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 I find intriguing:

Data management clarity. The recent Congressional hearings affirmed a key similarity between Facebook users and dealers: End users didn’t fully understand how a technology system provider might use the data they added about themselves and their customers to the system itself. On one hand, it’s completely understandable. No one reads the fine print anymore, even if we should. But on the other hand, many of us simply trust our technology partners to do the right thing. When this initial trust erodes, there’s usually trouble.

Ownership/control. It seems clear from the Facebook case that, while end users may have OK’d the company’s data gathering/sharing practices, there’s a sense that their data has been compromised, if not misused. The ownership/control question is similar for dealers. For their part, dealers share the sentiment that the data moving through their in-store technologies is their data, and they ought to have a greater say in how it’s managed and monetized.

Probability of oversight. I suspect we’ll see at least some effort by federal lawmakers to enact a more in-depth level of oversight, and understanding, to the regulations that guide the relationship between social media stewards like Facebook and their end-users. Perhaps the biggest take-away is that the feds, and Facebook users, are now paying more attention. The same is true with dealership data. Federal regulators and dealers are paying more attention. Will the regulatory landscape change on either front? Only time will tell.

Lack of alternatives. As a Facebook user, I’m not happy to learn what’s come to light in the past few weeks. But I’m not like some of my friends, who’ve said “no more” and deleted their Facebook accounts. Why? For me, the answer is that there isn’t really another alternative. I really do like the way Facebook keeps me in touch with family and friends. I’m like everyone else…Facebook is part of my daily routine. The situation’s similar for dealers. Many feel that they can’t part ways with their partners because their technology and tools play a key role in their day-to-day business operations.

In the end, I am optimistic that the debate and discussion about Facebook and dealership data will land in a good place.

Ultimately, both situations suggest we’ve arrived at a critical juncture—where the fast-moving pace of today’s technology-disrupted world has paused. It’s an arguably one-time opportunity to take stock of what’s happened and apply the lessons to shape a digital data-sharing environment that’s more equitable, fair and just for all parties.

With so much at stake, it seems the right thing should be the only thing to do.

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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 dealers that this review ought to a bit more all-encompassing and thorough. It should go beyond the checks you sign every month. It should look closely at the way you do things, and whether your people and processes, wittingly or not, create and contribute to opportunity costs that hurt your business.

You can Google a lot of definitions for “opportunity costs.” I like to think of them this way: They amount to the benefit, profit or value that you give up when you choose to make decisions, or complete tasks, in a certain way, one that may be less efficient than an alternative.

When dealers tell me they’re cutting expenses to help boost dealership profitability, I’ll suggest they take examine three areas of opportunity costs that are often ripe for reduction:

1. Pricing Vehicles: vAuto recently took a close look at how dealers price their new and used vehicles. It was a snapshot view that captured a week’s worth of price changes (increases and decreases) across new and used vehicle inventories. The analysis isn’t scientific, but it’s telling. The following take-aways suggest that dealers could reduce opportunity costs by reconsidering how they price vehicles.

Price adjustment frequency: For the most part, the data show dealers are reviewing and repricing used vehicle inventory at least three times a week. I found it curious that the vast majority of dealers did not make any new vehicle price changes in the mid-month week we examined.

Price adjustment direction: For most dealers, the overwhelming majority of pricing decisions resulted in reductions. On one hand, this take-away isn’t surprising, particularly given that dealers’ pricing primarily pertained to used vehicles in the analysis. But we noticed a notable number of dealers who struck more of balance; their price adjustments included increases and decreases (in both new and used vehicles). It’s hard to draw a firm conclusion, but I suspect the data indicate that dealers may be reflexively reducing prices, and not identifying the vehicles, and market conditions, that merit price increases.

Price adjustment size: If there’s a headline from the analysis, it might be “Dealers Who Price Their Vehicles More Frequently Make Smaller Adjustments.” The data showed a clear pattern among dealers who reviewed and adjusted vehicle prices more frequently—on the whole, their price adjustments were more incremental, and the impact on gross profits less profound. I couldn’t help but think that dealers who only touched their prices once or twice a week, and cut six-figure sums from their gross profits, might see better results if they priced in a more market-efficient, and proactive manner.

2. Sourcing Vehicles: There’s a dichotomy at many dealerships between their new and used vehicle departments. In new vehicles, I think you could make the case that dealers and managers would have a better mix of market-desirable vehicles if they put more insight and time into their factory ordering decisions. vAuto’s Brian Finkelmeyer, who helps dealers improve their new vehicle performance, says it’s not uncommon for factory orders to occur in a hurried, last-minute rush to meet the factory’s deadline.

“The opportunity cost comes when the scramble results in ordering copies of cars that you’ve had in inventory for the past four months,” he says.

In used vehicles, we’re seeing a shift toward making inventory sourcing less time-intensive. With today’s technology and tools, dealers and managers aren’t spending as much time researching and traveling the country, for three to four days a week, to acquire inventory. The shift helps them address the opportunity costs that come when key players are off looking for cars, and unavailable to do things like close deals, manage teams and move vehicles more efficiently through reconditioning.

3. Merchandising Inventory: I was a dealer back in the days when the Internet first arrived. It was a pretty clunky and time-consuming process to get vehicles, descriptions and photos online. At the time, I understood that time was money. The longer it took me to get my cars online, the less opportunity I had to sell them while they were fresh. That’s why I missed a lot of bedtime stories with my kids. I was still at the dealership, writing descriptions and uploading files.

We’ve come a long way since then. But even so, it’s still far too common for five, seven or even 10 days to pass before many dealers get their new and used vehicles properly merchandised and posted online.

The best I can tell, these delays are all due to process inefficiencies. Perhaps the inefficiency relates to your service department, or your detailing team, or perhaps the outside vendors who work with you on their schedules. Whatever the case, there’s room, I believe, for most dealers to minimize the opportunity costs associated with less-than-optimal (and time-urgent) merchandising.

I’ve shared these three areas of opportunity costs because I believe they represent some of the lower-hanging fruit that dealers can harvest to mitigate margin compression and improve their operational efficiency and profitability.

I also hope this post serves a broader purpose—to help dealers and their teams recognize that minimizing opportunity costs will ultimately provide more long-term benefit to your operation than simply cutting your monthly expenses.

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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 hold this year, following the realization that despite a fairly strong year of used vehicle sales in 2017, they actually made less money.

You can see this picture in end of year financial data from the National Automobile Dealers Association. Their December 2017 financial profile shows two disturbing year-end stats:

Average net profit per used vehicle retailed in 2017: -$2. I can’t remember ever seeing used vehicle net profit as a negative number. But it’s been dropping for the past few years. It was $164 in 2014, $132 in 2015 and $65 in 2016. Can you hear the sound? Drip. Drip. Drip.

Front-end gross profit declined. NADA reports the average retail gross profit dropped $78 to $2,337 last year, down from $2,415 in 2016. The average was $2,444 in 2015. Drip. Drip. Drip. (Note: NADA’s numbers include F&I income, which means the margin decline would be more pronounced, given many dealers’ efforts to increase F&I sales in recent years.)

The numbers wouldn’t be so disturbing if they were just a temporary blip. But like the leaky water line, the problem’s more chronic than coincidental.

The key question on the minds of dealers in my conversations is, now that they’ve recognized the problem, what steps can and should they take to fix it?

I’ll answer the question with some bad news. Unfortunately, there isn’t really a “fix” for margin compression. It’s now the nature of our ever-more competitive, efficient and transparent used vehicle marketplace.

But there are ways to mitigate the problem and stop leaks that often erode used vehicle profitability. Here are four recommendations:

Measure/manage efficiency of acquisitions. At many dealerships, there are at least a handful of individuals, if not more, who have the authority to appraise vehicles. From my observations, there’s a fairly wide degree of variance among the appraisers, when you judge their decisions based on their Cost to Market ratios.

Cost to Market measures your cost to acquire the vehicle against the prevailing retail asking prices for the unit, a calculation that yields your potential profit margin spread. If you acquire a vehicle for $8,500, and the retail asking price is $10,000, the Cost to Market is 85 percent.

There’s margin to be gained by managing and measuring the consistency of your appraisals, as weighed against your Cost to Market targets. I recognize there are real-life pressures to allow a little more for trade-ins. But I would submit those pressures will fade as you use the current market to establish the fair value of your acquisitions.

Trim reconditioning costs. I’ll put aside the question of how much you can rightfully charge for labor and parts for your internal reconditioning work. But when’s the last time someone asked your third-party vendors for a little haircut, perhaps a 5 percent to 10 percent reduction? Chances are, those invoices get paid without too much question—an area of oversight that offers some margin opportunity. It’s worth remembering that part of the NADA-reported net loss on used vehicles amounts to someone else’s gain.

Minimize discounting. Just as some appraisers seem to acquire cars for the right money than others, some sales associates are better at avoiding discounts than others. When you price your used vehicles to the market, there’s simply less room for negotiation, and your average showroom/other discount should reflect this reality. The key, of course, is to manage and measure your discounts. Everyone who puts their initials on a deal should be held accountable for the discounts they approve—and properly trained to know how to maintain your margin.

I tried cheap Viagra just for fun, got interested in this drug when I saw the advertisement. Of course, I understood that there could be side effects, but I thought that nothing bad would happen from one pill. And nothing bad happened. The effect of the drug was felt for about 5 hours, and my wife was pleased, as always.

Reduce inventory age. In today’s margin-compressed market, retail speed is the only way to take advantage of the age-old truth that fresh cars deliver the best gross. Dealers who sell a larger share of fresh vehicles would maximize each unit’s gross profit potential. It’s really a black and white proposition. No doubt, that’s why top-performing dealers maintain at least 55 percent of their inventories under 30 days. Their gross profits tend to look better than dealers who carry a larger share of older vehicles.

As I mentioned, these recommendations won’t completely eliminate margin compression. But they can help slow its harmful effects and help you avoid profitability leaks that make the problem even worse.

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NADA Day 3: Final Thoughts On A Great Convention

03.26.2018

I heard that there were more than 100 new products offered and promoted through press releases at this year’s NADA—almost double the number from last year. Among them, there were multiple companies offering a variety of solutions you could categorize as part of “digital retailing,” which is intended to help dealers engage and transact more […]

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NADA Day 2: A Telling Conversation and Other Nuggets

03.25.2018

I had the honor and privilege of spending time this week with Thomas “Mack” McLarty, a highly successful third-generation dealer from Arkansas who has also had a remarkable political career, including his service as chief of staff for former President Bill Clinton. I was curious to get McLarty’s perspective on the differences between running a […]

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NADA Day 1: Four Themes To Consider

03.24.2018

I took a fair amount of notes during the American Financial Services Association’s annual conference, and Automotive News Retail Forum events here in Las Vegas. Then, I compared the notes with take-aways from my conversations with dealers on the opening day of the NADA convention. I was curious if the comparison might yield any big […]

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An Emphasis On Efficiency, Innovation at NADA

03.20.2018

I’m ready for NADA. Are you? I’ve been asking that question, along with a follow-up—what are you ready for? The answers I’ve gleaned from dealers all boil down to essentially the same thing: Dealers are hungry for ways they can become better, more efficient, and more profitable. It’s the right answer, particularly as you consider […]

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Part 2: 4 Ways To Mitigate Margin Compression

03.02.2018

If today’s used vehicle market was a house, it’d have a serious structural problem. Let’s say the house had eight-foot ceilings 10 years ago. Today, the ceiling height is probably closer to seven feet, or even less, depending on location. I know the shrinking ceiling analogy is slightly abstract, but it’s an apt way to […]

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Part One: A Troubling Tradition-Minded Trend To Avoid

02.27.2018

In the past few weeks, I’ve noticed a troubling trend in dealers’ used vehicle inventories. The inventory turn rates at these dealers is slowing down. Last year, the dealers consistently maintained an annualized turn rate of 12 times or better. Today, I’m seeing the same dealers post turn rates closer to 10 or even less. […]

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Temptation Abounds. Will You Bite?

01.30.2018

‘Tis the season for temptation in used vehicles. It’s that time when some dealers stock up on used vehicle inventory in advance of the annual rite of spring-fed retail sales. I got a note today, in fact, from a dealer who’s contemplating bulking up his inventory even earlier this year, given recent softening of wholesale […]

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