ProfitTime is PoodleTime

by dpollak on 06/15/2019 · 0 comments

Toodles shares a little ProfitTime perspective…

 

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As franchised dealers work harder to maximize new vehicle sales in the current market, some are taking a deeper look at dealer trades.

The dealers are recognizing that, in today’s environment of rising floorplan interest expense and softer retail sales of new vehicles, they can’t afford to take in vehicles from dealer trades that that aren’t right for their inventory or market or let go of vehicles they really need.

“I was tired of having duplicate inventory when I wanted to grow the dealership,” says the general manager of a Midwest Honda store that retails about 100 new vehicles a month. “I was getting killed on dealer trades. I heard people saying, ‘Just give me another Civic back, or just give me another Accord back,’ and I’m saying, ‘why do we need five black Accord LS’ in my inventory?’ It doesn’t make any sense whatsoever.”

The operations director for a West Coast dealer group adds: “The amount of inbound dealer locates that we are getting has flip-flopped. We were having to call to get cars every time we had a customer who wanted a car we didn’t have, which happened a lot. Now, the local and not-so-local competition is calling us because we have what they didn’t know to order.”

I’ve kept notes from my dealer trade conversations, and I thought it might be useful to share some of the best practices these and other dealers are following to make dealer trades a more productive part of their new vehicle business:

Determine how often dealer trades occur. A couple years ago, vAuto did a study of new vehicle dealers that asked about dealer trades. Dealers told us that dealer trades were not typically regarded as an important part of their new vehicle stocking strategy. The responses also suggested that dealers weren’t keenly aware of how often dealer trades occurred. In some instances, I’ve since learned, dealer trades can account for as much as 50 percent of a store’s monthly sales—that is, someone’s calling another dealer to make a deal because you don’t have the vehicle in stock.

Track your dealer trade requests. Today, dealers are keeping better track of their dealer trade requests, and accounting for them in their next factory order—a process akin to the “lost sales” reports some dealers employ in their parts departments. The report helps determine if there’s a sufficient number of lost sales to stock the part and potentially sell a future customer. Inevitably, dealers say, their efforts to track dealer trade requests helps break a cycle where they aren’t consistently ordering vehicles their customers want, and the resulting dealer trades hurt their inventories more than they help.

Tie your inventory objectives to dealer trade decisions. When the Midwest Honda dealer grants a dealer trade request, he’ll look first to his own inventory to find holes that need to be filled, and then determine the exact car—based on model, trim, color and Market Days Supply—that he’ll request from the other dealer.

“If I get a call from someone who wants a Honda Civic, I don’t just take a Civic back automatically,” the Midwest Honda dealer says. “I’m looking first to what I need in my inventory and what’s in transit. The cool part is, when someone needs a car from me, I can almost always get back whatever I need, and I’m no longer taking in duplicate inventory I don’t need.”

On the flip side, if he asked another dealer for a trade, he’ll look to give back an older-age unit, or a vehicle with a less-desirable color or higher Market Days Supply. His goal is to use the exchange to improve his inventory’s appeal with potential customers, and only help competitors if he must.

As I’ve talked to dealers about how they handle dealer trades, I’m struck by how much I missed the boat when I was a Cadillac dealer in the 1990s.

I remember dealer trades happened all the time, and I gave them almost zero attention.

To be sure, I didn’t have the technology or tools that are available today that might have helped me easily and quickly understand how a dealer trade decision on one day might help or hurt me in the days and weeks that followed.

But, looking back, I also recognize that my essentially out-of-mind regard for dealer trades probably wasn’t best for my business.

The upshot: If dealers take a deeper dive into their own dealer trade practices, chances seem pretty good that you’ll find an opportunity for improvement.

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Since dealers began using Provision ProfitTime in earnest about six months ago, I’ve noticed a positive improvement in the overall investment value of dealer inventories.

To be sure, the improvement is a primary driver of the increases in gross profits and sales volumes that I’ve shared in this space in recent weeks.

But I thought it might be relevant and useful for dealers to go behind, or beneath, the headlines to understand the day to day decision-making that’s helping dealers maximize their inventory investment value and the return they receive from it.

To start, let’s examine the typical inventory investment value when dealers start using ProfitTime.

The top chart at right shows a composite of the investment value of dealer inventories across the country. The composite is derived from applying the ProfitTime algorithm, which combines each vehicle’s adjusted Cost to Market, Market Days Supply and other market factors, to score each vehicle on a 1-12 scale and assign it a corresponding precious metal designation (Bronze, Silver, Gold and Platinum).

You’ll notice that when dealers start using ProfitTime, more than half of their inventories consist of Bronze and Silver vehicles—the least valuable vehicles, in terms of investment quality. Meanwhile, slightly less than half of their inventories represent Gold and Silver vehicles, which represent the most valuable investments.

You can also see signs of investment inefficiency. For example, the average Cost to Market and Price to Market percentages for Bronze vehicles run above 100 percent, and the Market Days Supply percentage is the highest among all types of vehicles.

You can also see that dealers are holding on to their Bronze vehicles significantly longer than any other investment class.

These dynamics indicate that dealers are managing the poorest-performing vehicle investments as if they had much to gain.

Meanwhile, let’s look at the Platinum vehicles. You can see that dealers have a smaller share of these top-performing vehicles—probably because they’re inclined to sell them faster than any other type of inventory. This dynamic occurs despite profit-positive Cost to Market and Market Days Supply percentages that suggest these vehicles do, and should, deserve more time on the market to maximize their investment return.

It’s been fascinating to watch as dealers use ProfitTime, and see how the investment composition of their inventories change.

Check out the second chart at right from a dealer who’s been using ProfitTime since late February/early March. While the dealer’s inventory looked much like the composite above, he’s engineered some positive improvements.

For example, note the Bronze vehicles. The dealer’s got fewer Bronze cars, they’re priced to move and, generally speaking, they’re leaving his inventory as retail sales much faster.

Next, look at the Platinum and Gold vehicles. They now make up more than half of the dealer’s inventory. In addition, while the dealer probably should give these vehicles more time on the market, he is allowing them more time than he might have previously without ProfitTime.

“We’ve still got work to do,” affirms the dealer, whose average front-end gross profit has doubled since launching ProfitTime. “There’s room for even better improvement.”

From my conversations with ProfitTime dealers, I’ve gleaned three key reasons for the then/now investment value improvements.

  1. More consistent, investment value-minded acquisitions. With ProfitTime, dealers can appraise an auction or trade-in vehicle with the benefit of what we call the trifecta—the vehicle’s Stocking Grade (generally, its appeal in the market), its Strategy Action (a +/- designation that shows whether your inventory needs the car) and its ProfitTime score (the numeric value that determines the precious metal designation). With the trifecta, dealers say their buyers and appraisers have a clearer view of the critical factors that determine whether they should buy a vehicle, and what they should pay to acquire it. These insights become particularly valuable in both acquisition settings.

    With trades, dealers now have a clearer understanding of whether they can and should put more or less into a vehicle to make a deal. At auction, dealers say that while the ProfitTime trifecta may not necessarily help them acquire better investment-grade units, it helps them walk away from cars that don’t make sense financially or otherwise.

  2. Less ego and emotion. This point is a corollary to the one above. With ProfitTime’s investment value clarity, dealers aren’t acquiring cars they shouldn’t or paying more than they should. Similarly, ProfitTime dealers are now pricing vehicles more directly in relation to their respective investment values, not how they think the car should be priced. You can see the difference in the two charts—in the composite, the average Price to Market percentage for Bronze and Platinum vehicles is 101 percent and 96 percent, respectively; in the dealer’s chart, the Price to Market percentage is 98 percent for Bronze vehicles, and 101 percent for Platinum units.This pricing flip-flop essentially means that ProfitTime dealers are making decisions like data-minded investment managers rather than relying solely on what they know or playing hunches.
  1. The positive power of ProfitTime. Mathematically speaking, you’d expect that the share of Bronze and Silver vehicles for ProfitTime dealers would decrease as they retail these cars faster than their more profit-productive Gold and Platinum counterparts. I would add, however, that I’ve been surprised by the growth in the share of Gold and Platinum vehicles in dealer inventories. I’d presumed that the national composite averages simply represented the way things are in today’s market. As it turns out, ProfitTime is helping dealers understand the way things can, and should, be in today’s used vehicle market.

In my next ProfitTime in Practice post, I’ll address the question of whether inventory turn still matters when dealers switch to ProfitTime.

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