In its 2014 report on dealership financial performance, the National Automobile Dealers Association (NADA) highlights a disturbing trend in used vehicles.

The NADA report notes that franchise dealers enjoyed a 6 percent increase in used vehicle sales compared to 2013—an increase similar to what dealers saw in 2013, compared to 2012.

Yet, net profits for used vehicles declined last year, which leads to a key question, “What gives?”

To answer the question, I took a deeper look at the data from 2012 to 2014. I found two data points that help explain why dealers are selling more cars and making less money:

1. Dealers relied more on auction purchases in 2014 than they did in the prior year. NADA reports auction units made up 26 percent of used vehicle acquisitions, while trade-ins remained relatively flat year over year. In 2013, auction cars fed 25 percent of dealeCar cartoon 300x226 3 Ways To Boost Used Vehicle Profitability While Selling More Carsrs’ used vehicle inventories, up from 24 percent in 2012.

2. Dealers continue to sell more expensive vehicles. In 2014, the average sales price of a used vehicle ran $18,846 up 4.1 percent from the prior year. The increase marked the fifth consecutive year where the average dealer investment in a used vehicle increased.

Some of you may be thinking, “Thanks, Dale. You’ve just re-stated the obvious. We all know it’s tough to acquire the cars we need at a price that provides sufficient front-end margin.”

But , in light of a market where you can’t source all the used cars you need at your door, and you’ve got to pay more than you’d like to buy units for elsewhere, here’s the question dealers should be asking: What are we doing to retail these units faster to maximize profit and minimize risk?

Unfortunately, the NADA data suggests most dealers aren’t asking this question. I say this based on evidence from dealers who do ask the question, and do so diligently. These dealers beat the NADA averages. Their used vehicle net profits have increased in recent years, and keep getting better.

The following are three best practices these dealers follow to sell more used vehicles and make more money:

Know your opportunity/risk right away. The dealers recognize that the more they can know about a vehicle’s retail potential before they acquire it, the better. By evaluating each vehicle’s Market Days Supply and Cost to Market metrics, the dealers know pretty well, if not precisely, how their investment in the vehicle will perform. With this knowledge, the dealers plot the best retail exit strategy that will maximize front-end margin and minimize losses. It’s also not uncommon for these dealers to have more aggressive retail exit plans for auction cars, given the cost/margin challenges these vehicles pose in today’s market.

Press down your days-in-inventory average. I would encourage every dealer to conduct a two-pronged test of their past three months of used vehicle sales. First, assess the front-end gross profit and return on investment (ROI) for each sale. Second, segment the sales by days in inventory. If you’re like most dealers today, you’ll find that most, if not all, of the units retailed after 30 days performed significantly worse than those sold in less than 30 days. I suspect you’ll also find the bulk of your break-even and money-losing deals occurred after the 30-day mark.

Top-performing dealers accept this 30-day reality. They approach it like investors. They know they have 30 days to maximize the margin/ROI on every car and, if a unit is/becomes especially troubled, they’ll work even faster to retail the unit and redeploy the investment dollars in a vehicle with better potential.

I encourage dealers to maintain at least 50 percent of their used vehicle inventory under 30 days of age at all times. Anything less, I’m afraid, means you’re under-cutting your department’s net profit potential.

Source more cars in your store. In addition to showing that dealers relied more on auction vehicles in 2014, NADA stats indicate that dealers acquired more trade-ins from new vehicle sales (42 percent compared to 41 percent in 2013), while getting fewer trade-ins from used vehicle customers (24 percent compared to 25 percent) and off-the-street purchases (4 percent, 5 percent, respectively).

You could read these stats one of two ways: Dealers saw fewer retail-worthy units from used vehicle trade-ins and off-the-street purchases, or they did a better job acquiring cars from new vehicle buyers, while letting other in-store acquisitions slip.

Either way, the stats indicate dealers are probably missing cars that, if acquired, would offer better margin/ROI potential and reduce the reliance on auctions.

In a year from now, it’ll be interesting to review the NADA data for the current year. In particular, I’ll be curious to see how well dealers have reversed the trend of selling more used vehicles and making less money.

 

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I’ve been asked recently for benchmarks on closing ratios for dealers.

The frequency of the question, I suspect, follows the fundamental change in the way today’s new/used vehicle shoppers zero in on a potential purchase. As most dealers are aware, shoppers do the bulk of their homework and research online. On average, they visit fewer than two dealerships to ink their next vehicle deal.

transport showroom car showroom  300x244 A Quick Look At Closing Ratios And “Closers”This dynamic makes it ever-more important for dealers to make the most of the in-store opportunities that come their way. Statistically speaking, it’s a near-certainty that if the customer doesn’t say “yes” and buy your car, another dealer will get the deal.

I asked some top-performing dealers for their closing ratio stats to offer some number-crunched benchmarks:

Internet: 15 percent

Phone: 20 percent

Walk-in: 40 percent to 50 percent

Note: Some dealers rely a simpler closing ratio rule of thumb. They expect to close at least 50 percent of every showroom opportunity, irrespective of the source.

The dealers also shared an insight: More and more, their closing ratios depend on the consistent execution of customer-centric processes, rather than people you’d consider to be “closers.”

“Our sales process starts online with our listings,” a Colorado dealer says. “From there, our people follow a process that facilitates, rather than forces, customers to make their decisions. When everyone does their part, and follows the process, we keep more business than we let go.”

 

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There’s no question that dealers like packs.

But packs have become increasingly problematic for dealers, sometimes in ways they fail or refuse to see.

I recently asked a group of dealers to share how much they packed their used vehicles. The responses ranged from $0/per car to $1,200/car.

I then asked the dealers at the low and high end for additional details:

Average monthly volume: The $0-pack dealer sells 120 units per month, off an inventory of roughly the same number of vehicles. The $1,200-pack dealer averages 40 units per month, off a 90-vehicle inventory.

Average front-end gross: The $0-pack dealer typically sees a front-end gross average oshowroomhumor2 3 Ways Packs Prove Problematic For Dealersf $1,300/car (for a monthly average total of $144,000); the $1,200-pack dealer averages $2,800/car front-end (for a monthly average total of $112,000).

Average sales associate pay/production: The $0-pack dealer pays an average $275 flat for each sold unit ($300 for cars sold at asking price; $250 if they’re discounted), and sales associates average 15 cars/month (or $4,675/month). The $1,200-pack dealer pays a straight 25 percent commission off of gross (minus pack), or a $150 mini for no-gross deals. The sales associates typically sell 10 units, which usually includes an average of three mini deals (or $3,250/month). This dealership also pays $50 spiffs for selling aged cars and F&I sales, which the dealer estimates adds another $300 or so to a sales associate’s paycheck.

After running through these numbers, I went a little deeper. I asked about average sales team turnover. The $0-pack dealer might lose one, maybe two, sales associates a year; the $1200-pack dealer loses about half of his team.

With this comparative backdrop, I asked the group if they thought the dealer’s $1,200 pack might be crimping his ability to increase market share and sell more used cars.

Some dealers immediately said “yes.” They pointed to the dealer’s relatively low monthly sales volume, slower inventory turns and higher turnover as evidence that the $1,200 pack contributed to a less-than-optimal performance for the used vehicle department and dealership as a whole.

Other dealers cried foul. It wasn’t a fair comparison. The dealers had different markets and operating philosophies. Besides, even if things could be better, the $1,200-pack dealer has every right to “protect the house.”

I asked a follow-up question: If the two dealers were competing in the same market, which dealer would more likely enjoy a higher level of market share and overall profitability?

At this point, all the dealers in the group at least acknowledged that the $0-pack dealer would likely be selling more cars, and making a better return on investment.

I then shared the three reasons I believe packs create trouble for today’s dealers:

  1. Packs are a tax. By applying this tax, dealers effectively burden every car with additional cost. To offset the effects of the added cost on their front-end margin, dealers increase asking prices. By definition, this practice makes each unit less appealing to today’s price-conscious buyers. You can spot a high-pack dealer pretty quickly: Their used vehicles are often priced higher, and retail less quickly, than the competition. To me, these are symptoms of a dealer trying to collect a tax that is out of step with today’s market.
  2. Packs breed picky buyers and high pressure appraisers. I asked the group: Do you think buyers and appraisers might simply look past perfectly good retail units at auctions and trade-ins because the cars can’t absorb the pack and deliver a desired front-end margin? Is it possible you’re missing at least a few trades because packs cause appraisers to get too aggressive? The dealers agreed that the scope of either problem would directly relate to the size of the pack.
  3. Packs slow your inventory velocity. If a pack causes a dealer to miss inventory acquisition opportunities, or contributes to the consistent loss of half your sales team, the used vehicle department isn’t performing to its potential. The $1,200-pack dealer admitted that while he’d like to sell more than 40 used units a month, he’d come to believe the benchmark represented a “good job” in the department.

As we wrapped up the discussion, I asked the $0-pack dealer how he arrived there.

“It didn’t happen overnight,” he says. “When we started, I had a $1,000/car pack and cut it by $200. Our volume and total gross picked up right away. The rest is pretty much history.”

 

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Dealer Enjoys Early, E-Commerce Success

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Used Vehicle Recall Regulation: A Future Part Of Life For Dealers?

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Most dealers would agree that today’s typical customer is far more price-aware than those of previous generations. This awareness stands to reason: A vehicle purchase is a big-ticket item. No one wants to pay too much. And, the Internet makes it easier than ever for buyers to get a sense of what a fair deal could [...]

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