated recon teams in service.
—Reduced inventory age. I currently recommend that dealers strive to retail at least 55 percent of their used vehicle inventory in less than 30 days. Dealers who achieve this objective, which requires a Velocity-oriented pricing strategy, are doing all they can to minimize margin compression and take advantage of retailing vehicles when they are fresh and stand to deliver maximum gross profit. To understand why reducing the days to sale of used vehicles is so important, I encourage dealers to do a quick study of the gross profits they achieve on vehicles retailed in less than 30 days compared to vehicles retailed after 30 days.
In most cases, the results show the average front-end gross profit declines by at least 50 percent once vehicles cross the 30-day line. If you segment vehicles retailed after 45 days, it’s not uncommon to see a roughly 50/50 split between vehicles that make a little money and those that lose a lot more.
This analysis often leads dealers to agree with my assessment that any vehicle that you don’t retail within 45 days represents a failure of management. For some reason, right or wrong, someone turned their back on these units, when they should have been working harder to sell them.
It should be noted that none of these best practices represents an easy fix. Each requires dealers, managers and team members to think and do things differently, sometimes in a manner that’s contrary to what they’ve been taught.
But dealers who get past these hurdles find their reward. It comes in the form of improved used vehicle performance and profitability in an era where neither can be taken for granted.
Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column ran on his blog on April 4. For this story and all his posts, visit www.dalepollak.com.
The following is Dale Pollak's column that ran on his site on March 7.
Let’s imagine there are two dealers in the auction lane, bidding for the same car.
The first dealer wants the car because he’s sold a few of the same units recently, and did pretty well in terms of front-end gross. The three-year-old car has about 40,000 miles, and looks/smells pretty good. The CARFAX notes the car is “clean,” with “one owner.” The dealer’s checked NADA and MRR values, and thinks he can bid up to $17,300 for the vehicle, essentially the mid-point between the wholesale benchmarks, and make an estimated $2,000 front-end gross profit.
The second dealer has similar past experience with the vehicle, and also thinks it’s a decent car. Like the first dealer, he knows the vehicle’s retailing for roughly $19,500 in his market. But he also knows something else about the car the other dealer doesn’t. The vehicle has a respectable market days supply of 55 — a semi-fast seller if he prices it right.
The bidding starts at $16,500. It quickly climbs to $17,500. The first dealer bails out when the auctioneer asks for $17,700. The second dealer raises his hand and owns the car.
While this scenario is fictional, it represents three important facets of sourcing auction vehicles in today’s market:
1. Cars are won/lost by fairly narrow margins. You could credit the first dealer with a decent degree of bidding discipline. He stayed in the hunt, and even went past his original bid maximum, to try and get the car. But the extra $400 was too rich for his blood. He probably looked at the other dealer and thought, “That guy’s crazy. He over-paid and he’s not going to make any gross when he tries to retail it.”
2. Market insights make a key difference. To be sure, the second dealer would have loved to acquire the car for less than $17,700. But for him, it made all the sense in the world, even with a likely retail selling point of $19,500.
Why? First, the dealer knows all the math. His auction-buying tool calculates roughly $800 in fees, reconditioning and other costs — leaving roughly $1,000 in potential gross. While not ideal, the dealer also knows that the vehicle’s market days supply of 55 means he can likely make the $1,000 in the next 10-15 days and, in two to three weeks, he’ll redeploy the same capital on another unit.
3. The rise of a “total gross” perspective. The second dealer’s decision reflects an understanding that in today’s margin-compressed environment, it’s just as, if not more, important to acquire and retail vehicles that help you achieve a faster through-put of retail sales than focus solely on front-end gross profit. By doing so, dealers effectively ring the cash register more frequently — in used vehicles, parts, service and F&I.
Indeed, the success of the second dealer’s decision to purchase the vehicle for $17,700 will fully depend on his ability to properly merchandise and price the vehicle for a fast retail exit. But chances are good he’ll get the job done, and make twice as much money in the time it takes the first dealer to find, acquire and retail a vehicle that passes his test for a front-end gross objectives.
In the months ahead, dealers will likely see even more competition in the lanes and online. The reason: As new vehicle sales decline, and draw even fewer trade-ins, dealers will turn their attention to auctions for the inventory they need to achieve their goals for increased sales and profitability in used vehicles and beyond.
This outlook begs a question for every dealer: What new insights, perspective and tools will you use to ensure you know the exact auction vehicles to pursue and make your money every time you acquire one?
Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column ran on his blog on March 7. For this story and all his posts, visit www.dalepollak.com.
Most dealers agree that if you’re going to profitably and successfully sell a lot of used vehicles, there are many things you have to get right.
With this thought in mind, I analyzed the inventories of 60 dealers that made this year’s Automotive News’ Top 100 Dealership Groups Ranked by Used Vehicle Sales report. My goal is to help other dealers understand the operational benchmarks and metrics these groups follow to outperform their peers.
1. Market days’ supply
This metric measures the market supply and demand of used vehicles based on the number of competing units available in a market, and sales over the past 45 days. The best dealers review this metric in two ways: on a per-car basis as they make appraising, acquisition and pricing decisions, and on a total inventory basis as they gauge the overall desirability of their units in stock. In either case, dealers strive to find vehicles, and maintain their inventories, with a low market days’ supply, which signals fewer competing units and a greater likelihood of a fast retail sale.
My analysis shows the 60 dealer groups achieve an overall market days’ supply average of 69 days for their inventories — a standard that suggests a good degree of discipline as they acquire inventory.
2. Cost to market
This metric measures the difference between your cost to own/recondition a vehicle and current retail prices for competing cars. Top-performing dealers strive to keep a lid on their cost to market metrics to maximize the spread for their front-end profit.
The inventories of the 60 dealer groups show a total cost to market ratio of 88 percent, which translates to a 12 percent spread for front-end gross. Interestingly, the 88 percent cost to market ratio is higher than the 85 percent benchmark I typically recommend —a sign, I believe, that keeping a vigilant eye on costs remains a persistent challenge for even the best dealers.
3. Price to market
This metric shows how your vehicle prices compare to those of competing vehicles in the market. Many dealers religiously reference the price to market ratio as they decide how to position and price a vehicle in their market.
The metric is also useful at an inventory-level view to identify a dealer’s pricing strategy. For example, if the total inventory price to market runs above 100 percent, a dealer either has a lot of vehicles that, based on their market days’ supply, merit an above-market asking price or, more likely, the dealer uses price to maximize front-end gross.
Among the 60 dealers in my analysis, only a few showed overall inventory price to market ratios above 100 percent. The average runs 98 percent — a figure that indicates a balanced approach of pricing vehicles based on the competition, age in inventory, profit objective and other factors.
4. Average days in inventory
The 60 dealer groups showed an average days in inventory of 37 days — a figure that suggests room for improvement. I typically recommend that dealers maintain at least 55 percent of their inventory under 30 days of age to ensure sufficient sales velocity and profitability, given today’s era of price competition and margin compression.
To meet this standard, a dealer’s average age in inventory should run closer to 30 days, or even less. I was glad to see a handful of dealers on the list with average days in inventory at 25 days or less.
5. Annual inventory turns
As a group, the 60 dealers turned their inventories an average of 13 times a year —exactly in line with the benchmark I recommend for today’s market conditions.
I wasn’t at all surprised to see the following characteristics of dealers with average annual inventory turns at six times or less: Their average days in inventory often ran 50 days and higher, and their price to market metrics often ran north of 100 percent.
6. Average inventory cost
It’s only somewhat useful to compare the average inventory investment across a large number of dealers. The reason: Local markets vary as much as dealer preferences for the inventory they carry.
The average inventory investment among the 60 dealers ran $19,852, a figure that appears to be skewed by a few dealers with averages above $50,000 (figures that owe, I suspect, to the high-line leanings of the dealers and their markets).
The key take-away: Whatever your average inventory investment, you should strive to lower it to maximize your return on investment and mitigate risk.
Overall, my analysis suggests that metrics-driven management matters an awful lot to a majority of the dealer groups on the Top 100 list. I also have no doubt that much of their success owes to the consistency and diligence they apply to meeting these operational standards every day.
But we should also acknowledge another take-away from my analysis: Even among the best, there’s always room for improvement.
Editor’s Note: Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column was published on his website, www.dalepollak.com, on Oct. 4.
It’s not uncommon for dealers and used vehicle managers to complain that “we have to pay too much” to acquire auction vehicles.
On one hand, I get it. The auction environment is one where complaints about cost are a natural reaction: It’s your imperative to acquire a vehicle for as little money as possible. Then, bidding starts and your numbers just don’t add up to what’s happening in the lane. On top of that, if you do make a purchase, you’ve got other costs for the actual transaction, inspections, transportation and other factors.
In some ways, it’s no wonder that nearly every dealer I talk to believes “we have to pay too much” for auction vehicles.
But the complaint starts to ring hollow when you drill into the specific ways many dealers determine what they should pay for an auction vehicle, and how effectively they stick to their acquisition game plan when they’re in the lanes and online. In my conversations with dealers, I’m often able to find three areas where dealers could do a better job identifying and sizing up potential auction purchases and making more investment-astute purchase decisions.
1. The size/scale of your sourcing network.
An independent dealer outside Minneapolis recently shared that he’s cut his acquisition costs auction cars by about 10 percent in the past six months. How? The dealer is looking for specific units across a wider network of auction sources. “I never really looked beyond our local auctions,” says the dealer, who retails about 80 units a month. But, with the help of technology that shows him available vehicles across the country, he’s buying vehicles from auctions he never previously considered. “I bought a minivan from Phoenix the other day for 15 percent less than I could have acquired it here, even with transportation,” he says. “I used to think I didn’t need to go beyond my backyard, until I saw the cars.”
2. Vehicle financials.
It’s increasingly common for dealers to use a “retail-back” approach to determine how much they can pay for a particular auction vehicle. That is, they’ll assess the current retail market, the competing cars and prevailing retail prices, and then subtract their expected gross profit and related costs (e.g., buy fees, recondition, packs, transportation, etc.) to figure out how much they can pay.
When dealers complain “we have to pay too much” for auction vehicles, I’ll ask to unpack their formula to assess an auction vehicle’s financials. In many cases, I’ll find sizable allowances for front-end profit, reconditioning and packs. For example, a used vehicle manager at a Southwest Toyota store approached every car with a $2,000 front-end gross profit, $900 for reconditioning and an $800 pack. I asked the obvious question: “How often do you find vehicles where these numbers actually pencil out?” His response: “Rarely, if ever.”
After some discussion, the manager agreed that his formula for auction vehicle financials needed a make-over. For starters, we aligned his front-end profit expectations with his current front-end retail average (a $450 difference). We did the same thing with reconditioning (a $200 difference). We also agreed that he’d be better off with a lower pack for auction vehicles, something he pledged to negotiate with his dealer. In the end, the manager agreed that if he’d been using his revised formula, he’d likely be complaining less that “we have to pay too much” and he’d be a more efficient and productive auction buyer.
3. Purchase discipline.
“I’d get so impatient, and tired of losing cars, I’d just buy them.” So goes the reaction of many dealers and used-vehicle managers to today’s auction-buying experience. The problem, of course, is this frame of mind often results in paying too much for auction vehicles. The key? Sticking too your guns, even if it causes anxiety and heartburn. The fact is, used vehicle margins in today’s market are too thin to let emotions cloud a good investment decision. In addition, it’s important that dealers recognize there are, in fact, perfectly good reasons to seemingly “pay too much” for a particular car. “I’ll pay extra for a vehicle with a market days’ supply below 70,” says the used vehicle director at a three-store group. “I’ll make a little less on the front-end, but I’ll sell the car quickly and pick up back-end and service gross. I’ll take that deal all day long.”
In the end, my goal in sharing these points isn’t to diminish the difficulty of properly (and profitably) acquiring auction vehicles. It’s really to suggest that when you consistently hear the “we have to pay too much” for auction cars complaint, it’s likely a symptom of a self-inflicted problem.
Editor’s Note: Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column was published on his website, www.dalepollak.com, on Sept. 15.
I recently asked a group of about 20 dealers and used vehicle managers a series of questions.
How many of you mow your own lawns? No one raised a hand. After some discussion, it was clear that each individual felt their time was better spent doing something else.
How many of you get your groceries delivered? Several hands went up, with comments like “I don’t have time for that,” and “The convenience outweighs the cost.” Among those who still shopped at grocery stores, most also ate delivered/take-out food at two or three times a week.
How many of you use a cleaning service for your home? Most raised a hand, with several noting they and their spouses simply couldn’t keep up with housework given career demands and children.
In sum, the dealers all agreed that each example represents the rise of household outsourcing — where a third-party provider offered a better, faster, cheaper or more convenient alternative for the dealers and their families than doing these tasks themselves.
Next, I turned the tables. I asked the dealers if they’d ever consider outsourcing some of the work they’ve long regarded as the sole priority and province of their dealerships — specifically the acquisition and reconditioning of used vehicles.
I wasn’t surprised by the responses. Only a couple of the dealers said they’d consider this type of outsourcing. As one put it, “We can buy and recondition the cars better ourselves. Plus, we’d give up the internal gross profit for recon to someone else. It doesn’t make sense.”
Years ago, I would have wholeheartedly agreed with the dealer’s assessment. One of the most beneficial aspects of today’s typical dealership business model is the ability to make money at each phase of a used vehicle’s lifecycle. Indeed, in some cases, the internal and back-end gross a dealer pockets from a retail used-vehicle sale represents the only gross profit opportunity, given margin compression and market volatility.
But I’m starting to question whether this sacred cow — of doing the vehicle acquisition and reconditioning work yourself — is no longer the no-brainer decision it used to be. I’ve arrived at this way of thinking for three reasons:
1. Larger dealer groups are opting for outsourcing.
Perhaps the best example of this trend is the partnership between Sonic Automotive and Manheim, wherein the auction company buys the cars and makes them retail-ready. Sonic views the arrangement as one that drives greater efficiency and profitability for their used-vehicle operations. In a recent Auto Remarketing article, Sonic chief executive officer Scott Smith noted some of the benefits the group expects from the Manheim partnership: “We don’t have to build the facility to recondition cars. We don’t have to have the buying team. We don’t have to have all the technicians, all the staff, everything you have to have, so the economics will be significantly better.”
2. Vehicle acquisition and reconditioning efficiency remain persistent challenges for dealers.
All of the dealers in the group admitted they wished they could more quickly acquire and recondition vehicles. A few dealers noted they consistently recondition vehicles in two days or less, thanks in part to reconditioning teams and resources dedicated to the task. For most, however, the standard reconditioning time runs closer to five days or more. Every dealer acknowledged and understood that they’d make more money if they minimized the cost and time it currently takes to acquire and make their used cars retail-ready.
3. Pressure to outsource will only grow more pronounced.
I was struck by one dealer’s story as he and his wife decided it’d be best to hire a lawn service. The dealer considered mowing the lawn an important responsibility, particularly for the example it set for his young son. But every weekend, he found himself fighting for lawn time, while his wife protested that the time should spend it with the kids. Over time, I’m convinced dealers will face a similar trade-off as market realities and diminished profitability push them to consider outsourcing options that, at the moment, rub them the wrong way.
Make no mistake, I am not advocating that dealers rush to outsource their used vehicle acquisition and reconditioning work. I am, however, suggesting that the time appears to have arrived where these sacred cows may no longer be as sacred and smart as dealers have long believed.
Editor’s Note: Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column was published on his website, www.dalepollak.com, on Aug. 3.
If a new- or used-car manager made the wrong decision nearly 75 percent of the time, chances are pretty good that individual wouldn’t be working very long at your dealership.
Most dealers would agree with this statement.
Yet, according to National Automobile Dealers Association stats from last year, dealers and their managers appear to “miss” nearly 75 percent of the time when it comes to their sales team hiring decisions. NADA says the average annual turnover for dealership sales consultants runs 72 percent (80 percent at non-luxury stores, 48 percent luxury).
A recent DrivingSales/Hireology study, “How Dealerships Build Teams,” underscores that dealers appear to be aware of the pervasive hiring/retention problems at their stores. The study notes, “All dealers, independent of size, report major challenges in their hiring process. Most dealers surveyed said that every aspect of the hiring process is either a challenge or a major challenge, with the most acute problem being candidate quality.”
The study also suggests that some dealers recognize that persistent hiring/retention problems translate to sub-par dealership performance and profitability. These dealers are investing in HR systems, and changing hiring/retention policies and process. They’re changing pay plans, work hours and vacation times to become more attractive employers.
But my concern is for dealers who aren’t rethinking how they hire and retain employees, and who likely view near-constant turnover as merely the nature of the car business. My concern flows from three market factors that are converging fast, and will make the ongoing costs of poor hiring/retention increasingly difficult for dealers to bear:
1. Margin compression
Like it or not, dealers make less, in terms of return on investment, from their new and used vehicle sales. Front-end gross profits aren’t what they used to be, and the cost of inventory continues to climb. In this environment, it’s incumbent on dealers to be more efficient, precise and profit-minded in everything they do—including hiring. Hireology estimates that dealers who successfully reverse the trend of poor hiring/retention can add $386,000 to their net profits, gains that flow from reduction in hiring costs and cycles.
2. Buyer expectations
Time and again, industry studies affirm that today’s vehicle buyers want a more efficient and positive in-dealership experience. No matter how hard you may try, it’s nearly impossible to deliver this kind of experience if you’ve got employees who are only partially engaged in the task at hand, and generally unhappy to be at work in the first place. The old axiom that “you can’t have happy customers without happy employees” is more true than ever. This reality is why a growing number of dealers strive to provide more employee-friendly environments, eliminating “bell to bell” work hours, and providing a higher level of coaching, training and pay plan stability than they’ve done in the past.
3. Need to differentiate
A Michigan dealer with two stores puts it this way: “In today’s day and age, with the number of competitors and the consistency and quality of the product. The market has become very homogenous. There’s no key differentiation. A Toyota store used to be able to rest on their laurels with a quality product that nobody could touch. Well, you know what? They’re all pretty damn good. We chose to differentiate ourselves through our culture and people. It’s a 10-month-old work in progress, but it’s headed in the right direction. We felt it was the last frontier for us to combat margin compression and distinguish ourselves from the competition.”
The DrivingSales/Hireology study also cites data that shows dealers will face a people/skills shortage in the next 10 to 15 years—in part because of the current swinging door-nature of dealership employment.
It seems to me that dealers who build better teams today, and proactively work to address their human capital management problems, will have less to worry about when good people will be even harder to find in the years ahead.
Editor's Note: Dale Pollak is the founder of vAuto and an executive with Cox Automotive. This column was published on his website, www.dalepollak.com, on July 26.
