It’d be wise for dealers to take a deeper look at three aspects of their used vehicle inventories:

  1. What percentage of your used vehicles are less than three years old? How does this figure compare to a year ago? For many dealers, 52 percent of their used vehicle inventory is less than three years old, according to Edmunds.com. The number represents a seven percent increase from 2011. The prevalence of “near-new” vehicles owes to the ongoing increases in off-lease vehicles returning to the market and dealers’ efforts to maximize their certified pre-owned (CPO) sales.
  2. What’s your average cost of used vehicle inventory? How does this figure compare to a year or two ago? For many dealers, the average cost of inventory has increased by nearly double-digit percentages in recent years as they’ve pursued CPO opportunities, kept off-lease vehicles for retail and played to consumer demand for SUV and truck segments.
  3. What percentage of your new vehicle deals involve trade-ins? What’s the average age of those vehicles? For many dealers, there’s been a fairly steady decline in new car deals that include trade-ins. Industry stats show it’s dropped to about 45 percent. At the same time, the average age of new vehicle trade-ins is about six years old.

I’ve been raising these questions with dealers recently as we address ways to improve their used vehicle performance and profitability.

In many instances, dealers are having a decent year volume-wise in used cars. The problem: They’re finding it harder to move the needle upward, both in the number of units they put across the curb, and in the gross profit they generate with each retail sale.

It’s my belief that these performance difficulties owe, at least in part, to the declining diversity of used vehicle inventories. Tomixed inventory 300x102 3 Tips To Tune Up Your Used Vehicle Performance and Profitabilityday, these inventories often feature a larger share of higher-dollar, near-new vehicles than in recent years past. On the surface, this trend isn’t necessarily a bad thing.

But it suggests a shift in operational focus toward the “easy pickings” in today’s market, and a step away from maintaining a used vehicle inventory that appeals to broader segments of potential buyers. As my colleague and friend Tommy Gibbs puts it, dealers are in the “newscar” business rather than the “used car business.”

Here are three tips I share to help dealers counter-balance these market trends and optimize their used vehicle inventory to increase performance and profitability:

Mind your average cost of inventory. The most-successful Velocity dealers keep a constant eye on their average cost of inventory. The goal: Whatever the current average, you should aim to keep it trending down, not up. The vigilance results in decisions to acquire and retail lower-cost, slightly older inventory to complement and contrast a dealer’s factory CPO business. The older-age inventory can also offer the potential for a faster retail sale due to lower Market Days Supply metrics.

Maximize your trade-in opportunities. Top-performing dealers say their best appraisers do two things: They achieve look-to-book ratios at 50 percent or better, consistently take in vehicles at a Cost to Market ratio near, and preferably below, 80 percent, and diligently record every appraisal for accurate performance data. Such efforts ensure that you make the most of every trade-in opportunity, balance the sometimes competing needs of your new and used vehicle departments, and shape a more diverse inventory.

Minimize your average inventory age. I advocate that dealers should maintain at least 55 percent of their used vehicle inventories under 30 days of age. This operational standard owes to today’s ongoing margin compression and market volatility—factors that combine to erode the retail shelf life of used vehicles. More and more, if you don’t sell used cars quickly, you won’t maximize gross.

Dealers who apply themselves to these best practices often don’t see dramatic, overnight improvements in their used vehicle performance and profitability. It takes time for managers, buyers and others involved in used vehicle operations to break old habits and develop (or re-develop) the process discipline and consistency that puts the benefits these best practices offer within reach.

As a Northwest dealer recently put it, “You’re right, Dale. If this stuff was easy, everybody would be doing it.”

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I recently asked a group of about 20 dealers and used vehicle managers a series of questions:

How many of you mow your own lawns? No one raised a hand. After some discussion, it was clear that each individual felt their time was better spent doing something else.

How many of you get your groceries delivered? Several hands went up, with comments like “I don’t have time for that” and “The convenience outweighs the cost.” Among those who still shopped at grocery stores, most also ate delivered/take-out food at two or three times a week.

How many of you use a cleaning service for your home? Most raised a hand, with several noting they and their spouses simply couldn’t keep up with housework given career demands and children.

In sum, the dealers all agreed that each example represents the rise of household outsourcing—where a third-party provider offered a better, faster, cheaper or more convenient alternative for the dealers and their families than doing these tasks themselves.

Next, I turned the tables. I asked the dealers if they’d ever consider outsourcing some of the work they’ve long regarded as the sole priority and province of their dealerships—specifically the acquisition and reconditioning of used vehicles.

I wasn’t surprised by the responses. Only a couple of the dealers said they’d consider this type of outsourcing. As one put it, “We can buy and recondition the cars better ourselves. Plus, we’d give up the internal gross profit for recon to someone else. It doesn’t make sense.”

Years ago, I would have wholeheartedly agreed with the dealer’s assessment. One of the most beneficial aspects of today’s typical dealership business model is the ability to make money at each phase of a used vehicle’s lifecycle. Indeed, in some cases, the internal and back-end gross a dealer pockets from a retail used vehicle sale represents the only gross profit opportunity, given margin compression and market volatility.

But I’m starting to question whether this sacred cow—of doing the vehicle acquisition and reconditioning work yourself—is no longer the no-brainer decision it used to be. I’ve arrived at this way of thinking for three reasons:

1. Larger dealer groups are opting for outsourcing. Perhaps the best example of this trend is the partnership between Sonic Automotive and Manheim, wherein the auction company buys the cars and makes them retail-ready. Sonic views the arrangement as one that drives greater efficiency and profitability for their used vehicle operations. In a recent AutoRemarketing article, Sonic CEO Scott Smith noted some of the benefits the group expects from the Manheim partnership: “We don’t have to build the facility to recondition cars. We don’t have to have the buying team. We don’t have to have all the technicians, all the staff, everything you have to have, so the economics will be significantly better.”

2. Vehicle acquisition and reconditioning efficiency remain persistent challenges for dealers. All of the dealers in the group admitted they wished they could more quickly acquire and recondition vehicles. A few dealers noted they consistently recondition vehicles in two days or less, thanks in part to reconditioning teams and resources dedicated to the task. For most, however, the standard reconditioning time runs closer to five days or more. Every dealer acknowledged and understood that they’d make more money if they minimized the cost and time it currently takes to acquire and make their used cars retail-ready.

3. Pressure to outsource will only grow more pronounced. I was struck by one dealer’s story as he and his wife decided it’d be best to hire a lawn service. The dealer considered mowing the lawn an important responsibility, particularly for the example it set for his young son. But every weekend, he found himself fighting for lawn time, while his wife protested that the time should spend it with the kids. Over time, I’m convinced dealers will face a similar trade-off as market realities and diminished profitability push them to consider outsourcing options that, at the moment, rub them the wrong way.

Make no mistake, I am not advocating that dealers rush to outsource their used vehicle acquisition and reconditioning work. I am, however, suggesting that the time appears to have arrived where these sacred cows may no longer be as sacred and smart as dealers have long believed.

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Nearly a decade ago, I met Brian Benstock, general manager and vice president of Paragon Honda and Paragon Acura in Queens, N.Y.

At the time, Benstock thought he was doing pretty well in used vehicles. He retailed 80 units a month, and boasted a front-end gross profit that beat many other dealers.

But I wasn’t particularly impressed.

paragon 300x77 A Dealer’s Evolutionary Velocity Journey In Used VehiclesI was concerned about the cars Benstock wasn’t selling—the roughly 200 units that had aged well past 90 or 120 days in his inventory. With his pace of sales, Benstock turned his inventory less than three times a year, and carried $1.5 million in wholesale losses and uncounted opportunity cost. Yet, it didn’t seem to matter.

Today, Benstock and his team retail 300 vehicles a month. He consistently turns his inventory a remarkable 25 times a year. He sells more than half of these units within 15 days after he owns them. Front-end gross still matters, but Benstock uses a different formula to measure his performance–dollars-per-inventory-space-per-day. With that yardstick, Benstock’s used vehicle department generates $153/space/day now, compared to $60 back then.

“We used to have substantial gross per used vehicle retailed and little concern for the masked cost of aged units,” Benstock says. “Today, our front-end grosses are still healthy for the market, and there’s no water. We’ve also seen a big lift in gross profit, plus a 10-fold increase in internal labor profit for reconditioning. On top of that, we’ve got a lot more customers.”

Benstock describes his prior approach to retailing used vehicles with an iceberg analogy: “Usually, about three-quarters or more of an iceberg is underwater. We were quickly turning the small portion of the iceberg above water. Every month, the portion under water would get bigger and bigger and bigger. ”

I asked Benstock to share insights from his turnaround story to help other dealers increase the pace and profitability of their used vehicle sales.

Take the pain. “The pain is correcting the price of the cars that are underwater and to putting in strategies, habits, behaviors and disciplines to prevent your current cars from becoming old cars,” Benstock says. “We took the medicine over a 10-12 month period. At times, we had to price the old cars at several thousand dollars below cost. We told everyone it was going to hurt and, in the end, you’ll do better. It did hurt and, in the end, we got much, much better.”

Dump traditional pricing. “The mistake that we used to make, and many dealers still make, is putting the car out there high in the first 30 days to see if they can get lucky. With the efficiency in the market today, there is no getting lucky. I’ll ask the question: If oil is $30 a barrel, how much oil could you sell at $32 a barrel? The answer is not a drop. The same thing has happened with cars. The dealer who says, I’m going to get some gross and put my cars, or oil, out there at $35 a barrel, isn’t going to sell any. All he’s going to do is age his cars and play catch-up to the market.”

Revise your rulers. “If you asked how I measured aged units in 2007, I would have told you it’s a 100-days. If you asked today, I would tell you it’s 29 days,” Benstock says. This thinking reflects the reality of today’s more efficient, price-transparent and volatile market. The retail shelf-life of vehicles isn’t what it used to be. To manage this challenge, Benstock tracks vehicle age by buckets, and prices accordingly. Initially, the oldest bucket included units aged 120 days or more. Over time, the oldest age bucket became 90 days. Then 60. Then 45. Now, it’s 30 days.

“We moved the moat,” he says. “When we made 30 days the cut-off, we moved the moat to 18 days. That’s when the yellow warning sign starts flashing and you really look at the vehicles and ask, ‘what’s wrong with this car?’”

Keeping pressing for improvement. A couple years ago, I had the pleasure of a morning run with Benstock in Central Park. He set a persistent pace, one that picked up the longer we ran. He applies the same approach to managing used vehicles. Not long ago, I challenged Benstock and his team to maintain a benchmark of no less no less than 25 percent of their inventory in the 30-day-plus bucket (it had been hovering above 35 percent). Sure enough, within a month or two, Benstock had only 15 percent of his inventory in the 30-day-plus bucket, a standard he’s impressively maintained ever since.

If there’s one thing that underscores Benstock’s Velocity journey, it’s his persistent drive for ever-greater return on investment and success for his dealership and team.

“We strive to be above the top performers,” he says. “The used car business is really a business of math and metrics. If you have it all set up correctly and you execute, everything falls into line.”

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