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 describe how margin compression is changing the used vehicle business.

Consider, for example, that used vehicle prices are essentially the “ceiling” in the used vehicle market.

For a long time, dealers could effectively set the prices, or the ceiling, on a vehicle. They had great discretion and latitude.

Buyers, meanwhile, might have chipped away at the asking price, but dealers countered, and fortified their ceiling, with negotiation-savvy desk managers.

Today, things are much different. The market sets the ceiling for used vehicle pricing. And, in recent years, the rising weight of Internet-driven market efficiency and transparency put more pressure on the ceiling. As the load grows, the ceiling sags–narrowing the gross profit margin between a dealer’s cost to own a vehicle and its eventual selling price.

One might ask: “Dale, the average used vehicle transaction prices are higher, so how can the ceiling be closing in?”

It’s a valid question, but it overlooks the fact that many dealers are retailing more expensive vehicles and the margin between their cost and selling prices has been shrinking. The latest stats from NADA show that retail gross profits as a percentage of used vehicle sales prices dropped another 3 percent between 2016 and 2017—part of a downward trend that’s been occurring for several years.

In my last post, I tried to underscore why the dynamics of margin compression and market conditions make it difficult, if not impossible, for dealers to take the traditional tack of raising used vehicle prices to offset gross profit declines.

The post wasn’t intended to suggest that dealers can never raise used vehicle prices. There are instances when a vehicle’s Market Days Supply, and your retail objectives, warrant a price increase. This scenario, however, is a more calculated and market-justified move than simply increasing prices to gain more gross.

My previous post also promised four ways dealers can combat margin compression that go beyond rational, market-based pricing. Here they are:

1. 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.

This is why more dealers are aiming to maintain—and retail—a larger share of their inventories under 30 days of age. I encourage dealers to maintain a minimum of 55 percent of their inventory under this threshold. I know of several dealers who actually go further, and retail 60 percent or more of their vehicles in less than 30 days.

Of course, your used vehicle pricing strategy needs to go hand in hand with your efforts to reduce inventory age and retail more vehicles while they are fresh. I encourage dealers to examine when their retail sales occur, and assess how well their age-related Price to Market adjustments and targets help them achieve a faster pace of sales.

2. Address your acquisition efficiency. 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 the current market guides the way you establish the fair value of your acquisitions.

3. Trim reconditioning time and costs. It’s not uncommon for dealers to lose several days of prime retailing time as a fresh used vehicle investment awaits reconditioning. Top-performing dealers get vehicles out of the shop in 24 hours or less, and some even market them online before the recon work, detailing and full set of photos/videos are complete. Industry studies suggest it takes an average of seven to 10 days for vehicles to be retail-ready—a timeframe that saps your margin potential.

Dealers also have an opportunity to increase their front-end gross margins by more proactively controlling their outsourced reconditioning costs. In many dealerships, used vehicle departments pay third-party vendors for upholstery, windows and other repairs without paying much attention to the invoices. That was certainly the case when I was a dealer. Given today’s margin-compressed environment, it seems reasonable to ask these partners to find ways to reduce their costs by 5 percent to 10 percent to help you preserve your profitability.

4. Manage discounting. Just as some appraisers seem to acquire cars for the right money while others don’t, some sales associates are better at avoiding discounts than their peers. When you price your used vehicles to the market, there’s simply less room for negotiation, and your average showroom/other discounts 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 in today’s more transparent market.

Dealers who adopt these recommendations, and make them operational priorities, see front-end gross profit improvement fairly quickly. As you might expect, the degree of improvement correlates directly to the level of commitment and discipline dealers put to the task.

These dealers also gain a longer-term advantage. They’ve braced and bracketed their operations to keep margin compression from doing unnecessary damage.

By contrast, their competitors are complaining that used vehicle gross profits aren’t what they used to be, while letting the ceiling shrink even more.


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.

Time and again, after I ask the dealers about their slower sales pace, I get essentially the same answer: “Yeah, I know. We’re trying to get more gross on these cars.”

I’ll dig a little deeper to see what methods the dealers are using to get more gross.

Time and again, they’re taking the same play from the traditional used vehicle retailing playbook. They are raising asking prices, and making price adjustments less frequently, with the hope of gaining better front-end grosses.

These findings lead to two important points:

  1. Hope is not a strategy in today’s used vehicle market. The market’s too efficient and transparent. Customers know if your prices seem too high compared to everyone else. Some might investigate further. Maybe they’re missing something. Maybe there’s a good reason you’re asking more for essentially the same vehicle as the dealer across town. Inevitably, these customers will all end up in the same place. They’ll be interested in your vehicles unless and until your pricing makes more sense to them, compared to what they see in the market.
  2. Slower-turning inventory brings future trouble. Dealers sometimes justify the decision to allow a slower inventory turn rate by noting that their retail sales volumes haven’t suffered, and they may even be making slightly better grosses. But I’ll counter by showing how the slower turn is causing a harmful undertow. It often pulls a higher percentage of vehicles past 30 days of age, and sets up a higher likelihood of retail or wholesale losses in the not-too-distant future. In my experience, these losses often erase any front-end gross gains that may have come allowing your inventory turn to slow down.

Ultimately, I tell dealers that while the instinct to raise prices to improve your front-end gross profit may have worked in the past, it’s out of step with today’s more efficient and transparent market.

In my next post, I’ll dig into ways dealers can mitigate margin compression beyond pricing that won’t compromise the need for the inventory turn speed today’s market requires.

And for dealers who are contemplating additional price increases to get more gross, I’d submit that it’s a little like driving a vehicle with one foot on the accelerator, and the other on the brake.


Temptation Abounds. Will You Bite?

by dpollak on 01/30/2018 · 1 comment

‘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 prices.

I had to ask the question: “How did that work out for you last time?”

The answer wasn’t surprising. Last year, the dealer began acquiring more inventory late January to ensure he had enough vehicles to meet anticipated demand in early March. But, “by the end of February, the wholesale market had increased and we were selling aged units for less than it cost us to acquire inventory,” he says.

The dealer’s experience is not unlike those I’ve gleaned in conversations from other dealers. To an individual, they all admit that previous attempts to speculate on an expected uptick in retail sales often don’t pan out the way they thought they would.

Take this experience from a Texas dealer, who bulked up his inventory in anticipation of selling more used vehicles to replace those lost in Hurricane Harvey.

Indeed, the dealer sold more retail units, but he also suffered a hangover effect—a preponderance of 70-day and older vehicles he was forced to list at “fire sale” prices at the end of the year to get out of them. The upshot: The losses on the aged units effectively wiped out any gains the dealership realized from succumbing to the temptation to speculate.

“We thought the buying frenzy was going to last longer than it did,” the dealer says. “The projections of 750,000 to 1 million totaled cars wasn’t. Right now, we have 30 units on fire sale to get out of them. We just projected wrong.”

Such experiences have led me to conclude that dealers simply aren’t as good at gambling or speculating on future retail sales as they think. In fact, I’d assert that these attempts to play the market only pay off about 50 percent of the time.

Unfortunately, dealers often don’t remember the 50 percent of the times their speculative efforts don’t work, especially when they’re facing a fresh temptation to repeat the cycle.

On some level, the inability to resist this temptation is understandable. Dealers and used vehicle managers are typically individuals who like to gamble and take risks—witness the shoulder-to-shoulder blackjack tables after hours at any NADA convention in Las Vegas.

But I would suggest that dealers should strive to resist the temptation to speculate for the following reasons:

  1. Your past success. Like the two dealers mentioned above, it’s a useful, albeit sobering, exercise to honestly evaluate whether bulking up their inventory or holding on to vehicles really paid off in the past. How many of those vehicles sold quickly when the appointed time for their retail sale arrived? How many aged past the point where they delivered a sufficient return on investment? What was the average front-end gross for all of these vehicles (including any retail or wholesale losses)? In my experience, dealers find that their attempts to speculate panned out worse than they remember.
  2. Your holding costs. In many cases, the decision to stock up on inventory comes 45 to 60 days in advance of anticipated retail demand. This means if you acquire a vehicle for $15,000, you’re automatically saddling it with holding costs (assuming a $30/day average) that range from $1,350 to $1,800. This cost burden, which I recognize many dealers and used vehicle managers don’t regard as “real money,” makes it extremely difficult in today’s highly competitive market to realize a sufficient return on investment when the vehicles finally retail.
  3. Your crystal ball. In all my years, I still haven’t met anyone, in the car business or elsewhere, who can consistently and accurately predict the future, especially in an environment as competitive and volatile as today’s used vehicle market. We’ve all seen sure-fire winner vehicles turn out to be losers, which is a lesson worth remembering when the temptation to speculate strikes.

The bottom line is that the best dealers today are used vehicle retailers, not speculators. They don’t consider hope as a viable strategy for success. Rather, they focus their efforts on retailing everything they can in the current market. This strategy puts them ahead of competitors who can’t resist the temptation to speculate and too often get bogged down with the bad results.

{ 1 comment }

Four Key Resolutions To Improve Used Vehicle Performance


A new year brings much discussion about goals, resolutions and to-dos. That’s certainly the case with a lot of dealers, judging from conversations and e-mails the past few weeks. Collectively, the dealers are perhaps more clear-eyed about the year ahead in used vehicles than they have been in previous years. First and foremost, margin compression […]

0 comments Read more from Dale →



It’s not complicated.

0 comments Read more from Dale →

Two Questions That Matter Together—Why? and How?

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.

A Marketplace segment on a local National Public Radio station caught my ear yesterday. The segment featured an interview with Steve Sasson, the former engineer for Eastman Kodak Company who invented the first digital camera in 1975. Sasson discusses how his work began as a “filler job” handed to him by a supervisor. He details […]

0 comments Read more from Dale →

Three Ways To Work Around And Through The Used Vehicle Donut Hole


I’ve been struck by three trends in the current used vehicle market. First, late-model (three years and younger) vehicles account for almost 60 percent of retail sales, a fact affirmed in the latest Used Car Market Report from Edmunds. You can trace this development to the rise of off-lease supply, which many analysts expect to […]

2 comments Read more from Dale →

Webinar: A Four-Part Plan To Minimize Margin Compression


It seems margin compression is on the minds of a lot of dealers, judging from recent calls and conversations. Given the interest, I thought it would be useful to share a recent webinar I conducted with the American International Automobile Dealers Association (AIADA). In the webinar, I highlight four areas of longstanding operational inefficiency that, […]

0 comments Read more from Dale →

A Waymo Visit Brings Way More Future Mobility Insight


I did a little recon work prior to my visit this week to Google’s autonomous vehicle division, Waymo. I wanted to get a sense of how driverless vehicle technologies might be underway and visible in California’s high-tech corridors. Jay Seirmarco, an assistant general counsel for Cox Automotive who lives in San Francisco and works at […]

2 comments Read more from Dale →

3 Must-Dos To Combat Dealer Margin Declines


How many dealers figured they’d make up for ever-smaller margins in new and used vehicles by selling more cars in 2017? If you asked the question in a room full of dealers, I suspect most, if not all, hands would be in the air. “You make up your gross in volume” is the age-old rule […]

0 comments Read more from Dale →