I’m excited to embark tomorrow on a very unique trip.

I’ll be spending two weeks in Australia, helping dealers there better understand the Velocity Method of Management, and how they can use it to increase their used vehicle sales and performance.

Interestingly, the challenges and opportunities that margin compression brings to the car business are not unique to dealers in the United States. Technology-driven efficiency and transparency know no bounds, and Australian dealers are hungry for perspectives on how to thrive in a market that is highly competitive, less forgiving and more volatile than ever.

We are expecting more than 500 dealers at engagements in Brisbane, Melbourne and Sydney. Each dealer is paying $100 to attend, and the collected fees will go to a local charity.

At each event, I’ll be joined and supported by representatives from Cox Automotive’s Australian businesses, CarsGuide.com.au, Dealer Solutions, Manheim and SellMyCar.

I’ve never been to Australia. I’ve always been curious about its culture and people—thanks largely to the positive experiences I’ve had meeting Aussies here over the years.

I look forward to gaining a deeper understanding of the car business from Down Under dealers, and I’ll be sure to share my take-aways from the trip here.

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I imagine there have been a lot of long faces on dealers as they reviewed their financial statements from last month.

Not only did many dealers see fewer deals in their new car Compass What’s Your Course Correction In New Cars?departments compared to a year earlier, they also earned a little bit less on those deals than they would like. On top of that, floorplan expense is growing commensurate with the increasing size of new car inventories.

You could make a fairly strong case that winds are shifting in the new car market. We’ve been riding a nice tailwind for quite a few years. If current conditions continue, we’ll face a bona fide headwind that could further erode sales volumes and profitability.

Airplane pilots face these shifting conditions all the time, often multiple times during the same flight. In most instances, a shifty wind isn’t a big deal. The pilots simply adjust the altitude or the course of the plane (sometimes both) to maintain the smoothest flight path.

Pilots are pretty calm when they make these adjustments. They don’t freak out. They do what has to be done to meet the moment, while focusing on signs that suggest another course correction just ahead.

Dealers would be well-served to ask themselves and their managers—what’s our course correction in new vehicles?

Some dealers have already begun making their adjustments. They have tightened up their factory orders and dealer trades, avoiding the cars and combinations that are most abundant right now in their inventories. They are working to retail out of these vehicles first, to minimize floorplan and other inventory expenses. They are aggressively targeting acquisitions of in-demand units, the vehicles they know will sell most quickly and pose the least investment risk from Day 1.

More broadly, these dealers are emphasizing a greater level of efficiency and transparency in their new vehicle operations. They tout shorter transaction times as a differentiator that appeals to, and attracts, today’s customers. They advertise transparent and true payment and purchase prices in their vehicle listings. They find that earnest engagements with potential buyers, on their preferred, often digital, terms, delivers surprising results.

The dealers also have few illusions. They know margin compression isn’t going away. They recognize that the emerging headwinds will probably grow stronger. They also correctly believe that their calculated, and consistently applied, emphasis on efficiency and transparency will bring reward.

On some level, they think and act like pilots. They make the course corrections as the need arrives. They aim for the smoothest, most profitable, path forward.

In the current environment, it would be wise for all of us to revisit this gem from Henry Ford:

“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.”

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We’ve arrived at an interesting time for retail sales of new and used vehicles.

Both sides of the business face a market supply/demand imbalance, which raises risk for dealers.

regera 3 Keys To Increase Your New/Used Vehicle Throughput and ProfitabilityIn new vehicles, there’s almost an inventory pile-up on some dealers’ lots. Dealership days supply is running well north of the norm. Some dealers don’t even have the kind of vehicles (e.g., SUVs and trucks) that today’s buyers really want. Factories have pledged to adjust their production mix and pace, but I’m told they could, and should, do more. Meanwhile, retail sales appear to be driven by ever-higher incentives, which ultimately crimps the contribution each car makes to the dealer’s bottom line.

In used vehicles, the big headline is the rising supplies of off-lease, or near-new vehicles, in the market. We’ve begun to see the effects of this supply surge; Market Days Supply metrics are up across several segments in most markets. Wholesale prices are also more volatile due largely to the supply surge. On top of all this, the incentive-driven new vehicle market is eroding the “value gap” between new and used vehicles—adding further risk to front-end margins and retail sales.

Most industry observers expect buyer demand for new and used vehicles to remain relatively stable in the coming months. But a “relatively stable” degree of buyer demand is no guarantee that you’ll be able to sell more new/used vehicles and make more money than you did last year or the year before—particularly if you aren’t doing things any better or different to offset competitive threats and ongoing margin compression.

In light of these conditions, I encourage dealers to be more diligent and focused on three strategic priorities for their new and used vehicle departments:

Pursue the fast sellers. This priority helps dealers mitigate the drag on operational performance and profitability that comes as vehicles sit (and sit) in your new/used vehicle inventories. In new vehicles, it’s becoming ever-more critical for dealers to align their factory orders and dealer trades to competitive conditions—to acquire more of the faster-selling combinations that customers want to buy, and avoid the dogs the factory wants you to take. Currently, it’s not uncommon to find 40 percent or more of a dealer’s new vehicle inventory to be older than 90 days, which suggests ample room for improvement.

The story’s similar in used vehicles. If you make it a top priority to acquire vehicles based on favorable Market Days Supply and Cost to Market metrics, you’ve set the stage to attract buyers, drive a faster pace of sales and achieve the gross profits you expect.

Manage your return on investment. A sometimes under-appreciated reality of today’s retail market is that age matters in both new and used vehicles. Over time, the return on your capital investment in any vehicle diminishes, whether this depreciation comes from changed market conditions, floorplan/holding costs or some other factor. These are the variables dealers must track as they manage each vehicle’s lifecycle and strive to maximize ROI. By focusing more keenly on each vehicle’s ROI, dealers are less likely to overprice vehicles and allow any car to remain in inventory past the point that it delivers a sufficient return. This emphasis on ROI naturally leads to a more efficient and more profitable pace of new/used retail sales.

Reduce your discounts. For some dealers, this priority might be considered a “last frontier” for additional profitability in new and used vehicles. Here’s a common situation: Dealers have accepted the reality that they must price their new and used vehicles to the market. In sum, they are offering a reasonably fair offer on their vehicles. But, at the desk during negotiation, there’s little or no recognition of the pricing strategy. Managers and sales associates don’t explain to customers how your fair market pricing is purposeful—it’s intended to eliminate much, if not all, of the need to haggle over a purchase price. The absence of this discussion opens the door for buyers, some of whom are already satisfied with the price you posted online, to ask to pay even less for a new or used vehicle.

Dealers who have made discount reduction a priority typically pick up $200 to $500 in front-end gross per vehicle that they were effectively giving away without thinking about it. Their first step: Track the discounts on every deal to identify who contributes most to the problem.

Each of these strategic priorities, if executed correctly, can help dealers gain operational efficiencies that lead to competitive advantage.

But it’s the trifecta, working in tandem together, that truly provides the ability to achieve your goals of selling more cars and making more money in today’s “relatively stable” market.

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Pope Francis Calls For ‘Revolution Of Tenderness’ In Surprise TED Talk

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“A single individual is enough for hope to exist, and that individual can be you.” In a surprise appearance via video at the TED 2017 conference in Vancouver, Canada, on Tuesday evening, the pontiff said that tenderness is “the path of choice for the strongest, most courageous men and women.” “Tenderness is not weakness; it [...]

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A Thoughtful Note from NCM Associates

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I received the following thoughtful note from Terry Wichmann, a retail solutions consultant at NCM Associates. Dale, Thanks for your continuing help when I ask you to send your books to current vAuto clients and vAuto prospects. When discussing “velocity” (in general) and vAuto (specifically) during NCM Associates “Profit Improvement Meetings” at dealerships, I always [...]

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3 Best Practices To Beat Back Used Vehicle Margin Compression

04.04.2017

It’s like a leaky faucet. Drip by drip, the retail profit you make on used vehicles goes down the drain.   But unlike a leaky faucet, the fix for margin compression in used vehicles isn’t as easy as calling a plumber. That’s because, more and more, ongoing margin compression in used vehicles is the nature [...]

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Hal? Where Are The Used Cars You Purchased?

03.29.2017

One of the first movies that opened my mind to the power of technology was 2001: A Space Odyssey, the 1968 film from Stanley Kubrick. The movie was a cautionary tale about the danger of computers and technology becoming more human-like, creating dire consequences for actual humans. The central character was Hal, a computer that [...]

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A Key Problem-Solving Lesson From A Respected Diplomat

03.23.2017

I had the opportunity to take in a speech this week from former Ambassador Dennis Ross. Ross is a unique person. He’s served as a diplomat under three presidential administrations. He was a key player in Middle East peace talks for Presidents George W. Bush and Bill Clinton. He also served under President Barack Obama’s administration [...]

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Chevy Bolt Pricing: A Sign Of The Times

03.21.2017

I was intrigued by an Automotive News article this week that highlights pricing disparities among dealers as the new Chevrolet Bolt EV arrives in showrooms in select markets. The story notes a mix of price discounts and mark-ups across the seven states where General Motors is introducing the vehicle. Some dealers are discounting by as [...]

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Two Perspectives On Sourcing Auction Vehicles

03.07.2017

Let’s imagine there are two dealers in the auction lane, bidding for the same car. The first dealer wants the car because he’s sold a few of the same units recently, and did pretty well in terms of front-end gross. The three-year-old car has about 40,000 miles, and looks/smells pretty good. The CARFAX notes the [...]

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