Some used vehicle managers carry a double curse.

The first curse is their absolute focus on average front-end gross profit. They’ll say, “I can’t change this price because there won’t be enough front-end gross,” or, “I can’t buy this auction car because there won’t be enough front-end gross,” or, “I can’t offer the customer what their trade-in’s really worth because there won’t be enough front-end gross.”

The second curse is their inability to recogbentley2 3 Ways To Eliminate The Used Vehicle Manager’s “Double Curse” nize that the front-end gross-focused inaction on each of the preceding scenarios ultimately hurts the performance of their used vehicle department, as well as the size of their paychecks.

The used vehicle managers who carry this double curse create an even bigger problem for their dealers—the less-than-optimal performance of their used vehicle department ultimately saps the other dealership departments of their ability to maximize sales and profits.

Surprisingly, some dealers appear to be aware that their used vehicle manager’s double-curse is hurting the overall dealership prospects, but they choose to do nothing about it. How else to explain the disparities I see across dealer groups, where the performance of some stores—measured by the net impact of a strong used vehicle department across their peer departments—completely outshine the others?

The difference, of course, is that the used vehicle managers at the high-performing dealerships have effectively exorcised themselves of the double-curse, or they never suffered from it to begin with.

I understand the exorcism can be difficult, particularly for used vehicle managers who have spent years in the business. Unfortunately, they’ve been carrying the double-curse for a long time, and every year makes it more difficult to remove.

Used vehicle mangers who eliminate the double-curse have come to embrace three operational realities they previously failed to see:

First, it’s essential for used vehicle managers to recognize that in today’s market, there’s often very little money left in a used vehicle after you’ve owned it for 30 days. This timeline has become even more critical in 2015 in light of increasing supplies of available used cars. I would encourage dealers to compare the average front-end gross profits of used vehicle sales that occur in 15 and 30 days or less, against those that occur after the 30-day mark. (Note: I would ask that this be a full and honest accounting, that includes the holding costs associated with every car, irrespective of its sales date.)

Second, used vehicle managers must align their inventory management and pricing objectives to retail a greater share of vehicles within the timelines that will maximize their front-end profit potential. Inevitably, the managers will recognize that today’s market requires a balancing act between selling a car quickly to maximize its gross profit potential, and sacrificing some front-end margin to put the car over the curb fast and earn another retail opportunity. This turn-and-earn mentality, which I call the Velocity Method of Management, is often counter-intuitive to the most die-hard, double-curse-carrying used vehicle managers. But, in the end, the math works—selling more cars more quickly will improve gross profits, even if front-end averages slightly diminish.

Third, as used vehicle managers begin to retail more used vehicles in shorter timeframes, they begin to work on perfecting the throughput of their operations. They build alliances and understandings with their service directors that time is money in used vehicle reconditioning. Cars get fixed and front-line and online-ready in a matter of hours or days, not weeks. They continually work on ways to press down the costs of reconditioning, which builds front-end margin potential and greater efficiencies for both departments. They measure and share the impact of their efforts throughout the dealership, showing financials that reveal double-digit lifts in sales and net profits throughout the dealership.

It’s this final step that often gets the dealer’s attention. They start to see positive improvements in the financials for every dealership department. In some cases, the more enlightened dealers take additional steps to make the total dealership gains an ongoing reality. They measure and promote the positive impact the used vehicle department creates across all dealership departments. The dealers might even change pay plans to recognize and reward the used vehicle manager’s total dealership contributions.

As I mentioned, eliminating the double-curse isn’t easy. But I haven’t met a single used vehicle manager who cured themselves, and now wishes they hadn’t.

 

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Here we go again. Another factory messing with dealer margins.

This time it’s Fiat Chrysler, according to an Automotive News article.

The upshot: The factory is raising invoice prices by 1 percent, while leaving itsFiat 500c Abarth 1 300x199 Factory Pricing Decision Will Test Dealership Efficiencies Manufacturer’s Suggested Retail Prices (MSRP) unchanged. The end result, of course, is less available front-end margin for dealers.

Such is the life of a franchise dealer. At any moment, the factory can fundamentally change the rules of the retail game.

Of course, Fiat Chrysler’s decision will sting some of its dealers worse than others, particularly those in markets where the invoice-to-MSRP margin is almost irrelevant due to fierce competition.

In some cases, however, the pain for these dealers will largely be on paper, thanks to the prevalence of “below the line” monies that, as one analyst put, are intended to make dealers “whole.”

But here’s the kicker: The article says Fiat Chrysler’s decision is an attempt to increase its profit margins, given higher operational and supplier costs it’s absorbed in recent years.

Fair enough, I suppose. But wouldn’t it be better for dealers if their factory partners would first strive to improve margins through greater efficiencies, rather than simply passing along higher costs (and smaller margins) through increased invoice prices?

This question seems especially relevant given the reality that today’s market doesn’t afford dealers the luxury of raising their prices when they’d like a better bottom line. More and more, the pathway for dealership profitability and prosperity lies in efficiencies—those who retail and service a greater number of vehicles in the least amount of time invariably come out on top of their less-efficient competition.

Perhaps that’s the point of Fiat Chrysler’s decision. By shrinking dealer margins, they are effectively forcing their dealers to become more efficient, whether they like it or not.

 

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A dealer recently took issue with my assertion that the used vehicle business has been suffering from margin compression.

bentley1 3 Ways To Confront The Boogeyman In Used Vehicles“Dale, we’re averaging $1,400 per vehicle in front-end gross,” the dealer says. “That’s a little less than we made seven to 10 years ago, but it’s not a lot less.”

The dealer’s comment underscores what I’d consider a troubling misunderstanding of the harmful effects margin compression creates for dealers in used vehicles. You might even call it a “boogeyman” due to its lack of recognition for some dealers.

Here are two realities of margin compression dealers often overlook:

  1. The average cost of vehicles has increased. Edmunds.com reports that the average transaction prices for all used vehicle segments grew by nearly 6 percent in 2014, compared to the prior year. Analysts say the increase reflects the steady rise in new vehicle transaction prices, as well as market supply/demand factors. No matter the cause, the average cost dealers pay to acquire and retail used vehicles has gone up.
  2. The return on investment (ROI) on a per-car basis has declined. While dealers have been paying more to acquire and retail vehicles at higher transaction prices, the gross profit they earn has diminished. NADA stats show that front-end gross as a percentage of used vehicle transaction prices has declined 20 percent between 2009 and last year (from 10.7 percent to 8.6 percent, respectively). The end result is that dealers are investing more in each used vehicle, and seeing a lower return for the effort, risk and time required to retail each unit.

Both realities beg the question: Why doesn’t the dealer who challenged my assertion about margin compression recognize the harmful effects it creates for his business?

Part of the answer lies in the dealer’s emphasis on front-end gross profit. He’s still seeing roughly $1,600 per car, and doesn’t feel the effects of margin compression because he’s not looking at the big picture. I would bet good money the dealer would be less satisfied if his parts manager told him the store earned $20 for a $100 part and $20 for a $3,500 engine block.

In addition, the dealer, like many others, is selling more used vehicles. The stronger sales volume also helps mask the effects of margin compression.

I told the dealer he wasn’t alone in thinking that things were actually going pretty well in used vehicles, simply because the front-end gross dollars per car hasn’t changed much. I also shared three must-dos that I believe are necessary for all dealers to maximize the true potential of their used vehicle operations and minimize margin compression:

Pay close attention to your acquisition cost. Some dealers make it a day-to-day priority to monitor the average acquisition cost of their used vehicle inventory. They look at the average dollars spent per car, and the overall cost to market metric for their inventory. With this oversight, they notice right away when a buyer gets goo-goo and pays too much for an expensive car, or an appraiser puts too much into a trade. They start asking questions. They want good reasons why they buyer or appraiser effectively put the vehicle’s profit potential at risk. Such conversations, which are most effective when constructive rather than critical, tend to focus everyone’s attention the goal of pressing down costs to preserve front-end margin.

Hold your people accountable. It’s absolutely essential that buyers and appraisers understand the reality of today’s market—it doesn’t forgive when you over-pay for a vehicle. In addition to the conversations noted above, the best dealers keep a running tally of each buyer and appraiser’s ability to meet the dealership’s cost to market acquisition targets. Some dealers go further, and include this metric in pay plans, often as a bonus if the individual beats the benchmark.

Press down reconditioning costs. I like the way a Midwest dealer tackled this challenge. He sat down with his General Manager (GM), and the used vehicle and service managers. They reviewed 200 reconditioning repair orders, and itemized the top 25 most-frequently used parts used, the 10 most-frequent sublet jobs and the average effective labor rate. Next, the dealer conditioned monthly bonuses on the three managers working together to knock 15 percent off the cost of the parts, a 10 percent reduction in sublet costs and a 2 percent reduction in the effective labor rate. The dealer reports that these efforts have helped him generate an additional $200 per vehicle in front-end margin.

As our conversation wrapped up, the dealer said he understood the choice: He could either confront margin compression or go on believing it doesn’t exist or matter too much.

“You’re right, Dale,” the dealer says. “There is a boogeyman out there. We could and should be doing better than $1,600 per car.”

 

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Used Vehicle Recall Regulation: A Future Part Of Life For Dealers?

04.15.2015

A recent Detroit News article suggests dealers may have to worry more about recalls than they do today. The article discusses the Obama administration efforts to extend recall responsibility to used vehicles, and require dealers to fix any open recalls before they retail a unit. Currently, federal law requires dealers to address recalls for new [...]

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How Factories Make New Vehicle Pricing Challenges Even Worse

04.01.2015

Most dealers would agree that today’s typical customer is far more price-aware than those of previous generations. This awareness stands to reason: A vehicle purchase is a big-ticket item. No one wants to pay too much. And, the Internet makes it easier than ever for buyers to get a sense of what a fair deal could [...]

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3 Ways Dealers Work To Minimize Inventory Age In Used Vehicles

03.30.2015

It wasn’t all that long ago when most dealers really only worried about one or two things in their used vehicle departments—the average front-end gross profit, and the number of cars they’d sold to date in a given month. As a result, the used vehicle manager would also focus on the same things. On occasion, [...]

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A “Connection Commerce” Challenge For Dealers

03.24.2015

Most dealers understand that today’s car business is an Internet business. They know that new and used vehicles aren’t really for sale unless they’re posted online. The best dealers also recognize that they see more customers when online vehicle listings offer competitive, market-based pricing, and their merchandising (e.g., descriptions, photos, videos) tells a compelling story [...]

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Three Pointers To Right-Size Your Springtime Inventory

03.11.2015

Earlier this morning, I heard a robin singing outside our house. I listened a bit and smiled. The robin’s basically making his play for the summer. Hopefully, his song will attract a suitable mate. They’ll start a family and we’ll have a few more birds around here. But it also occurred to me that the [...]

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3 Ways Efficiency-Focused Dealers Will Gain Advantage In New Vehicles

03.10.2015

It’d be safe to bet that 2015 will be a good year for dealers. The forecasts are rosy: The consensus among analysts is that dealers will likely retail around 17 million new vehicles this year, a tally the industry hasn’t seen since 2006. Generally speaking, you could say that all boats will rise for dealers [...]

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Nagging Doubts About Net Neutrality

03.03.2015

Several dealers have asked me for my take on the Federal Communications Commission (FCC) vote last week to treat broadband Internet providers like utilities. First, I’ll note that I’m not the most impartial observer. My employer, Cox Automotive, is owned by Cox Enterprises, which provides broadband services through its Cox Communications division. I’m not involved [...]

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