I had the privilege of hearing Roger Penske, head of Penske Automotive Group, share his perspective on the car business today during a Q&A session with Cox Automotive president Sandy Schwartz.

The session is part of a Cox leadership team meeting this week in Fort Lauderdale, where we’re gathered to sharpen our knowledge and understanding of the challenges and opportunities facing dealers.

Now, in the interest of full disclosure, I should note that I hold a great deal of admiration and respect for Penske and his organization.

I’ve visited thousands of dealerships across the country over the years and, simply put, you can always tell when you’re in a Penske store. The facilities are consistently pristine, and every team member contributes to an unmistakable air of process, productivity and purpose in the dealerships. Based on these experiences, I’ve never been surprised as the Penske organization continues to build on its long track record of success and reputation as a top-performing dealer group.

In the Q&A session, Penske covered a lot of ground, but there were four key take-aways that struck me as instructive and relevant for every dealer:

  • The power of people. It’s clear to me that Penske and his organization put their people first. They place a high priority on recruiting, hiring and training people who fit well in their organization. They expect accountability, and they reward good performance with the additional opportunities and responsibilities good employees expect. As Penske shared his perspective, I couldn’t help but think that behind every great team, there’s a leader who views employees as assets, and champions the cause of proper human capital management.
  • Facility cost friction. Penske shared how his group has invested more than $2 billion in facility renovations and upgrades in the past few years. Penske wasn’t complaining; he astutely views the investments as part of a franchise dealer’s responsibility to maintain mutually beneficial relationships with factory partners. But Penske also noted the car business’ ever-accelerating shift toward digitally driven retailing. He openly wondered whether a dealer might be equally, if not more, successful in the future with just an “internet connection and a warehouse.” Ultimately, Penske’s observation points to what I’d call a growing gap between factory expectations for physical facilities, and the front-line realities dealers face with e-minded customers.
  • A customer trifecta. I liked how Penske framed today’s new/used vehicle buyers. You’ve got older customers, who buy at expected intervals and call “Charlie” when it’s time to make a vehicle purchase. There’s a second “hybrid”-like customer, who goes online and comes to the dealership armed with as much, if not more, information than sales associates. Millennials make up the third group, and their expectations require dealers to develop a meaningful and relevant presence in social media. Penske captured the key challenge and opportunity for dealers—how to serve each of these customer groups effectively, efficiently and equally well.
  • A “buffer” in tougher times. Penske touched on the cyclical nature of retail sales, noting that dealers will inevitably face tougher times ahead. His plan: Continue to build on the 42 percent of dealership gross profits that come from his service and parts departments. This emphasis on fixed operations performance and profitability creates a “buffer” that helps dealers weather more turbulent times in new and used vehicle sales. Penske’s correct, of course, and his point got me thinking: I wonder how many dealers will someday wish that they’d done a better job building their own “buffer” today, when times were good?

As Penske finished the session, I felt grateful for the opportunity to learn from one of the best in our business.

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If you ask dealers for their top complaint about the used car business, many will say it’s difficult, if not impossible, to acquire wholesale vehicles “on the money.”

Dig a little deeper, and the root of the complaint becomes clear—dealers believe they can’t make the gross profit they would like to see in their used vehicle department, particularly on units they acquire from auction.

Part of the complaint owes to market conditions. Front-end grosses on most used vehicles simply aren’t what they used to be, thanks to increased price transparency. National Automobile Dealers Association data shows that the front-end gross profit as a percentage of the sales price of used vehicles has declined 20 percent over the last several years and, judging from recent industry reports, the downward trend continues.

But I would submit that the real reason dealers find auction cars profit-problematic owes to the ways they identify, purchase and manage these vehicles as part of their broader inventory management strategy.

Let’s take a closer look at each:

usedcars 01 300x161 3 Essential Steps To Maximize Gross Profits On Auction CarsIdentify: It used to be OK to just go to the auction and buy some cars. Not anymore. The market’s too competitive, transparent and volatile for such gut-driven guesswork. The best dealers today know exactly what they plan to buy before they spend any time in the lanes or online. They are extremely precise, as well, placing the highest priority on cars that meet the color-, condition-, equipment-, mileage- and profit-parameters that fit their market. Most use technology and tools to achieve this level of precision, purpose and specificity with their auction buy lists. It shouldn’t be too surprising that dealers who operate in a less sophisticated manner often have the most difficulty finding the right cars.

Purchase: Today’s best dealers approach the purchase of an auction unit the same way. It’s a dispassionate, stone-cold analysis. They assess whether they can buy the car they need on the money, with precise knowledge of the profit to expect, given how much they’ll pay for the car and put into it. They use technology and tools to estimate all the cost inputs—acquisition price, packs, post-sale inspections, transportation, and other fees, and determine their potential gross before the bidding starts. Likewise, these dealers are disciplined. They rarely purchase outside their pre-set parameters and, when they do, they have a very good reason.

Manage: Top-performing dealers know that, in today’s market, auction cars represent their most costly and risky used vehicle investments. This understanding drives the care and precision they apply to consistently knowing the right cars and buying them on the money. But this understanding carries further—to each day and every stage the dealer owns this more costly and risky investment. Auction cars get more attention and scrutiny in reconditioning, in online merchandising and in the ongoing reviews of asking prices compared to trade-in vehicles.

This level of extra-scrupulous management oversight is necessary to maximize profit and minimize risk. As one dealer put it, “I don’t like to have any over-age vehicles in my inventory, but I absolutely hate it when we let auction vehicles age. More often than not, we end up with a loss we could have avoided.”

Dealers who strive to heed these three best practices will typically find improvements in their front-end gross profits. Such gains stand to reason: They’ve got the right cars, they bought them correctly and they’ve done everything they can to maximize each unit’s return on investment.

These dealers may still believe that front-end gross profits aren’t what they should be for auction-sourced inventory.

But this belief is more of a commentary on current market conditions, and the all-points effort that’s now required to optimize used vehicle performance and profitability. These dealers understand there’s money to be made with auction vehicles if you have the fortitude and know-how to make it.

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TJ Riley isn’t your typical independent car dealer.

For one thing, he’s a lot more disciplined than many franchise and independent dealers when it comes to buying vehicles at auctions.

“If you walk out to the Dallas Auto Auction on a Wednesday, it’s just eye-opening the amount of dollars changing hands, based solely on the hairs on the backs of people’s necks. There’s so much opinion, experience and perception driving decisions. There are also other motivations, like your boss said, ‘we sold 50 cars last month, let’s go get 50 more.’ Well, 50 more of what? Should we just go out and buy anything because you need them? These things happen at the auction every day. As an outsider coming into our industry, it’s mind-boggling.

“We ask ourselves two questions, every day. What is the right car, and what is the right price?” he continues. “If you can solve those two questions, and you know the answers as fact, you will win.”

Riley’s disciplined, efficiency-minded perspective follows the lessons learned and successes he achieved as an entrepreneur in construction and manufacturing.

“I gained a lot of understanding about process flow, especially in manufacturing,” he says. “Efficiencies, because of the margins manufacturers have to deal with, is the only way you can survive.”

Riley initially joined the Fort Worth, Texas-based Net Direct Auto Sales as an investor four years ago. He cites several “hard knocks,” mostly associated with buying the wrong cars at the wrong prices, as the catalyst for increasing his operational and ownership stake in the dealership.

Riley and his team set out to sell 25 to 40 vehicles a month—a goal they’ve long since surpassed as they’ve focused on market data and metrics to guide their decisions. The dealership specializes in trucks, a niche Riley identified as under-served and prime to deliver first-mover advantage.

I met Riley at the recent National Automobile Dealers Association (NADA) convention in Las Vegas. I found him to be a sharp student of the business, whose thinking on several fronts seems relevant to share:

Moneyball and used cars: Like me, Riley loved the way former Oakland A’s manager Billy Beane ditched traditional scouting reports, relying instead on player performance data to make roster decisions—the primary focus of Michael Lewis’ book, Moneyball. Riley takes the same approach to his inventory; it doesn’t matter if a buyer thinks a car is a good car, or that it might work. The data has to prove the case before he’ll make the investment.

“Here’s why the car business is so much easier than baseball,” Riley adds. “A car doesn’t wake up and have a bad day. It is what it is. A car is a commodity item. In baseball, or any other sport, there are a mass of human factors that are uncontrollable. A guy has a great year, something happened in his personal life, and he’s not the same player he was. That risk is really mitigated in the car business. The car business is really no different than if I’m trading pork on the market.”

Failure-friendly acquisitions: Across the country, dealers bemoan the effort and time it takes to properly acquire auction vehicles. Riley finds acquisition advantage by making failure a priority. “Our motto is we need to look at four times the average amount of inventory other buyers will look at every day. We have to appraise three times as many vehicles as the average buyer, and we have to be unsuccessful at a three times greater rate,” he explains. “So even if we are unsuccessful at a three times greater rate, but we’ve looked at quadruple the amount of cars and triple the number of appraisals, we still get the inventory we need. The hope is we’ll find the right cars at the right price. It’s just old-fashioned hard work at that point. My job is to make my buyers more and more efficient so that they can do this every day and not kill themselves. The ultimate goal is that they spend their time not on searching for cars, but working on the relationships, so that when they know the right car and the right price, and where it’s located, they have the right relationships in place to get the car.”

Continuous risk reduction: Riley views the used car business as akin to legalized gambling—where the person with the best math will win. “The best mathematicians work at NASA and Las Vegas. They have the metrics to reduce the gamble to as little as possible. You’re never going to get all of the risk out of any business, whether it’s Las Vegas or Wall Street or the car business. But your job as a dealer is to come in every day and reduce the gamble or risk you have in your investment.”

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vAuto’s Mandi Fang Earns An Automotive Honor

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I love it when somebody I know gets recognition they deserve. Many years ago, I found myself on the opposite side of a table with a very impressive woman. I remember her tenacity as a negotiator, as well as her command of minute details related to the deal at hand. She stood tall at a [...]

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4 Ways To Turn Auction Cars Into Advantage At Your Store

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You could say auction cars offer a blessing and a curse for dealers. The blessing is that auction cars are always available—offering a way for dealers to acquire inventory they need that they can’t get through trade-ins. For most dealers, auction cars make up 30 percent or more of their used vehicle inventory. But auction [...]

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NADA 2016 Wrap-Up: A Few Thoughts As The Convention Closes

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For much of the past year, I’ve been concerned that dealers might be forgetting that the car business is cyclical. I worried that dealers would take the past five-plus years of record-setting growth in new and used vehicle sales for granted. That they would overlook the reality that the good times simply can’t last forever. [...]

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NADA Day 3: A Touching Moment That Inspires And Transcends

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I need to go off the reservation for today’s NADA dispatch. It’s not that today’s time on the NADA exhibit floor wasn’t noteworthy. Rather, it’s because something far more personal and profound occurred elsewhere—at the Baccarat Bar at the Bellagio Hotel. Something that brought tears to my eyes, and that I’ll treasure forever. I had [...]

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NADA Day 2: A Few Firsts From The Floor

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It was a lively, long day on the exhibit floor at NADA on Friday. A dealer joked, “Dale, I heard things weren’t going so well, and that you’re selling socks at NADA this year.” The truth is, I was giving away Stockwave-themed socks as part of our launch of the innovative wholesale sourcing solution. I [...]

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NADA Day 1: Cox Lays Plans For A Successful NADA

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I had an eye-opening thought while standing before hundreds of Cox Automotive team members gathered for pre-NADA meetings here in Las Vegas. In all of the 47 years I’ve come to NADA, there’s never been a company with the scale and scope of produc ts and solutions that Cox Automotive offers to dealers—as well as one [...]

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Final Countdown: Stockwave Is Set To Sail At NADA

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Thanks to the Cox Automotive family, Stockwave has started strong. We’ve signed up hundreds of dealers in our lead-up to Stockwave’s official debut at the National Automobile Dealers Association convention in Las Vegas. It’s really a proud moment for all of us at Cox Automotive, given that Stockwave represents the first broad-scale example of our [...]

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