It’s not uncommon for dealers and used vehicle managers to complain that “we have to pay too much” to acquire auction vehicles.

ManheimAuction 300x225 3 Reasons A Chief Complaint About Auction Purchases Falls FlatOn 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, bidding starts and your numbers just don’t add up to what’s happening in the lane. On top of that, if you do make a purchase, you’ve got other costs for the actual transaction, inspections, transportation and other factors.

In some ways, it’s no wonder that nearly every dealer I talk to believes “we have to pay too much” for auction vehicles.

But the complaint starts to ring hollow when you drill into the specific ways many dealers determine what they should pay for an auction vehicle, and how effectively they stick to their acquisition game plan when they’re in the lanes and online. In my conversations with dealers, I’m often able to find three areas where dealers could do a better job identifying and sizing up potential auction purchases and making more investment-astute purchase decisions.

The size/scale of your sourcing network. An independent dealer outside Minneapolis recently shared that he’s cut his acquisition costs auction cars by about 10 percent in the past six months. How? The dealer is looking for specific units across a wider network of auction sources. “I never really looked beyond our local auctions,” says the dealer, who retails about 80 units a month. But, with the help of technology that shows him available vehicles across the country, he’s buying vehicles from auctions he never previously considered. “I bought a mini-van from Phoenix the other day for 15 percent less than I could have acquired it here, even with transportation,” he says. “I used to think I didn’t need to go beyond my backyard, until I saw the cars.”

Vehicle financials. It’s increasingly common for dealers to use a “retail-back” approach to determine how much they can pay for a particular auction vehicle. That is, they’ll assess the current retail market, the competing cars and prevailing retail prices, and then subtract their expected gross profit and related costs (e.g., buy fees, recondition, packs, transportation, etc.) to figure out how much they can pay.

When dealers complain “we have to pay too much” for auction vehicles, I’ll ask to unpack their formula to assess an auction vehicle’s financials. In many cases, I’ll find sizable allowances for front-end profit, reconditioning and packs. For example, a used vehicle manager at a Southwest Toyota store approached every car with a $2,000 front-end gross profit, $900 for reconditioning and an $800 pack. I asked the obvious question: “How often do you find vehicles where these numbers actually pencil out?” His response: “Rarely, if ever.”

After some discussion, the manager agreed that his formula for auction vehicle financials needed a make-over. For starters, we aligned his front-end profit expectations with his current front-end retail average (a $450 difference). We did the same thing with reconditioning (a $200 difference). We also agreed that he’d be better off with a lower pack for auction vehicles, something he pledged to negotiate with his dealer. In the end, the manager agreed that if he’d been using his revised formula, he’d likely be complaining less that “we have to pay too much” and he’d be a more efficient and productive auction buyer.

Purchase discipline. “I’d get so impatient, and tired of losing cars, I’d just buy them.” So goes the reaction of many dealers and used vehicle managers to today’s auction-buying experience. The problem, of course, is this frame of mind often results in paying too much for auction vehicles. The key? Sticking too your guns, even if it causes anxiety and heartburn. The fact is, used vehicle margins in today’s market are too thin to let emotions cloud a good investment decision. In addition, it’s important that dealers recognize there are, in fact, perfectly good reasons to seemingly “pay too much” for a particular car. “I’ll pay extra for a vehicle with a Market Days Supply below 70,” says the used vehicle director at a three-store group. “I’ll make a little less on the front-end, but I’ll sell the car quickly and pick up back-end and service gross. I’ll take that deal all day long.”

In the end, my goal in sharing these points isn’t to diminish the difficulty of properly (and profitably) acquiring auction vehicles. It’s really to suggest that when you consistently hear the “we have to pay too much” for auction cars complaint, it’s likely a symptom of a self-inflicted problem.

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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 responses. A journalist friend describes the interview process as “peeling the onion.”

A few weeks ago, I was the “onion” on Performance Matters with Garrett Jorewicz, senior director of operations for NextGear Capital.

Some background: Garrett’s podcast is his brainchild. He launched it as a way to primarily help his NextGear colleagues better understand their business and its connective tissue to other parts of Cox Automotive. The podcast struck me as a cool idea, and I made time for it on my calendar.

During the interview, Garrett proved to be a good interviewer. We discussed Stockwave, my books and a few personal things.

Here’s a link to have a listen:

 

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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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5 Pointers To Preserve and Protect Profitability As You Acquire Used Vehicles

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Most dealers would agree that you make your money in used vehicles when you acquire a car. If you pay too much for an auction or trade-in vehicle, you’ve shrunk the spread between your costs to acquire and recondition the unit, and its retail selling point. Conversely, if you “steal” a car, you’ve widened the [...]

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A Precision-Focused Approach To Digital Retailing

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You won’t find newspaper ads, radio spots or TV commercials promoting Cardinale Automotive Group. The 19-store group, headquartered on the Monterey Peninsula in California, ditched traditional advertising in 2010 as it began its transformation to become an all-digital retailer. Since then, the group has made incredible progress. This year, Cardinale ranks 2nd on the Ward’s [...]

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