You might say that the blessing we’ve enjoyed in used vehicles is running out of gas.
The blessing has been a relatively stable balance between used vehicle supplies and demand. These market forces have helped to subdue the effects of used vehicle depreciation for much of the year.
But industry analysts predict a continued rise in used vehicle supplies—driven by increased trade-in units, off-lease units and fleet sales—is reaching the point where depreciation is becoming more pronounced. A report by Black Book and Fitch in late August suggests that the annual depreciation rate will reach 15 percent in 2015, up from 12 percent in 2014.
For dealers, the market dynamics create an operational challenge: What’s the best way to minimize your exposure to depreciation and maximize your profit opportunity?
To answer the question, I recommend three best practices:
A balanced, market-wise mix of inventory: The profit-sapping effect of used vehicle depreciation isn’t uniform across all vehicle segments. Some segments, like compact cars and sedans, tend to suffer more than SUVs and trucks, where consumer demand helps to mitigate value declines even as supplies increase. In this environment, it can be tempting for dealers to place their bets on the least-risky segments, stacking their inventories to take advantage of better-performing segments.
The problem: This approach is akin to “putting all your eggs in one basket.” It over-exposes dealers to volatility—particularly as more dealers pursue the same segment-specific strategy or, other factors, such as gas prices, shrink demand.
Generally, I recommend that dealers base the composition of their inventory based on market insights. By doing so, you’ll spot opportunities to step up or step back in specific segments, as market conditions change. In addition, this strategy, by design, helps you build a balanced inventory that minimizes over-exposure to volatility in any one segment.
Minimize inventory age. With projections of an ever-increasing supply of used vehicles, dealers will face greater pressure to retail used vehicles in less time. This best practice follows the basic economics of supply and demand: As fresher vehicles enter the market, they create competitive choices for buyers that diminish the value of older units they’ve already shopped.
To combat these market forces, I recommend that dealers follow two standards: Strive to maintain at least 50 percent of their inventory under 30 days of age, and stick to a maximum 45-day retail window. Together, these operational standards breed a culture where time is money, and a greater share of vehicles retail while they’re fresh and grosses are better.
Price for profitability, not solely front-end profit. This best practice reflects the reality of today’s well-supplied used vehicle market: Some cars are true-blue winners from a front-end gross perspective. They face fewer competing units, and you can price them above the competition and expect buyers to pay your asking price.
Unfortunately, such vehicles do not represent the majority of most dealers’ used vehicle inventories. While most units have the potential to generate a decent front-end gross profit, their real value to the dealership extends beyond the sales desk. Each of these units, when retailed efficiently and quickly, creates additional opportunities to generate F&I and service income, acquire a trade-in, and repeat the reconditioning/retail cycle all over again. As dealers embrace this philosophy, their used vehicle pricing helps execute a “turn and earn” inventory management strategy that minimizes depreciation and maximizes the “total gross” of the dealership.
It’s worth noting that dealers who embrace these best practices don’t worry too much about rising used vehicle supplies and increased depreciation risks.
“The market is what it is, and it will do what it does,” says the CEO of a California-based dealer group. “In used vehicles, our goal is to create the most opportunity with every car. When we do that successfully, the worst case scenario isn’t as bad for us as other dealers.”
Dale Pollak is the founder of vAuto. These entries and Pollak’s entire blog can be found at www.dalepollak.com.
Auto dealers continually struggle with the question of whether to operate an in-house detail department or contract the work to an outside detail shop.
Those who choose to operate an in-house department claim it is more economical and that they have better control, and obtain a better quality of work and the ability to sell detailing to the public.
On the other hand, those who contract to an outside shop say they eliminate problems of in-house management, undependable employees, high volume costs and the elimination of hassles, in general.
Both positions are compelling and, for each particular auto detailer, completely logical.
In-house detail department
There are some very distinct and clear advantages to having an in-house detail department for the dealer.
Preparation is the best strategy when looking at the future growth of a dealership, and understanding the comparative benefits of in-house operations versus outsourcing the work is a good place to start.
An in-house detail department affords a dealership the following five benefits:
- Ownership
- Security
- Stability
- Benefits
- Profit center
1. Ownership
When a dealership has a vested interest in a department, it should become increasingly important to equip and staff the department with the best level of equipment, technology and personnel to ensure you are getting the best work possible for your own vehicles and those you detail for the public.
If a dealer has no vested interest in the detailing, he or she will not get the same level of quality and service he or she desires. Having a vested interest and a sense of ownership in a department can really pay off, but the dealer principal, the GM and the entire organization must have the vested interest.
Several years ago, I had to the opportunity to visit a dealership. The detail staff was not aware who I was or what I was doing there, but it was obvious through their actions and level of cleanliness of the detail department that they claimed ownership for the department and for the quality of their work. It was further obvious the entire dealership, starting with the principal, had a vested interest, too.
2. Security
Security at a dealership is important. Having outsiders coming in and out of the dealership, driving vehicles worth thousands of dollars, does not provide the greatest security.
If the detail employees work at the dealership day in and day out, these individuals have a vested interest in making sure things are secure and safe. Management can prevent theft within the department or certainly minimize the possibility of theft by being able to identify certain happenings being “out of place,” and subsequently, provide an alert.
3. Stability and turnover
Having the same people working on a daily basis, in a reliable manner, as far as attendance and detailing procedures go, builds up a sense of continuity and order in the dealer’s mind.
Constant change causes mistakes, confusion and concern, and a good in-house detail department can provide a reassurance that the work will occur as “normal.”
Stability and continuity definitely add value to the in-house detailing department.
Well-selected, trained and managed in-house detail employees can have greater tenure, or years of service at a dealership, than the transient employees typical of detail shops. One industry survey indicated that detail shops are liable to have turnover rates as high as 75 percent a year, or more. Any wonder the detail work is low quality and inconsistent?
The stability offered by an in-house detail department is a real benefit to the dealer, the new- and used-car departments, and to customers who might purchase the detail service.
4. Benefits
Often, when detailing is outsourced, the remaining in-house employees can become concerned about the benefits offered by the dealership.
If the dealership is outsourcing the detail work and only has a couple of people for new-car get-ready and washing, what kind of future will they have? What kind of benefits do they have?
Certainly, what level of pay will they receive — minimum wage?
5. Profit center
There is absolutely no doubt that many believe well-trained and managed in-house detail employees can, and do, go beyond the call of duty each and every day. Dedicated, in-house detailers who know the dealership and its expectations provide the quality detailing that the dealership expects as a normal course of events, rather than an employee in an outside shop that is underpaid and unappreciated by the owner.
What the in-house detailer possesses that the outside shop employee does not is the everyday knowledge of your needs. Employees in outside shops are simply told to do the wash as fast as they can. Speed rather than quality is the watchword for the outside shop employee.
The case for an in-house detail department
Unless the dealership is very small or very poorly managed, it is no contest … an in-house detail department has so many advantages to the dealer that it is almost unfair to compare.
As opposed to using an outside detail shop, a well-managed in-house department — with good equipment and well-trained personnel — can do the detail work far cheaper, far better and eliminate headaches and liabilities. Why is this?
Here are some basic reasons:
- Specialization
- Additional resources
- Specialized back-up support
- Dealer is in the employment business
1. Specialization
Since the in-house department is dedicated to detailing your dealership’s vehicles, it should and usually does, perform far better and cheaper than an outside shop. The department’s attention is only on your vehicles or the vehicles of your customers.
Specialized expertise that is more difficult for an outside detail shop to obtain includes:
— Top quality and well-trained personnel
— Knowledge of the latest detail technology, equipment and supplies. Most outside shops are using primitive technology, at best.
— Sophisticated employee training and motivational programs
— Well-trained managers and supervisors
— Quality-control programs, including measures on quality and satisfaction
— Safety programs
Specialization means that not only do the in-house detailers do the work better, but the dealership can also attract better-qualified people. The career path within a contract dealership for persons starting at entry-level is far superior to that of outside detail shop.
2. Additional Resources
The dealer can bring in consultants, and update and revamp an in-house detailing department. Not only does the outside shop lack these resources, but economically and psychologically, it is also much harder for a detail shop owner to change their own program. That said, it is easy for the dealer to bring in an outside “change agent” to help improve the department.
In addition to continuously evaluating new products and detailing methods, a dealership has buying power for supplies and equipment they need that an outside shop cannot afford.
3. Specialized back-up support
The dealer’s shop manager reports to either the fixed operations manager and/or the dealer. Back-up resources, such as safety training and general training by outside consultants, can supplement this.
4. Dealer is in the employment business
The number of employees, relative to the cost of detailing, does expose the dealer to employee issues such as:
— Workers compensation costs
— Wrongful dismissal and sexual harassment claims
— Turnover and related costs of recruiting, pre-employment checks, training, and additional administration
However, these disadvantages are more than offset by having control of quality, turnaround time and the ability to sell detailing to the public.
Done correctly, the profit from detail service sales can turn the detail department into a true profit center instead of being an expensive center.
If you need help determining which way to go, contact me buda@detailplus.com.
As I read the ongoing coverage of the VW scandal, I can’t help but think of the early days at Pollak Cadillac.
My father and I became Cadillac dealers in 1985. My Dad had been a long-time Buick-GMC-Jeep-Renault dealer in Gary, Ind. Our new store in Elmhurst, Ill., represented our collective hopes and dreams for an even more successful future.
Our honeymoon didn’t last long.
Cadillac’s line-up didn’t prove as popular with buyers as we’d hoped. As dealers, we could only question the factory’s wisdom as customers didn’t like the product redesigns and shared platforms. For us, the used car department became the lifeline for our investment.
Thankfully, years later, Cadillac has come around, and its dealers are blessed.
I can only wonder how long it’ll take for VW to restore the confidence and faith of its dealers, and make up the market share it’s losing to rivals.
News reports indicate VW has been taking steps make things right with dealers. I hope it’s enough, and I feel for dealers their investment in the brand. I trust that despite the adversity, the best VW dealers will find opportunity.
Perhaps there’s a relevant take-away for every franchised dealer: Even when the factory deals a hand you didn’t ask for, you’ve still got to deliver for yourself.
Dale Pollak is the founder of vAuto. These entries and Pollak’s entire blog can be found at www.dalepollak.com.
… American market analyst Arthur Nielsen uttered those words over 60 years ago. How can we apply Nielsen’s lesson to today’s modern automotive retail sales environment? Staying on top of the analytical measurements that affect your dealership’s performance is vital. Keeping yourself in the dark comes at a huge cost.
I am going to focus on one key metric that many dealerships struggle to shine light on — floor traffic.
When you look at the simple metric of floor traffic from a general retail business perspective, it would seem obvious that it’s an easy and extremely important metric to measure. However, this is the car business and, as a whole, we are – let’s say – “a little different.” As a whole, the automotive industry gets a failing grade for accurately measuring this fundamentally important statistic. I know of very few dealers who would get an A+. This is a shocking reality. So, why aren’t dealers tracking this information effectively? I believe the answer is either egos or laziness – or, there’s a strong chance it’s both. Most dealers aren’t able to accurately answer the question, “How many customers (fresh opportunities) were in your showroom last month?” How about you – can you give an accurate answer to that question? You are in the overwhelming majority if you cannot.
In an information and data driven market how is it possible to make simple business decisions without truly knowing how many fresh customers walked through your front door? Decisions like:
- Advertising dollars and the resulting ROI
- Stocking inventory, both new and used
- Number of sales staff required to effectively cover the floor
- Creating and measuring an effective sales process
- Retention and training of sales staff
Dealers that use accurate data to measure their sales processes and the correlating results are in a far superior position to make quality business decisions than dealers who strictly use sales volume history to make those decisions. Sales history is important but is not, on its own, a clear indication of future sales. Let’s look at an example to help illustrate this point:
Salesperson Tony sold 20 vehicles last month, and salesperson Darryl sold 15. Who is going to sell more vehicles this month? Which one would you focus your training energy on? Which one is producing a higher ROI? Which one has a better sales process? You would have a difficult time providing data-based answers to those questions based on volume alone. Now, if I told you that Tony had 60 fresh opportunities (first time ups) last month and Darryl had 30, how much easier would it be to create data-based answers to those questions? You would use this data to ensure that Darryl had equal fresh opportunities, and I would break down Tony’s sale process to see if there was an opportunity to adjust it in order to improve results. Traditionally, you would just ask Darryl to sell more cars like Tony, and you would reward Tony for being top sales associate. The bottom line is that the more relevant data we have, the more empowered we are to make the best possible decisions.
Everyone wants to increase sales. When dealers get frustrated about low sales, or talk about barriers to increased sales, you’ll commonly hear them say things like “traffic was down” or “it’s dead, and no one is coming in.” Dealers are correct when they say that traffic is down, as today’s customers (on average) are visiting less than two dealerships before they purchase a vehicle. In 2004, customers (on average) were visiting around 10 dealerships before they purchased a vehicle. These days, customers are spending so much time gathering and researching information online, that by the time they arrive at a dealership, they are more informed and are, generally speaking, more ready to purchase.
Understanding the new reality of who is coming into your dealership, I assume that you have changed your sales process since 2004 – at least I hope that you have. How effective is your sales process? What processes do you have in place to give you a competitive edge in the market? As the current market conditions related to traffic are relatively new, how do you know what works best in this market? When this current market evolves how will you be aware of it? How will you be able to change? These are all difficult questions to answer even if you track your traffic accurately; they are almost impossible to answer when you don’t track traffic at all.
If tracking traffic is so important, and is fairly easy to do, why aren’t dealers doing it? The most plausible reason I can give you is laziness on the part of front line by staff (including managers) and the effect on the egos of sales staff. Tracking traffic is work, and if the leaders in a dealership aren’t holding staff accountable for tracking and aren’t creating a culture of tracking, it will fall by the wayside. Also, some automotive salespeople like to tell “fishing stories” in regards to their closing ratios, and when telling those stories they inflate their closing numbers to make themselves look and feel better. This by itself could make the sales floor more complacent and resistant to change, since they already walk around telling themselves they’re doing a good job.
Here are some ideas on how to implement a strategy to obtain and use traffic data:
- Create a culture of tracking data accurately.
- Train and explain the value of the data to all employees of the sales department.
- Don’t use closing ratios as a “carrot” or “stick.”
- Write tracking traffic into the job description.
- Create bonus or spiff plans for accurately tracking customers until it becomes part of the culture and fabric of the dealership.
- Accept your closing ratio, and always look to improve it by working on your process.
- Use data to continually measure the effectiveness of your sales processes and adjust and measure your process as frequently as necessary.
There are numerous software programs that make it easy to track and measure your opportunities.However if those programs aren’t in your budget, an excel spreadsheet along with good old up-cards can be just as effective – they just require more time and effort.I can assure you, tracking this data is not only worth your money, but your time and effort, as well.
Depending on your dealership, the idea of effectively tracking traffic may be difficult to implement, as there are many years of old habits and perceptions to change. But, it’s worth it. Getting a better handle on your traffic data will help you see the light and gain a solid understanding of where your opportunities exist, as opposed to staying in the dark and thinking your dealership is doing a good job and that there is only room for minor improvement. It is time to come out of the dark and make the journey to improvement before the market completely passes you by.
Remember, it all starts with you!
Richard Macdonald is the founder of RPM Solutions. Richard provides consulting, training and coaching services to new-car franchise stores to help them maximize their used-car department profits. For more information, contact Richard at (416) 894-1475 or richard@rpmsolutions.ca.
What percentage of your time is focused on finding ways to make your dealership an incredible place to work?
Be honest — if your answer is under 10 percent then you need to read this article.
I've worked with hundreds of dealers, and what do you think the one thing is that almost every one had in common? They found it difficult to attract and retain quality employees.
Why is it that nearly all dealerships across North America share this same problem? The answer is actually quite simple — most dealer principals and general managers fail to ask themselves this one simple yet crucial question:
"Why should anyone work for me?"
We all know that it's the employees that ultimately drive the success of any organization. As the face, hands and feet of any business — our people define how our customers perceive our business. Would it not then make sense that developing a culture that attracts high-quality employees be a core responsibility of senior management?
The reality is that even when I've worked with incredibly successful and progressive dealers, very little thought has been put into this concept.
So many operators suffer from tunnel vision, often failing to see the forest for the trees. It's so easy to be focused on sales numbers and profitability, that it can be easy to overlook the steps necessary to sustaining it.
The culture at any business ultimately flows from the top down. Sadly, most dealer principals and general managers are still operating under antiquated beliefs and outdated strategies.
The automotive industry is changing, and for the better, but the pace is slow. We're seeing a 'changing of the guard' as the previous generations hand over the reins of the business to younger blood. The challenge is that the new generation was schooled by the previous one. A hereditary hindrance that has passed down a wide selection of outdated habits and processes that don’t suit today's market.
So how do you create workplace capable of attracting and retaining the top talent in your market?
It starts by creating a clearly defined Employee Value Proposition (EVP). Every business should have an EVP, and the more competitive your market is the stronger it needs to be.
When Convertus came to life over two years ago, we knew we had an uphill battle in front of us. We had a ton of experience in making dealerships successful, but launching a digital marketing company was uncharted territory.
We were entering into a market with some giant companies that were well-established, boasting big sales teams and marketing budgets. We knew we couldn't compete head-to-head, but we would instead have to find a way to offer something that the ‘big guys’ couldn't.
The Convertus office is located in downtown Vancouver, minutes away from dozens of Fortune 500 companies. With neighbors like Facebook, Microsoft, EA Games and Hootsuite, we knew we needed to find tangible and attractive ways to differentiate Convertus from all of the other great employers in our local market.
So what does the Convertus EVP look like? Here are just a few of the ways we attract high-quality people:
- Monthly team-building activities
- Fully stocked drinks and snacks
- Monthly fitness subsidy
- Employee run incentive programs
- Flexible vacation structure
- Weekly workshops
- Employee stock option plan
- Clear path to advancement
- Full corporate transparency
- Education matching
Yes, all of these things take money and/or time to offer to your employees. But, when done right, the quality of talent you will be able to attract will increase your efficiency enough to offset this initial investment.
When you create an incredible workplace culture the right employees will be more loyal, and be happy to make the potential trade off in monetary compensation.
In conclusion
The worst reason to do something is because you've always done it.
The quality of your team today will decide how successful your dealership will be tomorrow.
Stop asking what your employees can do for you, but rather, what you can do for your employees.
Kevin Gordon is a co-founder of Convertus, a fast growing automotive digital marketing agency based out of Vancouver. Contact Kevin at kgordon@convertus.com or call 888-354-6441 to see how Convertus can help you craft a winning digital marketing presence for your store.
I’d recommend that every dealer conduct the following three-part test of their used vehicle department:
Step 1: Determine your average cost of inventory. How does this figure compare to three or six months ago? Is it up or down, and by how much?
Step 2: Assess your inventory age. What percentage of your inventory is less than 30 days old? What percentage is older than 30 days? How have these figures changed, if at all, in the past three to six months?
Step 3: Calculate your average front-end gross by vehicle age. What’s the average front-end gross for vehicles retailed within 30 days? After 30 days? What’s the difference between the two? Remember this number.
The test helps identify operational problems that can slow the pace and profitability of your used vehicle sales. It’s a useful test at this time of year as fall arrives. Being what they are, the summer months can cause diligence and discipline to dissipate as the mercury rises. Used vehicle performance suffers. Sales slow, and grosses go.
As you take the test, here are some points to consider for each step:
Step 1: If you’re like many dealers, your average cost of inventory has likely headed north—despite month-over-month declines in wholesale vehicle valuations. Hopefully, the increases owe to conscious decisions to accept a higher acquisition Cost of Market ratio as you acquire vehicles from auctions or trade-ins. This scenario is particularly true for dealers that proactively participate in factory certified pre-owned (CPO) programs.
But be honest with yourself: How much of the increase really owes to appraisers offering too much, or buyers simply purchasing the easier-to-find (and more expensive) late model units at auctions?
The best-performing dealers strive to acquire and recondition every used vehicle at a Cost to Market ratio below 85 percent. This ratio, which compares the unit’s cost to prevailing retail asking prices, sets the baseline profit margin potential for every unit. As dealers work to beat this benchmark on every used vehicle acquisition, they effectively keep a lid on the average cost of inventory.
Step 2: If you found more than 50 percent of your used vehicle inventory is older than 30 days, you’ve got at least one problem—your cars aren’t selling fast enough to maximize your gross profit and minimize risk, given today’s market. This is why I recommend dealers maintain at least 50 percent of their used vehicle inventory under 30 days of age. To achieve this operational standard, dealers make it a priority to acquire the right cars for their market, and use pricing and online merchandising as primary, time-sensitive levers to attract buyers and sell the unit quickly.
Step 3: OK, so what was your number? Was it eye-opening to see the difference? If you’re like most dealers, you probably see a steep decline in the average front-end gross profits after 30 days in inventory. In fact, if you look closer, you’ll likely notice a handful of vehicles propped up your average front-end grosses after 30 days, while the rest of the vehicles were effectively money-losing units.
This part of the test reveals a stark retailing reality in used vehicles: You can’t really expect to make a sufficient return on investment on used vehicles once they age past the 30-day mark. This fact of life can be difficult for dealers to accept—and it’s a key reason why the most profitable and successful used vehicle retailers have made 45 days as the final cut off for every unit. Period. End of story.
Perhaps the best part of the test is that it offers useful insights for any dealer.
If you’ve felt like you’re not selling enough used vehicles or making enough money, the test should reveal some operational priorities that help you achieve both. And, if you’re among the dealers who feel satisfied with your used vehicle performance, I suspect the test identified an area or two where your team can improve.
Either way, the test is over. The results are in. What’s your next step?
Dale Pollak is the founder of vAuto. These entries and Pollak’s entire blog can be found at www.dalepollak.com.
I typically find it’s time well spent to keep an eye on how CarMax is doing. That’s why I reviewed this week’s release of CarMax’s second-quarter results and related earnings call transcript.
Three items caught my attention and seemed relevant for all used-vehicle retailers:
1. A disciplined, efficient, technology-driven vehicle purchase process.
Dealers and their buyers sometimes marvel at how much CarMax buyers seem willing to pay in the lanes for vehicles. During the earnings call, CarMax CEO Tom Folliard offered a quick overview of the company’s auction purchase process — an impressive approach that suggests their buyers know exactly what they’re doing:
“We are much more organized today than we were 10 years ago. We’re much more analytical about the way we approach car buying at the auction, and I think we’re in a better position today to optimize the inventory that we acquire at the auction because of all the analytics that we’ve put into it and all the digital capabilities that we’ve given our buyers. Our buyers are now all using tablets at the auctions. We’re tracking every single car that a buyer at CarMax looks at at the auction and deciding whether or not that car is worthy, and then the next time a buyer goes to the auction, they don’t have to look at that same car and we’re saving an enormous amount of time in evaluating cars at the auction. We have all the auctions on a program where the CarMax buyers are buying under one kind of generic card, and we can analytically decide where those cars go later.”
2. A robust “we’ll buy your used car” program.
I initially viewed CarMax’s reported 8-percent increase in wholesale unit sales and an 18-percent increase in wholesale profit ($951/car in the second quarter) as troubling signs. After all, CarMax is in the retail car business. Then I remembered: They’ve long touted the “we’ll buy your car even if you don’t buy ours” promise for years. The wholesale volume and profit increases reflect the success of this committed initiative more than any retail shortcomings. CarMax’s effort also signals its belief that engaging a customer in the dealership, even if they only want to sell a clunker, is an opportunity to seed a future retail sale — a useful insight for dealers struggling to make their own off-the-street purchase programs more successful.
3. A recognition that today’s buyers are different.
CarMax has embraced the idea that today’s buyers would welcome the opportunity to complete at least some parts of a vehicle purchase online — and they will reward dealers who do so. Here’s a quick overview that Folliard offered in response to an earnings call question:
“What we are trying to do is make sure our customers can do as much of the transaction as they want to do from home. We’ve definitely seen the sentiment shift where customers are looking to do more and more research, more and more pieces of the transaction from home, and in some cases the entire transaction from home. Our current capabilities are our customer can obviously do all kinds of inventory searches … We also give the customer the ability to put a car on hold. We give the customer the ability to transfer a car. If it’s a paid transfer, they can do it with a credit card without speaking to anybody and have that car transferred to the store of their choice.
“They can fill out a big chunk of the paperwork from home. We have tested online credit applications, and we are continuing to enhance our capabilities there. We’ve seen some start-ups and some smaller competitors that are doing kind of beginning-to-end transactions online. I don’t think anybody is in a better position than we are to be able to do those things, and those are some of the things that we’ll continue to work on and continue to evaluate as our business grows.”
The key point here is that CarMax is going further than other dealers when it comes to facilitating deals online. My colleague, Mike Burgiss of Cox Automotive’s MakeMyDeal, says it’s not uncommon for dealers to offer online tools, but they use the tools to generate leads, not actually work deals. “This remains a disconnect for many dealers, and an opportunity for those who make the shift to what I call a ‘connected commerce’ model for selling cars,” he says.
As I finished my review, I couldn’t help but think that while some dealers might not like CarMax, it would be foolish to ignore the rationale and reason behind their ongoing success.
Dale Pollak is the founder of vAuto. These entries and Pollak’s entire blog can be found at www.dalepollak.com.
For many dealers, the new-car business is increasingly all about volume. This reality doesn’t hold for every new vehicle — particularly in cross-over and truck segments that continue to be sought-after purchases by consumers and yield respectable grosses. But overall, the business is less about front-end gross profit, and more about volume, than it has ever been in the past.
This reality owes to several factors. The Internet has brought ever-higher levels of price availability and transparency to the market, which increases price competition and compresses front-end margins. At the same time, manufacturers have steadily narrowed the margin between dealer invoice and the Manufacturer’s Suggested Retail Price (MSRP). According to Kelley Blue Book, the invoice-to-MSRP margin has shrunk 60 percent since 1990.
In addition, factory-to-dealer bonus programs drive an emphasis on volume over gross. You can see signs of this trend at the end of nearly every month, when dealers will effectively give away even their best-grossing units to get their bonus checks.
But here’s what I find curious: Even as the new vehicle market moves ever closer to being a low-to-no-margin business where volume matters most, dealers have been slow to change the way they stock, manage and price their new car inventories to capture a greater share of sales.
I’ve come to this conclusion after analyzing new vehicle pricing and inventory management practices for dealers across the country. I undertook the study to find areas where dealers could do a better job, from an operational perspective, at meeting the need to increase sales volumes while maximizing gross profit on the vehicles that deserve it. Here’s what I found:
- Aged units. While I understand that dealers often have to take in less-desirable vehicles the factory configured and produced, I was struck by two statistics: First, the average time in inventory runs near 100 days. Second, I found that, on average, 40 percent of a dealer’s new vehicle inventory is over 90 days—well past the point where floorplan expense typically becomes a factor. These findings appear to reflect a long-held belief that inventory age doesn’t matter in new vehicles. But I would disagree, and suggest that dealers could improve the profitability and velocity of new vehicle sales if inventory age became a higher operational priority.
- Inventory turns. After seeing the prevalence of 90-day new vehicles, I wasn’t terribly surprised to find that dealers typically turn their new vehicle inventories only five or six times a year. I dug a little deeper and segmented the data by make. I was curious to see if some dealers might suffer from slower-moving inventory because of their factory partners. But what I found told a different story: For every brand, there are dealers who turn their inventory more than twice as often as their peers. This finding suggests that while some dealers fully embrace the importance of sales velocity and volume, others lag far behind.
- Pricing practices. My findings around inventory age and turn rates led me to look closer at pricing practices. My premise: Just as in used vehicles, proper pricing in new vehicles is essential to attract buyers and sell more cars in today’s market. I found multiple instances where dealers had a sizable share of their new vehicle inventories (in some cases as high as 50 percent) online without a price (Note: I counted listings “call for details” or MSRP-only pricing, given these are often defaults for vehicles without a dealer-set price). Upon investigation, I found the absence of a market-compelling price owed mostly to inattention. Time and again, I saw that dealers who priced their new vehicles at the beginning of the month were more likely to have cars online without a price than those who pay more frequent attention to new vehicle pricing, particularly as fresh units from dealer trades or the factory arrive.
In addition to inconsistent pricing, I found wide variation in the strategies dealers apply when they do price new vehicles. Some are far more attuned to competing vehicles and their markets than others. These dealers are more likely to include incentives in their pricing strategies to differentiate from the competition. In addition, some of these dealers monitor online activity (e.g., the number of vehicle details page (VDP) views) as part of their pricing strategies to account for current and emerging demand.
Overall, my analysis suggests a lot of opportunity for dealers to tighten up their new vehicle inventory management and pricing practices. Those who do will inevitably capture more market share and sales volume than those who stay the current course.
Dale Pollak is the founder of vAuto. These entries and Pollak’s entire blog can be found at www.dalepollak.com.
I’ve been getting requests from dealers recently to help them evaluate their performance in new vehicles.
The inquiries follow dealer concerns about ever-smaller margins on the new vehicles they sell, and a desire to increase market share and volume while maximizing the profitability for every retail unit.
These discussions have revealed three curious findings:
Inventory turns: I’ve found that, on average, dealers turn their new vehicle inventories five to seven times a year. This benchmark even applies to dealers who achieve a respectable annualized inventory turn of 12-15 times a year in their used vehicle department.
Inventory age: The average days in inventory for new vehicles runs close to 100 days, with roughly 40 percent of the cars above the 90-day mark. By contrast, many of these dealers consistently maintain an average days in inventory for used vehicles below 30 days, and they rarely see vehicles age past 45 or 60 days.
Pricing: Each dealer typically had his/her own strategy. Some priced everything at the Manufacturer’s Suggested Retail Price (MSRP), others preferred to show the MSRP and an asking price that conveyed an initial dealer discount. I was struck, however, by the prevalence of pricing strategies that either a) did not incorporate incentives to show a discount; b) lacked relevance to competing cars in the market; or c) sent confusing signals to potential customers.
For example, I asked a Chrysler Dodge Jeep dealer in the Midwest why nearly half of his vehicles showed an aggressive discount, while the rest showed MSRP. The reason: He priced his new vehicles once a month. As he retailed cars, new ones arrived from the factory or dealer trades. These units did not receive a price until the beginning of the next month.
The dealer agreed this pricing inefficiency might contribute to missed opportunities. “I can see that if a customer saw 10 of my Grand Cherokees at sticker and 10 at a discount, it might be confusing. And, if my competitor has the same car priced correctly, I might not get a crack at the business.”
Most dealers would not tolerate such inventory and pricing inefficiencies in their used car departments. Yet, they don’t seem to mind the less-than-optimal performance in new vehicles.
I encouraged the dealers to follow three best practices to increase new vehicle sales and profitability:
Match your new vehicle prices to the market. Dealers should recognize that today’s new vehicle buyers are aware of prevailing prices in the market—and they know if your asking prices fall in/out of the fair market range for specific models. In the past, it’s been difficult to efficiently make these price comparisons. Today, however, new technology and tools give dealers the ability to set competitive prices, and apply available incentives, within a matter of minutes, not hours.
Revisit new vehicle pricing at least once a week. As the Chrysler Dodge Jeep dealer’s experience attests, a once-a-month pricing policy can do more harm than good in today’s market. Just as we’ve seen in used vehicles, proactive new vehicle pricing helps you deliver the pricing clarity and consistency buyers have come to expect. I recommend dealers revisit their new vehicle pricing at least once a week, if not more often, to make sure your vehicles align with buyers’ pricing expectations.
Manage inventory age. A Chevrolet dealer explained his inattention to aging new vehicle inventory this way: “New cars don’t spoil like used cars.” After we examined his average days in inventory and annual turn rate, he recognized two things: First, he could do a better job focusing his pricing and sales team attention on older units, rather than retailing fresher cars because they’re parked closer to the showroom door. Second, as he worked to retail older-age units first, he’d reduce his exposure to monthly floorplan expense.
Dealers who consistently follow these new vehicle pricing and inventory management best practices invariably find that sales and profits improve. As one dealer put it, “margins are bad enough in new cars for me to be making them worse by not paying attention.”
Dale Pollak is the founder of vAuto. These entries and Pollak’s entire blog can be found at www.dalepollak.com.
It’s not uncommon for dealers to commit two cardinal sins in used vehicles as summer gets into full swing.
The first sin is the impulse to beef up used vehicle inventory to drive additional sales. Every summer, it seems, I hear from dealers who plan to add 30 to 50 units to their used vehicle inventories. Their goal: Use the extra cars to attract more buyers and make more deals.
I’ll often ask these dealers a question: “What’s your plan to deal with the 75 to 100 cars on your lot that haven’t sold yet?”
In most cases, the question does the trick. It gets dealers to realize that they shouldn’t stock up on additional inventory when the units they own aren’t moving fast enough. In addition, the question opens a deeper analysis into their current inventory. In many cases, the dealers uncover merchandising and pricing problems that contribute to a less-than-optimal sales performance.
During these discussions, I remind dealers that they should only increase their used vehicle inventory when they meet the following conditions:
- You already achieve an annualized inventory turn rate of 15 or 16. I generally recommend that dealers should consistently meet this benchmark before they add more cars. The reason: These dealers have proven their ability to acquire, recondition, merchandise and price each unit for an efficient, profitable retail sale. Dealers who lack this operational capacity and discipline often find that the influx of additional inventory only exacerbates inventory age, pricing and profitability problems they haven’t addressed.
- You add inventory incrementally. The best-performing dealerships tend to add used vehicle inventory in five- and 10-car increments. This approach does two things—it hedges the risk of burdening the used vehicle/service departments with too many cars too quickly, and it helps ensure your annualized inventory turn rate does not fall below 12, which I consider the minimum performance benchmark for today’s more volatile market.
The second summertime sin occurs during used vehicle appraisals. As new vehicle sales soften during the summer, some dealers press their managers and appraisers to acquire an even larger share of their used inventory from trade-ins.
The problem: As dealers seek to acquire more trade-ins, they often don’t hold appraisers accountable for purchasing these vehicles “on the money.”
To avoid this profit-damaging problem, I encourage dealers to evaluate each appraiser’s performance on a monthly basis. The evaluation should address two metrics—the appraiser’s Look to Book and Acquisition Cost to Market ratios.
The Look to Book ratio reveals the percentage of vehicles that each appraiser evaluated and the dealership purchased. The Acquisition Cost to Market ratio measures the appraiser’s valuation against current retail asking prices for a specific vehicle; it provides a guide to the unit’s front-end profit potential before reconditioning/other costs.
When I review appraiser performance, I like to see an overall Look to Book ratio around 50 percent, coupled with an overall Acquisition Cost to Market ratio below 80 percent. These benchmarks, which can vary based on the individual and dealership, tell me that the appraiser is properly avoiding the sin of acquiring trade-ins at the expense of the unit’s front-end profit potential, or letting too many retail-worthy cars slip by.
I also encourage dealers to monitor the Acquisition Cost to Market ratio for buyers who purchase vehicles at auctions. This oversight should occur year-round, but it merits extra attention during the summer, when wholesale values are generally on the wane. In general, the Acquisition Cost to Market for auction-purchased vehicles should run less than 85 percent.
Dealers who commit these sins of summer will face a disadvantage as fall arrives. They’ll be sitting on aged cars and diminished profitability while their competitors reap the retail rewards that prudence always delivers.
Dale Pollak is the founder of vAuto. These entries and Pollak’s entire blog can be found at www.dalepollak.com.
