My Facebook feed brought a pleasant, if random, surprise the other day.

A childhood friend, Jim Ballard, shared a YouTube video (below) from a guy who apparently explores, and films, scenes in and around Gary, IN, where I grew up. In fact, Ballard and I were next door neighbors.

For whatever reason, the videographer chose to document what remains of the former Len Pollak Buick and Opel dealership (7301 East U.S. 20), which my father built and opened in 1969.

I remember how excited we were to see the construction started in 1968. I also remember my parents’ disappointment (and resolve) when a tornado wiped out the initial work.

I remember working on the construction site with my older brother, Mitch. We were clean-up guys, who dutifully picked up wood scraps and pieces of metal, and stacked enough bricks to last a lifetime.

I remember how the facility’s final $1 million price tag (nearly $7 million in today’s dollars, I’m told) seemed astronomical.

I remember playing hide and seek with my brothers and friends just about anywhere we could get away with it. I remember sitting at desks, waiting for my Dad after hours, pretending we were making car deals.

In the video, the videographer asks viewers to share any background or history they might know about the facility. I figured, I’m the guy. So here goes:

A focus on efficiency: Until I watched the video, I hadn’t thought much about how my own emphasis on operational efficiency links to my Dad’s days as a dealer. He designed the dealership to optimize efficiency. You can see it in the video. Every service bay has its own door, to ensure efficient movement of cars on and off lifts. Our service dispatcher worked in a tower, to keep an eye on work and allocate jobs the most efficiently. We had separate make-ready areas for new and used vehicles to keep the service department focused on customer pay/warranty work, and to optimize this experience for customers.

A standalone used car department: The video shows a smaller building, which my Dad built for our used car department. At the time, most dealers housed their new and used vehicle operations in the same building. My Dad thought used vehicles deserved its own space. This building is where I learned how to sell cars, and made my first deal on a 1972 Chevy Vega. The building also had an air conditioned, cork-lined room that housed a mainframe computer—another nod to my Dad’s progressive take on the business.

My tie trick. After college, I started out at the dealership as a customer relations manager, and later earned a promotion to after-sale manager. I had four protection products to sell– rust proofing, undercoating, paint shield and fabric guard. At least six times a day, I’d congratulate a customer on their purchase and start my spiel. Inevitably, I’d dip my tie in a cup of black coffee to demonstrate how fabric guard would help customers keep stains off their car seats.

A legacy that lives on. The video made me think of key people from my early days in the car business. My first hire was Jerry Cleek, who helped me build our AMC Jeep business in the early ‘80s. When we sold the dealership, it was the No. 2 Buick store in Indiana. The buyers were my Dad’s longtime partners, Jack Kerr and Bob Nielsen. Their families remain in the car business with other stores in Northwest Indiana.

The video was also a little heart-breaking to watch. The dealership buildings where I’d played as a kid and worked as a young adult, are largely abandoned. The magic of the place seems long gone.

In some ways, the current state of the dealership is like much of the Gary area today—a mere shadow of its former glory as a progressive, vibrant place to do business and provide for a family.

My hat’s off to the videographer for choosing to explore my family’s former dealership, and the opportunity to stroll down memory lane and share a little history.

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If you had the unfortunate experience of living in a house where the ceiling was slowly collapsing, you’d face one of two corrective choices.

First, you could prop up the ceiling. I imagine this would involve using 4’ by 4’ posts, or maybe a metal beam, in the spots that sag the most.

Second, you could lower the floor. I’m not an architect or a contractor, but I suspect both would think that, while doable, a lower floor is only a costly, temporary fix.

I share this analogy because it represents the situation facing dealers in their used vehicle departments. There’s just not as much room between the ceiling (or prevailing retail prices) and the floor (the cost to acquire a vehicle) as there used to be.

Velocity dealers see this reality first hand. They know that the Price to Market ratios where many vehicles retailed in years past are lower today. They also know that this top-down pricing pressure makes it more difficult to consistently acquire vehicles at the Cost to Market benchmarks they previously achieved.

The reasons for the ceiling collapse in used cars shouldn’t be any surprise. Today, we face a much more efficient, fast-moving and transparent market. These market forces may not be colluding, but they are most certainly colliding, which puts unprecedented pressure on retail prices.

Some dealers point to the rising cost of used vehicles, particularly those they acquire at auctions, as a primary cause of ever-smaller front-end margins.

The observation is fair. But it misses the fact that the rising cost of vehicles wouldn’t be a problem if retail prices rose accordingly.

Unfortunately, that’s not the situation we face. Just because you spent $15,000 to acquire a vehicle doesn’t automatically mean it’ll retail for $17,000 or better. In today’s market, chances are better than good that the $15,000 unit will require a retail asking price around $16,000 if you expect it to sell in a timely manner.

The good news is that when dealers understand that margin compression is like a collapsing ceiling, they can take steps to mitigate its harmful effects on their used vehicle performance and profitability.

I typically recommend three operational fixes for the ceiling collapse problem:

1. Focus on investment quality. To use the house analogy, this strategic emphasis is like assessing the strength of each vehicle’s retail ceiling before you acquire the car.

For example, if you’ve got vehicle with sufficiently low Market Days Supply and Cost to Market ratios, you probably have a vehicle that’ll stand tall in the market for a longer period of time.

Conversely, if a vehicle has high Market Days Supply and Cost to Market ratios, you’ve got a unit that’s already weighed down by retail market pressures. By definition, it’s a less-sturdy car that represents an investment return that’ll sag more, the longer you own it.

2. Price to maximize your return. Stock investors should know the price point at which they will either make or lose money on an investment, before they choose to invest.

In today’s market, dealers should similarly align their pricing strategies to the investment outcomes each vehicle represents. If it’s a high-, middle- or low-gross unit from Day 1, your pricing should reflect this time-sensitive reality.

This approach is akin to accepting the fact that, in a house with a collapsing ceiling, there are some spots where you can stand, and others where it might be difficult to sit, or even crawl.

3. Fix your floor. Some dealers have gone too far in trying to lower the floor, or Cost to Market, in their used vehicle departments. They’ve pushed ever harder to acquire auction and trade-in vehicles with lower Cost to Market ratios than they targeted in the past.

On the surface, this approach makes financial sense. Who wouldn’t want to do all they can to increase the space between the retail ceiling and acquisition floor, and make more money?

But it’s a problematic practice, particularly if applied in a one-size-fits-all fashion. That’s when appraisers and buyers miss or overlook vehicles that would be perfectly good retail units except for the less-than-favorable (and often arbitrarily set) Cost to Market ratios.

The best-performing Velocity dealers recognize that while Cost to Market matters on every used vehicle, today’s margin-compressed market requires more flexibility.

Just like baseball, the dealers know that you can score runs without hitting homers every time you’re up to bat.

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When I was a dealer, we thought we were doing a pretty good job if we managed a .5:1 used-to-new-vehicle sales ratio.

If we retailed 50 new Cadillacs a month, I expected that we would also sell 25 used units, which were almost always Cadillacs.

A recent Automotive News piece suggests that, since I was a dealer 20 years ago, the used-to-new vehicle sales ratio for many dealers hasn’t significantly changed—despite my sense that most dealers express a clear desire to retail more used vehicles to offset growing margin compression in their variable operations.

So what gives? Why haven’t dealers been able to make more significant gains in used vehicles? What known/unknown factors might be holding them back?

These are the questions that came to mind reading the Automotive News article. It focused on the used-to-new-vehicle ratios among its top 100 dealership groups. Less than 20 groups—18, to be exact—achieved a 1:1 used-to-new ratio and, among those, only nine achieved a 1.25:1 ratio.

My Cox Automotive colleague Les Abrams shares my view that, for today’s dealers and margin compressed market, a 1:1 ratio suggests you’re doing a “good” job, and a 1.25:1 (or better) ratio indicates a “great” job.

Such performance levels help you light up what I’ve long called the “wheel of fortune” in your dealership—the gross profit opportunity every retail used vehicle sale represents for your service/parts department, your F&I office, your used car department and, yes, for your new vehicle department.

But these higher levels of performance appear elusive. National Automobile Dealers Association (NADA) data shows that while the used-to-new-vehicle ratio has nudged forward in recent years, it seems to stubbornly hover around .75:1.

For the past 10-plus years, I’ve been blessed with the opportunity to help dealers improve their used vehicle performance, in part by encouraging them to make the 1:1 ratio a primary objective. My work has also allowed me to see and understand why some dealers struggle to make the wheel of fortune spin faster at their stores.

Here are three common factors that diminish used vehicle performance:

A front-end vs. “total gross” mentality. I’ve long made the case that today’s market is too efficient and transparent for dealers to get the front-end gross profits they believe their used vehicles should deliver. They get frustrated, and they double down on the “let’s get gross” strategy. Unfortunately, today’s market isn’t likely to reward traditional gross-building tactics like waiting for the right buyer, or setting your asking prices above the market. Both tactics result in older-age units, deeper “get ‘em out of here” spiffs and discounts and less overall profitability. These tactics also slow the wheel of fortune.

The better way, I believe, is that dealers should adopt a more investment-minded, total gross mentality. With it, dealers learn to take losses and low-gross deals in stride. Their average front-end gross is important. But it’s even more important that they turn used vehicle inventory to generate consistently higher returns across every dealership department.

Too-picky vehicle preferences. Some dealers are pretty picky about the used vehicles they’ll retail. They’ll pass on units their market wants in favor of those they prefer to sell. To some degree, this thinking makes sense, given dealer desires for differentiation and specialization. But top-performing used vehicle retailers have long ago shed their preferences in favor of market and financial particulars that affirm they can quickly retail a vehicle, and make money, if they acquire it.

A related point: I understand some dealers face factory pressure to meet certified pre-owned volume targets, which can tie up capital and management attention that might be better deployed on different inventory. To be sure, dealers need to play ball with the factory. But let’s remember: It’s your ball, and your playing field.

Process inefficiencies. Every used vehicle department has a lot of moving parts and processes, each of which affects the other. Whenever I hear a dealer share his/her struggle to improve their inventory sales velocity and turn, we’ll often uncover unnecessary inefficiencies with appraisals, reconditioning, merchandising and pricing. Dealers must recognize that in today’s more efficient market, time to market and time on market, must be compressed to maximize performance and profitability.

I hope this discussion helps you assess where your current used-to-new-vehicle ratio stands, and craft next steps to improve your used vehicle performance through the remaining months of this year.

After all, in today’s unforgiving market, if you’re not getting better, you’re getting worse.

 

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3 Pillars Of A Stellar Used-to-New Vehicle Sales Ratio

05.07.2018

A recent Automotive News article discussed how, even among top dealer groups, it’s difficult for some dealers to achieve a 1:1 used-to-new-vehicle sales ratio. The article noted that among the top 100 dealership groups ranked by used vehicle sales, less than 20 groups achieved a 1:1 used-to-new ratio and, among those, only nine achieved a […]

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A Dealer in Distress

05.04.2018

I received the below note from a dealer experiencing a very stressful Spring selling season, but probably not for the reason you think. Note from dealer: Hey Mr. Pollak, hope all is well and you are having a blast doing what you do. Wanted to say hi and give you an update from your biggest […]

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Automotive News Addresses Used Vehicle Margin Compression

05.03.2018

This week’s Automotive News includes an article that addresses the very real problem of ongoing margin compression in used vehicles. The piece quotes my colleague, Cox Automotive economist Jonathan Smoke, and me sharing our views on the factors behind the -$2 average net profit per used vehicle retailed that dealers achieved in 2017, a figure […]

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Three Pointers To Maximize Purchased Unit Profitability

05.02.2018

I’ve heard more complaints lately from dealers that it seems impossible to acquire wholesale inventory and make the front-end gross profit they expect. Indeed, if you compare the typical Cost to Market metrics for purchased and trade-in units, you can see why some dealers are complaining. The typical Cost to Market range for auction-purchased units […]

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4 Corollaries From the Facebook, Dealer Data Fronts

04.16.2018

I’ve been following the controversy involving Facebook and its user data. The debate and discussion remind me of an issue that’s very familiar to dealers—how dealership data is handled and monetized by some technology partners. To be sure, the particulars of the issues facing Facebook and dealers are different. But there are four apparent corollaries […]

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3 Opportunity Costs You Should Consider Trimming

04.10.2018

As more dealers think of ways to adjust to today’s margin-compressed environment, cutting costs becomes a primary topic of conversation, if not decisions. It’s a good exercise. It points your attention to how you’re spending money. It prompts you to examine whether these investments deliver the return on investment (ROI) they should. But I caution […]

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Margin Compression Takes A Bite—How Will You Bite Back?

04.02.2018

For many dealers, margin compression in used vehicles has been a bit like a leaky water line. The truth is, the line’s been slowly dripping for years. But no one really noticed it until now—after a ceiling or wall has started to bubble, crack or crumble. Dealers’ awareness of margin compression seems to have taken […]

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