The Germain Automotive Group has increased front-end gross per car by $300 since beta testing a new inventory management concept from Dale Pollak and the vAuto team at Cox Automotive.
This new philosophy — and the data product behind it, called Profit Time — looks at inventory aging in a unique way, Pollack told nearly 200 high-performing dealers using the vAuto system at an invitation-only three-day conference in Chicago last week.
Pollak, with Chris Stutsman, senior director of product innovation for vAuto, said Profit Time, “a new investment prediction system” for combatting margin compression may not be for every dealer.
“I urge you, proceed very cautiously. This is for early adoptors,” said Pollak, vAuto founder and executive vice president at Cox Automotive.
He told dealers increasing margin compression forced him and the team to look again at inventory management practices.
“Something was wrong. We had missed something. There was a shift in the details in our Velocity model,” he said. “Could I challenge what I believe and what Velocity is built upon? Velocity was my identity. How would I bring this new insight to the industry?”
That “missed something” he revealed, was the error in basing inventory management on the calendar. The practice of lowering prices as vehicles age out doesn’t lead to the most sales and profit opportunity, Pollak said, because pushing up gross reduces turn and vice versa. “The goal is to optimize both gross and turn,” he said.
“We got it wrong with calendar-based inventory management. Calendar time management is flawed technology, and it’s amazing the industry got by with it for a hundred years,” he said.
The problems with age-based pricing are:
- It assumes the market compresses margin on all cars at the same time — and time’s effect on profitability depends on the vehicle; and
- It accepts that floor cost for every vehicle is the same — when all costs to markets are not equal
Profit Time categorizes vehicles according to a precious metals-type ranking system: Platinum, higher-end and Bronze or bread-and-butter vehicles in high supply, with Gold and Silver categories between.
Each night, the tool recalculates these rankings using live market views configured for the particular vehicle. This data is assigned to appraisers in real-time to assist with better appraisal outcomes. Other calculations include cost to market, like-mine day supply and market sales volume.
“There is still an art to the used-car business — art and science. Aesthetics, eye appeal, will always be a factor in making a decision about what to acquire and how to price vehicles. The science is a new data element with more insight into a vehicle’s potential than anything we had prior,” Pollak said.
“No longer are we using lagging indicators to identify performance,” Stutsman pointed out.
Describing Profit Time categories as bananas — Platinum as still-green ones with much shelf life left and Bronze as black bananas — these men noted most dealers inventory a high supply of Bronze models.
“Dealers like to buy these [black banana] cars and price them high, and then sit on them for too long because the calendar says they have time to make a profit. That is wrong!” Pollak said. “Profit Time is a rejection that calendar time has any place in vehicle management.”
Randy Kobat, vAuto’s senior vice president for Inventory Software Solutions, whom I spoke to later, used a steamboat paddlewheel analogy to explain this new turn philosophy. The paddlewheel of a steamboat turns in the river at a constant rate — the dealership’s overall turn rate. However, in this new methodology the inner spokes of the wheel, the precious metal categories, each turn at different rates.
Kobat said, dealers should turn dark bananas rapidly.
“If priced rationally, I can build volume in my store, and if I price appropriately I can create additional revenue from F&I and service. Dealers actually sit on a gold mine with black bananas they’re not capitalizing, because they hang on to them too long,” Pollak added.
vAuto believes its new data product will help dealers challenge margin compression. At the Germain Group, for instance, the tool is increasing front-end grosses by 30 percent.
“Margin compression is the single largest threat to the dealer, and you can’t stop it, but it can be managed better and mitigated much more than we have historically. Profit Time is a new metric, a new philosophy for making credible decisions that go to the heart of the margin compression problem,” Pollak said.