Astute Velocity dealers have understood that the “car is the star” in used vehicles.

That’s why they go to great lengths to make sure they acquire vehicles with the color, equipment and trim levels that market data affirms will matter most to potential buyers. To be sure, they still acquire and retail “bread and butter” cars, but they don’t expect these vehicles to deliver the gross profit, or sell as quickly, as units that the market validates as truly special.

In recent weeks, I’ve been struck by the number of dealers who are realizing similar, “the car is the star” insights in new vehicles.

1941ChevAKPickup A New/Used Vehicle Parallel: The Devil (And Your Gross) Is In The DetailsTake John Smith, Jr., owner of the Fort Smith, Arkansas-based Smith Auto Group. Earlier this year, his Chevrolet store had high hopes for the manufacturer’s newly redesigned ¾-ton Silverado pickup. But over the summer, Smith was troubled when he saw the numbers as they sold the trucks.

“I thought, ‘OK, why did we move this truck for this low amount of gross? It’s a pretty hot commodity,’” he says.

After reviewing market data with his manager, Smith and his team realized the problem. “We had the package below where we needed to be in the marketplace,” he says. “We found that in this market, people buying that truck are going all the way and want all the bells and whistles. That takes those trucks to the $60,000 range, which is a pretty steep truck. But they’re selling.”

To be sure, Smith notes the “constraints were on” and “we took what we could get” when ordering the pickups from the factory.

I’ve heard similar insights from dealers using vAuto’s Conquest system. They are now able to see how much color, equipment and trim nuances across model lines make the difference between a “star car” and a “bread and butter” unit that merits a turn-minded exit strategy.

“We’ve moved from having a knee-jerk reaction to keeping a watchful eye on our new vehicle inventory,” Smith says. “A consistent, watchful eye is far more valuable than having something creep up on you and hit you in the head.”

 

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I’ve been hearing more disenchantment and doubt from dealers about the value of a turn-and-earn strategy for retailing used vehicles, which I call the Velocity Method of Management.

The most vocal detractors are typically dealers who have long taken pride in the average front-end gross profit they achieve in used vehicles. The dealers like seeing their stores listed at the top of the 20 Group composites, with front-end gross averages that can run $1,000 or more than their peers.

It’s not too uncommon for turn and earn-focused Velocity dealers to come homeAmazing futuristic concept cars 13 300x134 3 Reasons A Front End Focused Strategy Falls Short In Used Vehicles from a 20 Group meeting feeling a bit deflated. Their front-end gross profit average is nowhere near the top dealer. They’ll then ask for guidance on how they can improve their performance and show up at the top of the page at the next 20 Group meeting.

More often than not, I tell these dealers to hold their horses. We’ll then take a closer look at the health of the high-gross dealer’s used vehicle inventory and their rate of used vehicle sales.

Time and again, the dealers with the highest front-end gross profit averages have more aged vehicles than they should, and their rate of used vehicle sales over the past five years tends to be flat or trending down. In other words, their front-end gross profits may be impressive, but the overall performance of the used vehicle departments isn’t where it could or should be.

The analysis gets even darker when you consider these dealers don’t regularly write down aged used vehicles to their actual wholesale cash value, and apply the loss to year-to-date, front-end gross profit. If the dealers undertook this level of honesty in their accounting, the average front-end gross profits they share would inspire much less envy.

Of course, such “dirty details” typically don’t generate much discussion at the 20 Group meetings—a symptom, I think, of the gentility dealers bring to the meetings and the traditional belief that average front-end gross profit is a reliable barometer of a dealership’s overall performance in used vehicles.

I advise dealers that they’d be better off worrying about the “total gross” they can generate from a turn and earn strategy in used vehicles rather than pumping up their average front-end gross profit. To make the case, I’ll share three reasons why I believe a single-minded focus on average front-end gross profit is the wrong strategy for today’s used vehicle market:

1. You can’t sell cars as quickly as the market requires. While my analysis of used vehicle inventories and sales rates at dealerships with high front-end gross profit averages isn’t scientific, the results are remarkably consistent. To me, the consistency indicates a market where consumers are too smart to pay too much for used vehicles, and dealers who only aim for high front-end gross profits on every car inevitably end up with aged inventory. This is not to suggest that dealers shouldn’t try to maximize front-end gross profits; rather, I’m saying that today’s market conditions require dealers to get in/out of their used vehicles faster than they had to in the past. In most cases, used vehicles lose their ability to make a meaningful margin contribution before 45 days in inventory. If you hold out for maximum front-end margin, you’ll pay the price with aged units and miss opportunities to redeploy the investment into more profit-productive vehicles.

2. You lose sight of other money-making opportunities. Think of your last trip to a gas station. Chances are pretty good you bought something other than gas (e.g., a snack, soda, etc.). The reason gas station owners offer so many non-fuel products flows from two factors—margins on gas sales are terrible, and each stop at the pump offers other higher-margin sales opportunities. To be sure, dealerships aren’t gas stations, but dealers share the pain of market-driven margin compression on the primary products they retail. To combat this market reality, I urge dealers to recognize that each used vehicle sale, whether it’s a short deal or even a loss, means money-making opportunities in F&I, service and parts—not to mention the cycle of future profits if they take in a trade.

As dealers adopt this “total gross” mindset, their inventories turn more quickly, they take fewer trips to the auction and every dealership department benefits. As a long-time Velocity dealer recently put it, “I don’t pay much attention to my front-end average anymore. I’m more focused on making my used vehicle department drive the profitability of my dealership.”

3. Your sales volume suffers. In market after market, dealers who adopt a turn-and-earn strategy that emphasizes “total gross” production are doing better than ever. They’re setting sales volume records, making more money and, in some cases, they’re buying up competitors who used to boast about their high front-end gross profit averages, even as their sales volumes limped along.

I would encourage tradition-minded dealers who believe that front-end gross matters most in used vehicles to consider the following quote from Mark Twain: “The less there is to justify a traditional custom, the harder it is to get rid of it.”

 

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Consider the following research findings about the up-and-coming generation of car buyers, known as Milennials or Generation Y:

  • Theirs is a “kinship economy,” according to J. Walker Smith, chairman of The Futures Company, a marketing research firm. As Millennials engage retailers, a positive experience is paramount. “It’s all about how we resonate with people,” Smith says. “They don’t want a relationship with your brand, they want relationships with other people.
  • They expect to “co-create” retail experiences, says Sheralyn Hartwell, executive director of Frank N. Magid Associates, which specializes in business strategy research and development. “They expect to have their own custom experience, and they expect to be co-creaters,” Hartwell says.
  • They believe they are a generation of “creators” who are part of a group that will “change outdated systems,” says Dannielle Paponetti, director of ad sales research for Viacom Media Networks, which owns MTV and VH1.
  • They view cars as “appliances” that offer the ability to “explore and control” their destiny. They are less likely to get driver’s licenses when they reach driving age, and vehicle purchases often coincide with life events, such as a new job or relocation.
  • They use technology (smart phones, in particular) to research shopping decisions, and they “expect you to know more than they do” about the products/purchases under consideration, Hartwell says.
  • They are less than satisfied with the in-store experiences dealers offer, says Isabelle Helms, vice president, research and market intelligence for Cox Automotive. In particular, negotiation and paperwork are among the chief complaints they cite about buying vehicles, she says.

I gleaned these insights from a recent Cox Automotive-sponsored research summit in Atlanta. To me, the individual findings were not all that surprising—they ran consistent with what I’ve read and seen in the past. However, taken as a group, the insights got me thinking about three specific things dealers will need to do to remain relevant and satisfying retailers as they increasingly serve a new generation of smart, technology-astute buyers.

1. Align your sales process and strategy to emerging expectations: It shouldn’t surprise any dealer that tomorrow’s generation of vehicle buyers doesn’t like a purchase process that requires negotiation and up to four hours in the showroom to complete a deal. In fact, these are key drivers behind the growing number of dealers who have re-engineered their sales strategy toward a model that moves cars with little or no negotiation. Some are pressing the in-showroom sales timeline to 90 minutes and less.

This model requires two steps many dealers are still reluctant to undertake—putting “first pencil”-like prices on new/used vehicles online, and standing firmly behind their market-validated asking prices in the showroom.

To be sure, this sales strategy re-alignment isn’t easy. It’s really a cultural shift that requires payplan and process changes to advance a business model where transparency leads to trust and, in turn, trust leads to more cost- and time-efficient sales and improved profitability. Currently, dealers who have adopted the limited/no-negotiation models report positive early pay-offs, and greater satisfaction from Millennial/other buyers who are delighted to share their experiences with friends.

2. Embrace Technology: If anything, the findings listed above suggest that the speed of technological change for dealers will only increase. Millennial buyers like photos, but they love videos. They get frustrated when they can’t easily find prices or vehicles using mobile devices. More and more, they’ll also want to complete a greater share of their vehicle purchases online.

In her research findings, Hartwell shared that Millennials want to engage retailers who “get them.” This means dealers will need to know more about each customer before the first phone call or showroom visit—a level of understanding that is only possible with new technologies. In the end, dealers will need to make sure every customer engagement picks up where the last one left off.

3. Let go of the Gen Y stereotypes: Paponetti’s research reminds Baby Boomers like me that we can be dismissive of the positive traits Millennials can bring to a business. They consider themselves creative innovators who thrive in collaborative environments and question the “whys” behind processes that strike them as inefficient or outmoded. They’re technology “natives” for whom adapting to new technologies is relatively easy. They have a willingness to take risks and learn from mistakes. They are loyal and hard workers when they receive the near-constant level of feedback they need to shine and feel happy.

As dealers prepare for future buyers, they will be challenged yet again to let go of some of the traditional ways of retailing new/used vehicles. The good news: Based on the size of the Millennial demographic, there will be a lot of up-and-coming professionals entering the work force to help take their businesses where they’ll need to be.

 

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