It’s here—the slowdown in new vehicle sales that many dealers and industry observers have expected to arrive for some time.taxincentive A Market Minded Path To Improved New Vehicle Inventory Profitability

As one analyst puts it, “the new car market is no longer growing, which means automakers now have to measure success in terms of market share, transaction prices, incentive levels and profitability.”taxincentive A Market Minded Path To Improved New Vehicle Inventory Profitability

This no-growth environment isn’t all bad news, however. Dealers are still retailing a healthy number of new vehicles. Analysts predict we’ll end the year at or slightly below total new car sales for 2015. Inventory levels are up, but not off the charts, thanks to more aggressive incentive spending by OEMS.

The big problem for dealers is making money in new cars, which a slowing market will only make more difficult for dealers to achieve.

The National Automobile Dealers Association reports that through the first half of 2016, new vehicle gross profit as a percentage of the selling price declined .5 percent. This dip translated to a 10.6 percent decline in front-end gross—from $1,164 in the first half of 2015, to $1,040 in 2016.

This margin compression will likely only get worse, as the margin-toxic combination of pricing transparency, factory incentives and stair-step programs, and the competitive nature of dealers advance the erosion of front-end gross profit.

As I’ve talked to dealers about these conditions, I’ve observed three responses.

The first group of dealers are doubling down on their efforts to improve, or at least maintain, their front-end gross profit objectives. They are trading off volume, and factory below-the-line rewards, in exchange for gross. The dealers can’t stomach effectively giving away new vehicles to meet factory targets. They also reason that higher inventory levels—a consequence of smaller sales volumes—are OK given historically low floorplan interest expense.

The second group of dealers are doubling down on their efforts to meet the factory targets and collect the bonus money. They accept an ever-larger share of little or no-gross new vehicle deals as a consequence of staying in good standing with the factory.

The third group of dealers are adopting what might be considered a more market-minded, Velocity-style approach to retailing new vehicles.

By using inventory management and pricing tools, they become students of their markets and inventories. They are acutely aware of the fastest-selling, highest-grossing vehicle combinations and colors for their markets. Conversely, they also determine the slower-selling, lower-grossing new vehicle combinations and colors. They apply both sets of competitive, car-specific insights to their new vehicle stocking, pricing and desking decisions.

The end result? They typically improve their front-end gross profits, improve inventory turns and meet their factory-set sales objectives.

I believe the third group of dealers is on to something, particularly as the new vehicle market seems destined to enter more troubled waters. Here’s one dealer’s take on how this third approach has helped improve his new vehicle operations:

“We were hurting ourselves with a sizable chunk of our new vehicle inventory,” says a Southwest dealer. “More than a third of our inventory was older than 90 days. I took a closer look, and all I saw was room for improvement—cars we shouldn’t have traded for, and others we ordered with the wrong color or equipment. Our pricing needed work, too. We had 100-day-old cars priced the same as fresh ones, and variables like color and trim didn’t matter as much as I now know they should.”

The dealer’s experience illustrates two realities that become painfully obvious to dealers who adopt a more market-based, Velocity-style approach to managing their new vehicle inventories:

  • There are too many older-age vehicles. It’s not uncommon for dealers to have nearly 40 percent of their new vehicles older than 90 days—which can mean $2 million to $3 million of a dealer’s new car investment essentially tied up in “dead stock.” Once understood, dealers set a new benchmark, working to minimize 90-day-plus units to less than 20 percent of their new vehicle inventories.
  • New vehicle pricing lacks sufficient science and sophistication. Like the Southwest dealer, many dealers tend to price new vehicles at the model/trim level, without accounting for an individual vehicle’s Market Days Supply, color, equipment, age and other factors. Not surprisingly, dealers who apply a more car- and market-precise approach to new vehicle pricing find opportunities to rightfully raise prices and earn gross, and instances where prices reflect an expectation for gross profit the car will never command.

In the coming months, I suspect we’ll see some debate over whether the new vehicle market is simply plateauing or fully headed south.

But for dealers, the debate won’t matter.

You’ll still face a more challenging market, ever-smaller margins and ever-greater factory expectations—three reasons why dealers who become better students of the market and stewards of their new vehicle inventories today, will fare better tomorrow.

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Committed. Loyal. Driven. Persistent. Scrappy. Family. Aggressive. Blessed. Humble. Competitive. Grateful. Energetic. Integrity. Passion.

These words came from individual members of vAuto’s Performance Management team as they introduced themselves to open their annual meeting today near our Chicago-area headquarters.

The introductions required each of the nearly 150 team members to describe themselves with a single word—a pretty cool and powerful way to kick off a meeting.

As I listened to the words and voices from around the room, I felt tears well up.

First, the words summarized exactly the characteristics and qualities that anyone in business, especially the car business, would aspire to live every day.

Second, the voices were unequivocally honest and sincere—a testimony, I believe, to the comfort and trust that comes when a group of people share a common goal of helping dealer clients, and relish their collective success.

Third, the descriptors perfectly matched the people and personalities that vAuto’s Performance Management leaders, John Griffin and Michelle Drinnan, work very diligently and hard to find and hire. They stick to their time-tested profile, saying “no” far more often than “yes” to potential applicants, even if it means more short-term strain and stress.

Six years ago, I worried that my decision to sell vAuto to Cox Automotive would make life more difficult and disruptive for everyone at vAuto, but particularly Performance Managers. They really are the front line fighters for vAuto, coaching and coaxing dealers to adopt new ways of thinking and operating their businesses to sell more new/used vehicles and make more money.

Today’s meeting affirms that my worries, while unavoidable, were unfounded. vAuto’s Performance Management team continues to be a shining, successful star for Cox Automotive and our industry. Day after day, they selflessly prove that when you give your best to dealers, they give back.

I feel grateful, honored, inspired and full of respect for this special, talented and uniquely gifted group of people.

vAuto’s Performance Management team deserves a public shout-out and thank-you for all they do for our dealer clients, our company and for me.

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Like most other Chicagoans, I’ve been paying close attention to the Chicago Cubs this year.

After a record-setting season, the team made it to the World Series, raising the hopes of many that 2016 could be the year that ends a 108-year title drought.

As I’ve tuned into the World Series games, I’ve been W Flag 300x205 3 Reflections On The Car Business and the Chicago Cubsstruck by three similarities between the way big league managers like the Cubs’ Joe Maddon and the Cleveland Indians’ Terry Francona lead their teams, and astute dealers tackle the challenges of retailing new/used vehicles in today’s more-volatile market.

1. Strategy matters. This year’s Cubs team follows a strategy that blends top-tier pitching with strong bats and sticky defense. The strategy for the Indians seems similar, though they appear to lean more on their bullpen for pitching prowess than starters. Each strategic pillar is equally important, and bad things tend to happen when one or more pillars falls short. Still, both teams have stuck to, and fine-tuned, their basic strategies all season. The best dealers follow a similar path. Their strategies encompass the types of new/used vehicles that work best for their markets, and they execute merchandising/pricing plans for each vehicle to achieve their gross profit and inventory turn objectives. Both big league managers and dealers study data that details insights about the competition, and their player/vehicle performance, to make tactical adjustments and decisions that they believe will yield a positive outcome.

2. Strong starts drive success. The first two World Series games highlight how strong starts affect the outcome of a game. In Game 1, Cleveland scored in the first inning; in Game 2, the Cubs scored first. Both teams went on to win the games. So it goes in the car business. If your vehicles don’t start strong, and sell early/fast, you face an uphill battle to earn the gross profit and return on investment you expect.

3. You win some, you lose some. The Cubs and the Indians have proven they know how to win. But, more importantly, they also understand that even the best teams will encounter, and endure, some losses. The same is true in the car business. You play the game with the cars you’ve got on hand, and the field, or market, that’s in front of you. The goal is to win more often than you lose—and to use the lessons from each loss to post more “Ws” on your books.

As I look ahead to tonight’s Game 3 and the rest of the Series, I also think of the prophetic lines the late/great folk singer and lifelong Cubs fan Steve Goodman penned in 1984:

“Well this is the year
And the Cubs are real
So come on down to Wrigley Field
(We’re singing, now)
Go, Cubs, Go!
Go, Cubs, Go!”

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A Telling Dive Into Used Vehicle Inventory Age and Front-End Gross

10.27.2016

For the past several years, I have been encouraging dealers to retail at least 50 percent of their used vehicle inventory in less than 30 days. In more recent months, I’ve upped the ante, urging dealers to retail at least 55 percent of their used vehicles in less than 30 days. This steeper operational standard [...]

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Shared Culture, People and Purpose Drive vAuto/Cox Automotive Success

10.10.2016

Today marks an important anniversary for vAuto. Six years ago, vAuto’s then-president Keith Jezek and I flew to Atlanta to sign the paperwork that brought our company into the Cox Automotive family. We’d had other suitors. There were other companies willing to pay the nine-figure sum we sought for vAuto’s 3,000-plus dealer client base, our [...]

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6 Benchmarks Top Used Vehicle Dealers Achieve to Outpace Others

10.04.2016

Most dealers agree that if you’re going to profitably and successfully sell a lot of used vehicles, there are many things you have to get right. With this thought in mind, I analyzed the inventories of 60 dealers that made this year’s Automotive News’ “Top 100 Dealership Groups Ranked By Used Vehicle Sales” report. My [...]

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A Used Car Operations Tune-Up With Tommy Gibbs

09.29.2016

I thought I’d put out a plug for my friend, Tommy Gibbs, who is hosting a half-day Used Car Workshop on Wednesday, Oct. 19, in Chicago. Tommy doesn’t do many public workshops. He’s normally busy traveling the country and meeting with dealers/dealer groups in private sessions where he helps them tune up their used vehicle [...]

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3 Reasons A Chief Complaint About Auction Purchases Falls Flat

09.15.2016

It’s not uncommon for dealers and used vehicle managers to complain that “we have to pay too much” to acquire auction vehicles. On one hand, I get it. The auction environment is one where complaints about cost are a natural reaction: It’s your imperative to acquire a vehicle for as little money as possible. Then, [...]

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Performance Matters Podcast Peels the Personal Onion

09.02.2016

I do a fair number of interviews with analysts, reporters, students and others interested in the automotive industry. As a general rule, the best interviews are really conversations, marked by a healthy exchange of ideas and perspectives. Likewise, the best interviewers are those whose curiosities, interests and personalities produce open-ended, thoughtful questions that inspire meaningful [...]

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3 Tips To Tune Up Your Used Vehicle Performance and Profitability

08.23.2016

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

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