At the recent NADA Show 2019, I spoke to several dealers about their 2019 used-car strategies, and that story was published in Auto Remarketing.
Included in that article were comments from used-car expert Tommy Gibbs of Tommy Gibbs & Associates, who shared some pre-show highlights of this then-upcoming used-car workshop.
For this article, I interviewed two other used-car management experts for their perspectives on 2019 used-car challenges, to which I’ve added more of Gibbs’ remarks.
In addition to Gibbs, the other experts are Joe Lescota of Joe Lescota Management Education & Training Co., used-vehicle training experts; and Ed French, president of AutoProfit, an automotive profit performance company, and a member of the board of directors for TruWorth Auto, an independent used-car operation with dealerships in Indianapolis and Kokomo, Ind.
A theme emerging from their remarks address management discipline, inventory balance and change.
“Moving forward this year, people need to practice greater discipline, reevaluating packs, pay plans and salespeople recruitment,” Gibbs said by phone, “and tracking the gap between the Internet price and final transaction price. Better dealers have a small difference — $100 to $150, but others from $500 to $600. This is give-away profit.”
This gap closes as managers train their sales people on how to justify and sell the price (and value) when the customer comes into the showroom.
“The consumer has done his or her homework on the Net before they come in — that’s why they’ve shown up, so let’s hold the line as best we can,” Gibbs said.
A well-balanced inventory helps here, French said in a phone interview.
“A balanced acquisition strategy gets unbalanced due to time constraints for searching for inventory, the pressure to fill the lot with the kinds of cars that time shows were bad decisions, because they were easy to acquire,” French said.
“For example, I can buy cars from rental car sources because they’re easy to source, but those cars won’t usually sell at a high profit. Acquiring cars that return higher profit takes work. Frankly, the used-car business is an easy one if we have the right inventory and the right people.”
Lescota, who connected via online messaging, encouraged managers to break from tradition.
“Dealers cheat themselves out of profit by permitting management to focus efforts on fast moving merchandise while allowing older units to sit. When I inquire about aged units, I’m told, ‘I can’t afford to take those to the auction. I would lose a ton of money on them,’” he said.
“That doesn’t make sense when those units are losing value (depreciating) daily, and their initial cost on the books remains the same. Aging cars are the most expensive units in stock; management is attempting to hold out for higher grosses. I also hear managers explain, ‘Oh, we write those down each month.’
“Yes, I tell them — but a write-down is a loss,” Lescota said.
Noted Gibbs: “This discipline also means dealers acknowledge when mistakes are made on acquiring the car, pricing it or holding it too long. If you overpay or put too much into the trade, or the car is bad, it takes discipline to call them what they are.
“Discipline is about doing trade walks to identify problematic vehicles, so you can get them out of there fast. Managers also hold onto cars for 50 to 60 days, and when those cars eventually sell, the dealer is lucky to make anything on them. The discipline is to find a retail buyer before the car gets to 40 days,” Gibbs said.
While agreeing sourcing is and will be a challenge in 2019, these experts also reframed the situation favorably.
“The highest profit margins are on used vehicles traded in rather than purchased from auction. One of the first places I look for inventory is dealer’s opportunity to trade. All too frequently, dealers are missing trades by not focusing on the acquisition portion of the selling transaction,” Lescota said.
“I analyze two numbers: the opportunities to trade percentage and, second, look-to-actual-acquisition (look to book). If new-vehicle sales slow down in 2019 as forecast, dealers will have to be more diligent in maximizing every selling opportunity. Trade-ins offer higher value to potential buyers, because there is a clear history behind that vehicle. It’s much easier for a salesperson to sell the ‘emotion’ of the trade vehicle,” Lescota said.
Gibbs agreed sourcing is really a question of the right cars.
“Nice cars will always be hard to find,” he said. “Tell me about a time in history when that was not so!”
Getting cars from acquisition to the frontline faster is a theme dealers talked about on the exhibit floor at the recent NADA convention, and, Lescota told me, dealers who speed up this process free up margin.
“If it takes longer than 48 to 72 hours to prep a vehicle for sale, an evaluation must be made as to the effectiveness of that process. Dealers must look at their inventory as cash rather than a car,” he said. “This cash must continually work, and that means increasing turn to maximize profitability in a highly competitive used-vehicle market.
“Question whether there is sufficient staffing in the recon center, whether the used-car manager is keeping up with recon processes and why there are parts on hold, and so on,” Lescota said.
Related to Gibbs’ comment about holding the gap and selling value, Lescota said the used-car manager should look at a $1,000 recon investment as additional profit, not an expense.
“Why is the vehicle worth what is asked by the dealer? Reconditioning is a selling tool,” Lescota said.
Some of these challenges, French said, stem from well-entrenched ideas and work patterns.
“We’re still struggling with senior management’s perception of used-car operations,” he said. “These ideas have improved significantly in the last few years as margin compression, flattening SAAR and other indicators have focused dealers on paying attention to the used-car side of the business. Dealers have to migrate to used cars or fixed operations to support their net profit to return on sales.
“So, because it’s hard to change legacy patterns, which is human nature, disruptors have entered the market and succeeded because they aren’t burdened by heritage practices. CarMax, the first significant disruptor, forced change on the way dealers do business. Now Vroom, Fair and Carvana are disrupting other aspects of the used-car business.
“I always make this commentary to 20 groups: It is hard to throw out or change a process that has made you a millionaire; the disruptors have no legacy to protect, but go after what the consumer is demanding, asking, ‘Why wouldn’t we do it that way?’,” French said.