I’ve spent the past three weeks traveling across the country to talk to dealers about Provision ProfitTime, a new metric and methodology we’ve introduced to help dealers better manage the effects of margin compression in used vehicles.

The discussions and meetings have been eye-opening, for both the dealers and me.

For dealers, ProfitTime initially stirs the emotions. The most profound reaction is disbelief, particularly from dealers who have invested their hearts and souls in Velocity principles. There’ve been some “Oh, sxxt” and “WTF?” moments, followed by a palpable sense of relief as dealers see the benefits of understanding, and managing to, each used vehicle’s investment value.

For me, the ProfitTime discussions and travels have brought me back to the earliest days of vAuto, when I was the only guy suggesting a different way forward for managing used vehicles. In some ways, ProfitTime feels like we’ve discovered a hole in the used vehicle universe, and figured out a way to fix it. I’ve also come to the realization that I’ll be a busy guy in the months ahead as ProfitTime goes to market.

I’ve met with enough dealers to understand the common, most-pressing questions ProfitTime presents. I thought I would share five of them here, with answers:

1. Does ProfitTime invalidate Velocity? The answer is an emphatic, “No.” ProfitTime is a path beyond Velocity, where your retailing strategy is based not on the number of days you hold a vehicle, but rather the investment value or profit potential each vehicle holds. Velocity metrics and principles help you discern a vehicle’s investment value, but they don’t precisely measure it for you like ProfitTime. I would also add that ProfitTime and Velocity are both rooted in my belief that while used vehicle management is, and probably always will be, a blend of art and science, the science itself is getting better all the time.

2. Will the transition to ProfitTime be as painful as the switch to Velocity? I wish I had a crystal ball to know the answer for certain. On one hand, dealers typically had a larger share of aged/distressed inventory when they adopted Velocity compared to today. At the same time, while the share of investment-distressed inventory in dealerships today might be smaller, the average cost per car is significantly higher. Ultimately, the correct adoption of ProfitTime will require that dealers reckon with their worst used vehicle investments first. This reckoning represents the short-term financial pain that will precede the long-term gain. I would also say that the degree of any associated pain will ultimately depend on how well dealers have aligned and calibrated their used vehicle age management and market pricing strategies to date.

3. Why do I have so many Bronze vehicles in my inventory? A quick point of context: In my discussions with dealers, I’ll show them their inventories through the ProfitTime lens. Invariably, we’ll find that almost half of their vehicles carry the Bronze designation in ProfitTime, which means these vehicles are the most distressed from an investment perspective. These vehicles also tend to have asking prices, or Price to Market ratios, higher than the individual vehicle’s investment value suggest they should command. These dynamics are nearly universal, which suggests two important take-aways:

First, the share of Bronze vehicles is a market condition. It’s perhaps the most compelling sign of how much margin compression and a more efficient, transparent market have combined to fundamentally alter the financial foundations of the used vehicle business. Front-end margins on some vehicles, particularly the bread-and-butter volume cars, are simply smaller today than they used to be.

Second, if these vehicles have less investment potential from the get-go, there’s less margin for error when it comes to buying and pricing them correctly. As I examine Bronze vehicles more closely with dealers, we typically see where some of the art of used vehicle management could be sharpened.

4. How does ProfitTime calculate each vehicle’s investment value? ProfitTime is built on an algorithm that draws from three principal data sets for each vehicle—the Like-Mine Market Days Supply, adjusted Cost to Market and recent sales volume. The resulting calculation then scores vehicles on a 1-12 scale, and assigns a Platinum, Gold, Silver or Bronze precious metal category to each vehicle. We’ve tested and re-tested the algorithm across millions of vehicles in dealer inventories to know, with utmost accuracy and confidence, that the ProfitTime valuation is sound.

5. Where will ProfitTime have the most profound impact in my used vehicle department? I believe ProfitTime will bring the most profound clarity and impact to used vehicle appraising and pricing decisions. When you examine a dealer’s inventory with ProfitTime, you’ll see what I call a pricing “inversion,” wherein the Platinum vehicles, or best investments, are priced lower than all the other vehicles. Meanwhile, Bronze vehicles, which represent the worst investments, are priced the most proudly. This condition is the direct result, I believe, of a lack of true investment value insight when appraising and pricing decisions are made. If we knew, for example, that a vehicle was a low-scoring Bronze vehicle at the time of an initial appraisal, I believe dealers and managers would be less inclined to price the vehicle, even though it’s “fresh,” at a 100 percent or greater Price to Market ratio.

As I discuss ProfitTime with dealers, many begin to see how the metric and methodology will help them improve sales volume, inventory turn and total gross profit in ways that weren’t possible before. The dealers also recognize that they’ve got some work to do with rethinking their management processes and retraining their teams.

I’ll be keeping close tabs on their ProfitTime progress, and relaying what I learn here. Stay tuned!

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I’m excited to take part in an Automotive News webinar at 1 p.m. CST tomorrow to share vAuto’s latest innovation, our Provision ProfitTime metric and methodology.

I’ll be joined by my ProfitTime co-creator, Chris Stutsman, who serves as vAuto’s director of innovation.

 

Our goal will be to help dealers gain a better understanding of how/why we developed ProfitTime, and why we believe ProfitTime represents a game-changing opportunity for dealers who want to more consistently and effectively manage their used vehicles and inventories as investments, and more actively mitigate margin compression.

You learn more about the webinar and register here.

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I suspect everyone who attended Access: Velocity had the same feeling as we left the Peninsula Hotel on Friday—my brain needs a little break.

We had a busy day-and-a-half of general sessions and workshops. I took a bit of time to mull the dealer conversations and session take-aways. Here’s a rundown of things I thought I’d share:

Age Management Shortcomings. We spent a fair amount of time at Access: Velocity discussing what I consider to be a critical finding—that our reliance on the calendar as a measurement of a used vehicle’s profitability is fundamentally flawed.

To be sure, time still matters in used vehicles. Depreciation happens every day, and inventory turns are still important. Selling cars remains the single-best way to drive a dealership’s intra-departmental “wheel of fortune.”

But our research shows that, as margin compression continues to erode profitability, there needs to be a better way than simply checking off days on a calendar to manage each vehicle to its maximum investment value and return.

We discussed two primary reasons why the calendar doesn’t really work as a measurement of each vehicle’s investment value.

First, the calendar doesn’t recognize on Day 1 that some vehicles represent a better investment value than others. From the calendar perspective, every car’s a “fresh” car. But, as we’ve come to understand, some cars are really “fresher” than others on Day 1. The calendar simply can’t, and doesn’t, know if you over-paid for a vehicle, or it’s the wrong car.

Our research also found that this “fresh car” perspective often results in merchandising and pricing decisions that diminish returns from vehicles with high investment values, and expects unrealistic returns from vehicles with low investment values.

Second, the calendar assumes that every passing day exerts the same downward pressure on profitability for every vehicle. But we now know that, in fact, the investment value of some vehicles is more resistant to the advance of time than others.

At Access: Velocity, we talked at length about how dealers will need to shift their thinking from the number of days they hold a vehicle to the profit potential each vehicle holds.

It was exciting to see how these investment value insights played out at Access: Velocity, and how they represent a path beyond Velocity that will help dealers mitigate margin compression.

These investment-focused conversations reaffirmed my sense that, when NADA 2019 arrives, vAuto will be leading the way to a better way of used vehicle inventory management.

Inventory Investment Accountability. We had a rich discussion about how dealers can and should maintain more discipline over the amount of money they invest in their used vehicle inventories.

Today, it’s not uncommon for dealers and managers to “buy more cars” without regard for the investment return they’re getting from the current inventory. This mindset often contributes to distressed inventory—the cars that often should have been addressed before buying more inventory.

I liked one dealer’s solution to this problem. He maintains a strict $3 million cap on his inventory/reconditioning investment, and requires managers to deliver at least $300,000 in gross profit (a 10 percent return) every month. Managers face a penalty if they don’t meet the requirements, which help maintain a collective focus on minimizing distressed inventory.

“Predictive” and “Private” Inventory Sourcing: As we discussed how new technology and tools can help dealers reliably predict the investment value of used vehicles, several dealers asked about what I’d call predictive vehicle sourcing, as well as ways to mine private seller acquisition opportunities.

On predictive sourcing: Dealers asked if there’s a way, when a vehicle in inventory gets a sufficient level buyer attention (e.g., VDPs, calls, e-mails, etc.), that they could know it. Through an alert or some other notice, their sourcing team would know, in advance, about an imminent retail sale and begin working to find a replacement unit. The concept makes good sense, and merits attention.

On private sellers: Some dealers shared how they mine private seller listings on Autotrader and other third-party sites to find, and pursue, vehicles that match their inventory needs. The effort follows frustration with the seemingly ever-rising costs of acquiring auction vehicles. The dealers suggested that these listings might be integrated into inventory sourcing tools to drive greater efficiencies and time savings.

Private, Public Dealer Advantages: Access: Velocity special guest speaker Alan Haig, president of Haig Partners, noted how today’s dealership buy/sell activity is primarily driven by private dealers looking to grow and scale their operations. He also noted that while public dealer groups have grown through acquisitions, they haven’t “figured out how to acquire share from competing stores” when they enter a market. At the same time, Haig suggested that public groups may have a long-term advantage if/when vehicle buyers seek out brands, and the experiences they offer, more than specific dealerships.

Quotable Quotes: I’ve always had an ear for what Reader’s Digest once dubbed, “Quotable Quotes.”  I picked up a couple at Access: Velocity:

On change management in a dealership: “You have to be stronger about your vision than people are about their resistance. If you are, you’ll outlast them. But your vision has to be right.”

On discounts to customers who insist they should get one: “Make it symbolic, not significant” and “Don’t be confused by the opportunity to negotiate and getting a good deal.”

On today’s competitive marketplace: “Every morning you wake up, you better be running.”

A Higher Purpose: In addition to providing a unique forum for Velocity dealers, our Access: Velocity event serves a higher purpose—we donate 100 percent of attendee registration fees to charity. This year’s event raised $252,500 for the Juvenile Diabetes Research Foundation—an impressive sum that speaks to the generosity of dealers and their desire to help those less fortunate.

My sincere thanks to all the dealers who attended Access: Velocity and shared your insights, perspective and time with me, the vAuto team and your peers.

I have a feeling that this year’s event will be remembered as a first step toward positive, profit-focused change that will pay dividends for dealers in the years to come.

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Access Velocity Day 1: A Game of Inches and Investments

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I heard the same thing time and time again from dealers at Access: Velocity. After all the effort, energy, money and time invested in retailing new and used vehicles, there just isn’t as much profit left on the monthly income statement as there used to be. The proceeds from all the activity and sales amount […]

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Another Access: Velocity Begins

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Independent Dealer Realizes His Car Business Dream

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It’s been a bit of a dream come true for independent dealer Dan Oakes in Kansas City. In 2010, Oakes acted on his curiosity and interest in the car business. His job as an energy trader provided the capital and time to open a small independent dealership, Oakes Auto. The business grew by baby steps—a […]

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3 Keys To More Efficient New Vehicle Inventory Management

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Perhaps it’s telling that, as of today, no one has commented on the Automotive News piece that discusses how dealers will face a “tough slog” in the months ahead in new cars. The reason, I suspect, is the fact that dealers, and pretty much everyone else in the industry who’s paying attention, has long understood […]

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A Proud, Promising Moment for Cox Automotive and Auto Retailing’s Future

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This week brought a significant milestone for Cox Automotive, the car business and me. On Wednesday, I was part of a group that cut the ribbon to officially open the new Cox Automotive Solutions Lab at Northwood University in Midland, MI. This lab is pretty special. First, it reflects the commitment of the Cox family, […]

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Where Can I Buy Cars?

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The below is a post taken from my good friend and industry training expert, Tommy Gibbs’ Zinger. Where Can I Buy Cars? Posted on August 21, 2018 by Tommy Gibbs If I get asked this question once a week, I get asked this question 100 times a week. It’s generally phrased as, “We can’t find […]

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Musing on Major League Baseball and Used Cars Metrics

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A New York Times piece this week highlighted a couple trends in Major League Baseball that some find disturbing. This year, for the first time in league history, there may be more strikeouts than hits through the course of a season. And, of the hits, home runs will account for a sizable share, perhaps more […]

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