I was fascinated by a column in the The New York Times that suggests that too much positive thinking can be a bad thing.
The author, psychology professor Gabriele Oettingen, has studied the effects of positive thinking and concludes that it “fools our minds into perceiving that we’ve already attained our goal, slackening our readiness to pursue it.”
She recommends a different approach, one that combines optimism and realism, which she dubs, “mental contrasting.” Her explanation of how it should work:
“Think of a wish. For a few minutes, imagine the wish coming true, letting your mind wander and drift where it will. Then shift gears. Spend a few more minutes imagining the obstacles that stand in the way of realizing your wish.”
This process, Oettingen asserts, gives us a sharper, more realistic sense of the next steps necessary to achieve a goal, as well as the energy and stamina needed to take those steps and achieve the objective. She also believes “mental contrasting” helps us establish goals that we’re more likely to reach.
As I read the column, I couldn’t help but think of the high hopes many dealers bring to their new and used vehicle inventories. In fact, the column helps explain why dealers put too much positive faith into specific new and used vehicles, and stick with pricing and retailing strategies that amount to symptoms of false expectations and hope.
I also thought of the best Velocity dealers. For them, “mental contrasting” is a daily exercise that relies on market data to define the potential obstacles each new and used vehicle may encounter. With these insights, the dealers are able to correctly assess each vehicle’s prospects as a gross-generating retail unit, as well as the steps necessary to maximize the unit’s profit-making potential.
Oettingen’s closing lines seem useful to help dealers temper their typically optimistic outlook as retailers:
“Positive thinking is pleasurable, but that doesn’t mean it’s good for us. Like so much in life, attaining goals requires a balanced and moderate approach, neither dwelling on the downsides nor a forced jumping for joy.”
Dale Pollak is the founder of vAuto. This entry and Pollak’s entire blog can be found at www.dalepollak.com
For the past several years, I’ve been a vocal advocate of the Velocity Method of Management — a market-based inventory management strategy that pushes dealers to turn their used vehicle inventories to maximize return on investment and minimize risk.
My advocacy flows from a firm belief that today’s market penalizes dealers who do not make a concerted effort to sell more used vehicles in less time. In today’s market, the longer a dealer hangs on to a vehicle, the less likely it will generate a sufficient return on investment. This reality owes to a combination of competition, pricing transparency and volatility — all of which contribute to margin compression.
My faith in a “turn and earn” retailing strategy also flows from the successes of dealers who adopt this approach. In a matter of months, the best “turn and earn” dealers double their monthly sales volumes and see record-setting levels of profitability in their used vehicle, service/parts and F&I departments. The big pay-off comes a bit later, when the higher level of performance and profitability become standard operating procedure, and dealers achieve a level of financial return and reward they hadn’t considered possible.
But for every Velocity success story, there are dealers who can’t successfully adopt a “turn and earn” inventory management strategy. I’ve seen enough of these implementation failures to identify three key reasons the dealers came up short:
1. They lose faith. A few years ago, I coached a New York dealer as he adopted a “turn and earn” strategy. His first course of action: Take accountability for all the aged vehicles in his inventory. This wasn’t easy because it required taking a $500,000 loss in the early months as the dealer retailed cars that had sat too long to offer a positive return.
This day of reckoning is a prerequisite for dealers who adopt a Velocity strategy and, for some, it’s too painful to accept. These dealers will blame the “turn and earn” strategy for the loss and ditch the strategy altogether. Of course, the strategy didn’t create the loss; rather, it exposed a “water problem” the dealer would rather ignore.
I compare the initial stage of Velocity strategy implementation to the experience anyone undergoes as they try to rid themselves of an addiction. At first, it feels terrible and, for some, this initial pain proves too much. But those with more persistence realize that, over time, they actually feel better as the addiction loses its grip.
The same is true for dealers adopting a “turn and earn” strategy. Their addiction is aged vehicles, and it’s a difficult habit to break. Those who have the faith to withstand and work through the initial pain, often wonder why they ever thought an aged unit was OK.
2. They can’t break the resistance. When dealers adopt a Velocity strategy, all the goal posts move closer. Dealers must put used vehicles online as soon as they purchase them. Likewise, reconditioning/detailing must be completed in day or two, not a week or more. Appraisals and asking prices must continually align and re-align with the market. Managers must make speedier decisions about each vehicle’s exit strategy.
In other words, a true “turn and earn” dealership requires a much higher level of collaboration among dealership departments, and everyone must understand that efficiency and speed drive the size of their paychecks and the dealership’s success. It’s not uncommon for dealers who adopt a Velocity strategy to find their skills as coaches and leaders put to the test.
“At times, it felt like I was herding cats,” says a Midwest dealer who adopted the Velocity strategy two years ago. “It’s tough to get everybody on the same page and we lost a couple people who couldn’t make the adjustment.”
3. The old habits never really go away. It’s common to hear dealers say that their average front-end gross profits decline as they adopt a “turn and earn” strategy. I address this complaint by showing dealers how their average gross profits have really normalized to the market. I also encourage them to focus on the “total” gross profit each vehicle, and their inventory as a whole, now generates for the dealership.
But some dealers have a hard time seeing the whole picture, and they end up undermining the “turn and earn” strategy with decisions that draw from a more traditional average front-end gross-focused playbook.
For example, dealers will set used vehicle asking prices well above the market in an effort to maximize average front-end gross profits—irrespective of whether the unit deserves the asking price, based on market data. This knee-jerk, control-the-gross impulse inevitably puts the dealer’s vehicles at a price disadvantage and slows their rate of sale.
Some “turn and earn” dealers also see diminished front-end profitability due to sales process “leaks.” This scenario occurs when dealers set market-competitive asking prices, and then allow sales associates to discount the price by $500 or more. The solution, of course, is a compensation plan that rewards sales associates when they stand firm on price and help sustain each vehicle’s front-end profit potential.
I advise dealers who want to adopt a “turn and earn” strategy that the transition will be a difficult, sometimes painful journey. I let them know they’ll face each of the challenges noted above, and probably a few more.
I also note that every successful Velocity dealer has been there. They’d be the first to tell you that adopting a “turn and earn” strategy isn’t easy. They’d let you know it takes an extraordinary level of commitment and courage to confront and contain the adversity that inevitably arrives.
But they’d also say the journey, for all its pain, has been well worth the gain.
Dale Pollak is the founder of vAuto. This entry and Pollak’s entire blog can be found at www.dalepollak.com
A quick test: What percentage of your used vehicle inventory do you retail in the first 10 days or less?
OK. Time’s up. Do you know the correct answer for your inventory?
Relax. I wouldn’t necessarily expect that you’d be able to ace the test. In fact, only a few dealers actually monitor their inventories at this level of granularity.
I’d also submit that one could make a case that dealers don’t really need to know how many vehicles you retail within the initial 10-day timeframe. If they’re paying attention to other, broad inventory metrics—like Market Days Supply, Cost to Market, Price To Market and Average Age (in days) of Inventory—they’ll do just fine in terms of inventory turns and profitability.
More and more, however, “just fine” really isn’t enough to maximize used vehicle department performance, not to mention the “total gross” potential of the dealership.
This realization has spurred bright-minded used vehicle managers to drill deeper into their inventory data.
Here’s an example shared during this month’s Access: Velocity event: Trent Waybright, director of used vehicle operations for Kelley Automotive Group, Fort Wayne, Ind., took a close look at his 10-day-or-less tally and found less than 20 percent of the group’s used vehicles sold in this timeframe. No surprise, the cars in this segment also produced the highest average gross profit when they sold, and they had the lowest average cost of all inventory units.
Next, Waybright calculated what his departmental gross would look like if he sold 5 percent more units in 10 days or less, a task that would require a 1 percent lowering of the transactional Price to Market average for vehicles in this age segment to 99 percent, and pulling forward sales that typically occur after 30 days. His exercise revealed an opportunity to increase departmental gross by $36,000/month.
Waybright is currently looking to address the challenges beyond price changes necessary to realize the improved results, with tighter reconditioning times first on the list.
I believe other dealers would benefit by examining how/why their inventory performs when it’s fresh and isn’t. Between these two poles, I suspect you’ll find opportunities that can make a “just fine” performance in used vehicles even better.
Dale Pollak is the founder of vAuto. This entry and Pollak’s entire blog can be found at www.dalepollak.com
In a recent "Think Tank Tuesday" video report, Paul Potratz asks, “Is something or someone keeping you from achieving more success at your dealership?"
Potratz, founder and chief operating officer of Potratz Advertising, says if so, this needs to be addressed in order to grow your business.
Potratz outlines how to approach the real issue and overcome the obstacles keeping you from success.
“What’s causing you to not be able to move on?,” Potratz asks.
First, he says you have to find the “rock in the road”, or what is holding the business back.
The next thing, he says, is you have to focus on the hard things, and make the phone calls that you don’t want to make.
What's next? Set deadlines, says Potratz.
Then, you must measure results, not activity. It is easy to see people working hard and assume they are generating results, but that is often not the case.
For more tips on how to get over dealership obstacles, see the latest “Think Tank Tuesday” video.
You may think you have all your bases covered and you’re reaching all of your possible demographics, but that’s not the case, according to Paul Potratz, founder and chief operating officer of Potratz Advertising.
In the latest “Think Tank Tuesday” marketing tip video, Potratz contends Google has uncovered thousands of different niches that may be are missing in your marketing strategies.
The video featured guest Matthew Goodwin, performance manager at Potratz Advertising, as well.
The pair showed viewers a variety of Google Analytics pages, first focusing on the demographics tab — a portion of the analytics tool that can be added by inputting a small about of code.
Goodwin walked the audience through the demographics tool and what it shows users, such as the age and gender of those visiting your website.
From something as broad as gender, down to what your website viewers are interested in, you can target specific demographics in your customer-base, based on finite information gathered from Google Analytics.
For an in-depth walk through of the Google Analytics categories and what they can tell you about your shoppers, see the latest “Think Tank Tuesday” video.
I wouldn’t think that I’d ever find commonality between used vehicles and the U.S. Secret Service.
But last Thursday’s news of the White House security breach brought used vehicles to mind.
To be sure, losing one’s focus on used vehicle management processes produces less dire potential consequences than lapses among the elite corps of men and women who protect the president and other federal officials. If you fall asleep at the switch in used cars, you run the risk of lost opportunity and profitability — and it’s unlikely anyone would be physically harmed.
As I pondered the Secret Service snafu, I found two relevant take-aways for dealers:
1. People and consistent process execution are paramount. From what I can tell of the White House incident, it resulted from a breakdown in the fundamentals of day-to-day process execution by people at multiple levels. Dealers face similar a challenge—on any given day, if you or one of your team members misses any of the fundamental steps of the processes that help you retail vehicles quickly to maximize profitability, you diminish your chances of meeting this critical objective.
2. Mistakes can — and will — happen. If nothing else, the Secret Service problems remind us that even the best and brightest can make mistakes. The next challenge for the agency, of course, is to determine why the mistakes occurred and address the root causes to avoid a repeat. The same is true for dealers — even the best and brightest Velocity dealers occasionally fall short of their goals, sometimes due to mistakes that, in hindsight, were avoidable.
Perhaps the words of Winston Churchill offer the right perspective for the Secret Service and dealers as we face the future: “Success is not final, failure is not fatal: it is the courage to continue that counts.”
Dale Pollak is the founder of vAuto. This entry and Pollak’s entire blog can be found at www.dalepollak.com
Most dealers understand that today’s used vehicle business is an Internet business. That is, buyers size up your cars, prices and reputation online—before they get to your dealership.
This reality has led the smartest dealers to recognize that the online performance of their used vehicles provides the single-best indicator of each vehicle’s appeal with potential buyers and future showroom traffic. These dealers have long been paying close attention to the number of Search Results Page (SRP) to Vehicle Details Page (VDP) views their inventory receives to guide merchandising and pricing. In general, there’s a clear understanding that if a car isn’t getting looks online, there’s likely a problem in its presentation or price, or the unit itself.
But it’s fair to say that measuring the online performance of used vehicles has been an iffy science at best. To date, dealers haven’t had clear-cut evidence to understand why some vehicles get more SRPs and VDPs than others.
That’s why this week’s announcement from AutoTrader.com about the launch of the vAuto-powered ListingLogic tool is so important. The tool tells dealers exactly why some cars perform better than others and, even better, it recommends ways that dealers can enhance a vehicle’s potential online appeal based on factors that help competing vehicles stand taller (e.g., descriptions, photos, price, advertising package, etc.).
I see three clear implications from AutoTrader.com making ListingLogic available—for free—to dealers who use its latest advertising packages:
1. SRP/VDP conversion rates are largely obsolete as online performance indicators. With ListingLogic, dealers can track and trend the number of VDPs each vehicle receives on a daily basis, and quickly understand what to fix if a unit’s VDP-per-day metric falls short.
2. More precise used vehicle pricing. When we tested ListingLogic with vAuto dealers, some immediately began incorporating VDP-per-day data into daily reviews of their used vehicle inventory performance and their pricing strategies. The data drives more market-precise pricing adjustments and, in some cases, reveals opportunities to raise asking prices and improve front-end gross potential.
3. Faster inventory turns, better ROI. ListingLogic should empower dealers to make better, more efficient decisions about their used vehicle merchandising and pricing. Those who use this game-changing tool the most effectively will, I believe, be better equipped to meet their return on investment (ROI) objectives for their used vehicle inventories, as well as their investment with AutoTrader.com.
I would encourage all dealers who use AutoTrader.com to ask your rep to show you ListingLogic and demonstrate how the tool’s unprecedented insights can help you increase used vehicle VDPs and sell more cars in less time.
Dale Pollak is the founder of vAuto. This entry and Pollak’s entire blog can be found at www.dalepollak.com
What do car dealerships and start-up companies have in common?
Usually, not much. By nature, they are very different business models:
Dealerships are generally well-established, as they require a great deal of capital to acquire or start.
Start-up companies are generally quite the opposite. They typically start with nothing, or very little.
I had an interesting conversation with a dealer principal and owner of an auto group a few weeks ago.
We discussed the marketing strategy of his stores, it went something like this:
Kevin: “What percentage of your marketing budget is spent on traditional advertising, and what percentage is spent on digital?”
Dealer: “About 70 percent traditional and 30 percent digital.”
Kevin: “How did you and your team decide on that split? Do you feel that you receive a better ROI on traditional?
Dealer: “Well, I know that digital marketing is more effective; we just haven’t switched our budget yet.”
Kevin: “Interesting, so what are you waiting for?”
Dealer: “We just don’t know how to make the switch, where to put the money, etc. We know print and newspaper, we know nothing about digital.”
This type of rationale isn’t uncommon when it comes to dealers, and the prospect of shifting to digital; it’s something I’ve heard many times before.
The main reason why dealers aren’t spending the lion’s share of their marketing dollars on digital isn’t because they believe that traditional is superior, it’s because they don’t know how to make the switch. It was the fear of the unknown that was holding this dealer principal back, the fear of doing something different from what had brought him success for so many years in the past.
Large and well-established companies in our space focus on protecting their golden goose by making small changes rolled out over long periods of time. I understand this logic (to some degree), as key decision makers are often accountable to shareholders or individuals who have already made their fortune, and tend to be more averse to risk at this stage of their life.
While many dealerships and their ownership/management start out with a somewhat entrepreneurial mindset, it’s common for that to fade over time as success comes (and routine sets in). This provides an inherent advantage to businesses being run by driven individuals who are still working to carve out their legacy, and are willing to take some calculated risks along the way.
Eighteen months ago I switched from working inside of a large auto group, to working within a start-up that supports dealerships across North America. During this time I’ve had a unique opportunity to observe and analyze the contrast between the two worlds. The ‘sit back and wait for business to come to you model’ does not work in the world of start-ups as it does for some dealerships.
If you are one of the managers or owners that are willing to take chances and challenge the status quo, here are few good places to start:
Reject normal: Many dealers make decisions on how they are going to run and market their dealership based on what their competition is doing. This is a great formula, if you want to be just like them — average.
Grow talent, don’t buy it: It’s easy to go out and ‘buy’ a top dollar employee to help grow your business. A start-up company doesn’t have this luxury. Instead, look at bringing in someone who has less experience but lots of talent. This way requires more effort and takes more time, but the long-term results will more than make up for it.
Figure out what you do best, and leverage it: Most dealerships struggle with identity; they can’t differentiate themselves from their same-make competitor down the road. In an increasingly competitive market, it’s imperative that every employee on your payroll can articulate why your store is the clear cut answer when a customer is looking to purchase or service your brand of vehicle.
Make every dollar count: Over time, dealers have become comfortable in spending copious amounts of money on advertising media which is notoriously difficult to track. Stick to advertising in ways that you can at least establish some form of ROI with.
Why start-ups do the four things on this list: This one is simple and obvious. Start-ups can’t blow money on unproven advertising mediums because they don’t have excess capital to do so. Start-ups don’t have the competitive advantages that their well-established competitors do; they have to find innovative ways to run a better operation and supply a better product/service if they want to be successful in carving out a piece of the pie.
If you feel like your store is stuck in a rut and just isn’t moving forward at the speed you want it to, consider the definition of insanity:
“Doing the same thing over and over again, and expecting different results."
The automotive industry is ripe with opportunity, perhaps more so now than ever before. With the last few years bringing so much change (and the years to come showing promise of even more), those who embrace the change and start running their business more like a start-up will surely rise to the top.
Want to learn more about Convertus, a fast-growing digital marketing start-up serving the automotive industry? Contact Kevin Gordon at kgordon@convertus.com or 888.354.6441
Business leadership is discussed everywhere online, in print, on television and in auto industry trade journals.
The best dealer principals and their general managers do not work alone. New- and used-car sales managers, fixed op managers, service managers, F&I and Internet managers have a huge impact on the day-to-day operation of the dealership. But, in reality, employee motivation and teamwork make the success of the dealership possible.
This is especially true in the automobile industry: no manager of any dealership department can complete a full day of work without dependable employees.
No matter how smart, experienced or dedicated, a manager might be, they depend on employees to get the job done.
In short, a good manager must hire quality people, make sure they are on the same page, and convince them all to work together.
Even in these tough economic times, there are steps that can help all dealership departments to do well.
Yes, without question, the process of finding new employees and motivating them seems like a daunting task, yet the excitement created by a well-functioning team is worth the effort.
The Problem
The problem for almost all dealers is the detailing department. Why? It’s simple. No dealer principal or general manager pays the same kind of attention to the detail department that they do to other “more important” departments.
That is right; the entire automobile industry views the detail department as a “necessary evil.” They pay lip service to its importance; but in reality, they devote little time, money or attention to insuring the detail department functions as well as the other departments in the dealership.
There is no “real” manager. The department is given to the used-car manager, the service manager, the fixed ops manager or the body shop manager — all of whom are busy operating their primary department, and do not really want the job, but take it because the dealer principal or general manager says to.
Worse yet, they do not even know what to manage. They have no experience or skill to know what it takes to have an efficiently functioning detail department. The “experienced” detailers do not know either, so what you have is a rudderless detail shop “floundering in the stormy sea”.
What the dealer principal or general manager MUST DO is commit to putting a competent manager in charge of the department and insuring he/she is elevated to the same status as any other department manager with set performance goals. This person needs to know nothing about detailing, and all about managing, hiring, training, motivating, etc.
Once such a manger is in place, you can begin the process of hiring competent employees for the detail department.
Detail Employees
If a dealer wants to eliminate the problems they have in their detail department, the one thing they must accept is “do not hire experienced detailers.”
Why? If they were good, they would already be working since there are so few good detail employees.
Second, their experience is only good if you let them do what they want. Then it is the inmates running the asylum.
Finally, in most cases people who apply for a job as a detailer are a “type” that you would not hire for any other department in the dealership. What you want are career-oriented people looking for a career in the automobile industry.
The following is an example of a good “help wanted” ad to assist you in attracting the desired employees:
AUTO SERVICE TRAINEE: XYZ Motors has immediate openings for career-oriented individuals in a new service department. No experience necessary, will train. Individuals must have a stable work history and be a team player. High school diploma, valid driver’s license, and clean driving record required. Interested candidates should apply to: (name a person they are to contact for an application at the dealership).
When they apply in person, you can screen them out by their appearance and grooming. While it is true that clothes do not make the person, it can sure speak volumes in some cases. Once candidates are screened, bring them in for the interview.
The Interview
Once specific applicants have been selected, the interview process is the next important step to finding the best employees.
Have a preset list of questions to make sure you do not miss the important attributes you are looking for in an employee.
Building a Successful Department
Once the detail manager has done their best to hire good employees and has a detail team in place, management must encourage the detail team to push for exceptional results on a day-to-day basis for the detail department.
Rich Karlgaard (www.RichKarlgaard.com), Forbes publisher and author of the book “The Soft Edge: Where Great Companies Find Lasting Success,” offered several tips in an article he wrote.
The article presented various steps to help managers reduce employee cynicism and build a successful department that operates on trust.
The most applicable tips to develop a strong team and retain quality employees are:
1) Never lie or hide the truth.
There are many things a manager is thrilled to share with employees. For a detail manager they would be things like, “The used-car department had zero complaints this week,” or “Our retail customers are all completely satisfied,” or “Our labor cost to production is down.”
Karlgaard states, “Even when the news is bad, people should never feel they’re being kept in the dark; transparency and trust must coexist”.
2) Show employees that you care.
When people do not believe their superiors care about them, not just as workers, but also as human beings, trust cannot thrive.
While it is true that fake or contrived caring only increases cynicism, genuine caring dissolves it.
This means leaders must be “people persons” who stand up for their employees’ best interests and do not mind showing (appropriate) affection.
3) Aspire to predictability.
A good manager should want to be known as a creative, outside-the-box thinker.
They should not be bound by routine or limited by “the way everyone else does it.”
Karlgaard says that is fine: embrace innovation to your heart’s content in areas like development and marketing campaigns; just do not be unpredictable in your behavior, priorities and values.
“Unpredictability destroys trust,” he explains. “As a manager, your team should have total confidence that you’ll do what you say you will. They should have no doubt that you’ll keep your promises, act with integrity and look out for their best interests.”
4) Make it safe to speak up.
When your employees make an honest mistake, can they admit it without being scolded and belittled?
What about input and ideas?
Can they share those things and expect to be taken seriously?
Hopefully, the answer to these questions is “yes”.
Karlgaard states that everyone should feel confident that they can participate in meetings, say what is on their mind, be respected for their opinions and ideas and admit mistakes.
Either trust or fear rules an organization, and Karlgaard says managers and owners have to choose.
Fear-based culture can kill employee curiosity, dull creativity and stunt growth, according to Karlgaard.
In climates of fear, people are afraid to make mistakes, and fear saps performance, teamwork and morale.
5) Celebrate grit and gumption.
If a manager wants employees to be worker bees — performing the tasks that management designates, on a set timeline — compensate them with paychecks only.
If an operation wants employees to be partners, they have to reinforce employees when they act like partners, Karlgaard states.
In other words, take notice when they display passion, motivation (grit), initiative and guts (gumption).
“When employees do the things you want them to do — persevering through tough tasks, innovating, taking calculated risks — reward them,” Karlgaard instructs. “A simple ‘thank you’ can go a long way. So can public recognition at a meeting or through a company-wide email. The point is, notice and celebrate the behaviors you want more of. ”
6) Constantly drive home the “meaning” of the work people do.
One of the best methods to increase trust is to identify a greater purpose, your operation’s “true north,” as Karlgaard calls it.
Why do you exist?
What meaningful value do you offer to employees, customers or society?
A great purpose should be aspirational, not merely financial.
It should create a common cause and promote a collective effort.
It should answer all the tough questions of why:
- Why commit?
- Why persist?
- And, most importantly, why trust?
“Figure out what meaningful things your company provides customers, whether that’s peace of mind, easier lives, reliable support, or something else, and look for ways to convey that purpose at your company,” Karlgaard concludes. “It’s hard to be cynical about your work and your customers when you actually do believe in what you’re doing.”
This may be a huge departure from the way most dealerships operate their detail departments, but I present it to make you realize that if you keep doing what you have always done, you will get what you always have.
I’ve been hearing more disenchantment and doubt from dealers about the value of a turn-and-earn strategy for retailing used vehicles, which I call the Velocity Method of Management.
The most vocal detractors are typically dealers who have long taken pride in the average front-end gross profit they achieve in used vehicles. The dealers like seeing their stores listed at the top of the 20 Group composites, with front-end gross averages that can run $1,000 or more than their peers.
It’s not too uncommon for turn and earn-focused Velocity dealers to come home from a 20 Group meeting feeling a bit deflated. Their front-end gross profit average is nowhere near the top dealer. They’ll then ask for guidance on how they can improve their performance and show up at the top of the page at the next 20 Group meeting.
More often than not, I tell these dealers to hold their horses. We’ll then take a closer look at the health of the high-gross dealer’s used vehicle inventory and their rate of used vehicle sales.
Time and again, the dealers with the highest front-end gross profit averages have more aged vehicles than they should, and their rate of used vehicle sales over the past five years tends to be flat or trending down. In other words, their front-end gross profits may be impressive, but the overall performance of the used vehicle departments isn’t where it could or should be.
The analysis gets even darker when you consider these dealers don’t regularly write down aged used vehicles to their actual wholesale cash value, and apply the loss to year-to-date, front-end gross profit. If the dealers undertook this level of honesty in their accounting, the average front-end gross profits they share would inspire much less envy.
Of course, such “dirty details” typically don’t generate much discussion at the 20 Group meetings — a symptom, I think, of the gentility dealers bring to the meetings and the traditional belief that average front-end gross profit is a reliable barometer of a dealership’s overall performance in used vehicles.
I advise dealers that they’d be better off worrying about the “total gross” they can generate from a turn and earn strategy in used vehicles rather than pumping up their average front-end gross profit. To make the case, I’ll share three reasons why I believe a single-minded focus on average front-end gross profit is the wrong strategy for today’s used vehicle market:
1. You can’t sell cars as quickly as the market requires. While my analysis of used vehicle inventories and sales rates at dealerships with high front-end gross profit averages isn’t scientific, the results are remarkably consistent. To me, the consistency indicates a market where consumers are too smart to pay too much for used vehicles, and dealers who only aim for high front-end gross profits on every car inevitably end up with aged inventory. This is not to suggest that dealers shouldn’t try to maximize front-end gross profits; rather, I’m saying that today’s market conditions require dealers to get in/out of their used vehicles faster than they had to in the past. In most cases, used vehicles lose their ability to make a meaningful margin contribution before 45 days in inventory. If you hold out for maximum front-end margin, you’ll pay the price with aged units and miss opportunities to redeploy the investment into more profit-productive vehicles.
2. You lose sight of other money-making opportunities. Think of your last trip to a gas station. Chances are pretty good you bought something other than gas (e.g., a snack, soda, etc.). The reason gas station owners offer so many non-fuel products flows from two factors—margins on gas sales are terrible, and each stop at the pump offers other higher-margin sales opportunities. To be sure, dealerships aren’t gas stations, but dealers share the pain of market-driven margin compression on the primary products they retail. To combat this market reality, I urge dealers to recognize that each used vehicle sale, whether it’s a short deal or even a loss, means money-making opportunities in F&I, service and parts—not to mention the cycle of future profits if they take in a trade.
As dealers adopt this “total gross” mindset, their inventories turn more quickly, they take fewer trips to the auction and every dealership department benefits. As a long-time Velocity dealer recently put it, “I don’t pay much attention to my front-end average anymore. I’m more focused on making my used vehicle department drive the profitability of my dealership.”
3. Your sales volume suffers. In market after market, dealers who adopt a turn-and-earn strategy that emphasizes “total gross” production are doing better than ever. They’re setting sales volume records, making more money and, in some cases, they’re buying up competitors who used to boast about their high front-end gross profit averages, even as their sales volumes limped along.
I would encourage tradition-minded dealers who believe that front-end gross matters most in used vehicles to consider the following quote from Mark Twain: “The less there is to justify a traditional custom, the harder it is to get rid of it.”
Dale Pollak is the founder of vAuto. This entry and Pollak’s entire blog can be found at www.dalepollak.com
