When I was a dealer, we thought we were doing a pretty good job if we managed a .5:1 used-to-new-vehicle sales ratio.

If we retailed 50 new Cadillacs a month, I expected that we would also sell 25 used units, which were almost always Cadillacs.

A recent Automotive News piece suggests that, since I was a dealer 20 years ago, the used-to-new vehicle sales ratio for many dealers hasn’t significantly changed—despite my sense that most dealers express a clear desire to retail more used vehicles to offset growing margin compression in their variable operations.

So what gives? Why haven’t dealers been able to make more significant gains in used vehicles? What known/unknown factors might be holding them back?

These are the questions that came to mind reading the Automotive News article. It focused on the used-to-new-vehicle ratios among its top 100 dealership groups. Less than 20 groups—18, to be exact—achieved a 1:1 used-to-new ratio and, among those, only nine achieved a 1.25:1 ratio.

My Cox Automotive colleague Les Abrams shares my view that, for today’s dealers and margin compressed market, a 1:1 ratio suggests you’re doing a “good” job, and a 1.25:1 (or better) ratio indicates a “great” job.

Such performance levels help you light up what I’ve long called the “wheel of fortune” in your dealership—the gross profit opportunity every retail used vehicle sale represents for your service/parts department, your F&I office, your used car department and, yes, for your new vehicle department.

But these higher levels of performance appear elusive. National Automobile Dealers Association (NADA) data shows that while the used-to-new-vehicle ratio has nudged forward in recent years, it seems to stubbornly hover around .75:1.

For the past 10-plus years, I’ve been blessed with the opportunity to help dealers improve their used vehicle performance, in part by encouraging them to make the 1:1 ratio a primary objective. My work has also allowed me to see and understand why some dealers struggle to make the wheel of fortune spin faster at their stores.

Here are three common factors that diminish used vehicle performance:

A front-end vs. “total gross” mentality. I’ve long made the case that today’s market is too efficient and transparent for dealers to get the front-end gross profits they believe their used vehicles should deliver. They get frustrated, and they double down on the “let’s get gross” strategy. Unfortunately, today’s market isn’t likely to reward traditional gross-building tactics like waiting for the right buyer, or setting your asking prices above the market. Both tactics result in older-age units, deeper “get ‘em out of here” spiffs and discounts and less overall profitability. These tactics also slow the wheel of fortune.

The better way, I believe, is that dealers should adopt a more investment-minded, total gross mentality. With it, dealers learn to take losses and low-gross deals in stride. Their average front-end gross is important. But it’s even more important that they turn used vehicle inventory to generate consistently higher returns across every dealership department.

Too-picky vehicle preferences. Some dealers are pretty picky about the used vehicles they’ll retail. They’ll pass on units their market wants in favor of those they prefer to sell. To some degree, this thinking makes sense, given dealer desires for differentiation and specialization. But top-performing used vehicle retailers have long ago shed their preferences in favor of market and financial particulars that affirm they can quickly retail a vehicle, and make money, if they acquire it.

A related point: I understand some dealers face factory pressure to meet certified pre-owned volume targets, which can tie up capital and management attention that might be better deployed on different inventory. To be sure, dealers need to play ball with the factory. But let’s remember: It’s your ball, and your playing field.

Process inefficiencies. Every used vehicle department has a lot of moving parts and processes, each of which affects the other. Whenever I hear a dealer share his/her struggle to improve their inventory sales velocity and turn, we’ll often uncover unnecessary inefficiencies with appraisals, reconditioning, merchandising and pricing. Dealers must recognize that in today’s more efficient market, time to market and time on market, must be compressed to maximize performance and profitability.

I hope this discussion helps you assess where your current used-to-new-vehicle ratio stands, and craft next steps to improve your used vehicle performance through the remaining months of this year.

After all, in today’s unforgiving market, if you’re not getting better, you’re getting worse.

 

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A recent Automotive News article discussed how, even among top dealer groups, it’s difficult for some dealers to achieve a 1:1 used-to-new-vehicle sales ratio.

The article noted that among the top 100 dealership groups ranked by used vehicle sales, less than 20 groups achieved a 1:1 used-to-new ratio and, among those, only nine achieved a 1.25:1 ratio. The findings mirror National Automobile Dealers Association (NADA) data that says the average dealer achieves a roughly .75:1 used-to-new sales ratio.

I’ve long advocated that dealers should strive to achieve at least a 1:1 ratio for three reasons.

First, dealers have more direct control of their used vehicle business. They can typically choose the vehicles they want to sell, and price them the way they prefer, without too much factory intrusion.

Second, used vehicles typically generate more gross profit on a per-car basis than new vehicles, particularly when dealers make cost and time efficiencies top priorities.

Third, the used vehicle department is the hub of what I call the “wheel of fortune”—every used vehicle represents an opportunity to generate gross in parts/service, F&I and the used vehicle department itself. Best of all, the wheel spins faster as you sell more used vehicles more quickly.

I was curious to better understand how these and other factors may fit the operational strategy of the Delavan, WI-based Kunes Country Auto Group, which ranked as the top performer on the Automotive News list. The Kunes group achieves an impressive 1.7:1 used-to-new-vehicle sales ratio, according to the article.

My conversation with Jennifer Myers, the Kunes group’s director of marketing, touched on three pillars of the 15-store group’s used vehicle success that I thought would be useful to share more broadly.

Pillar 1: A “used car”-minded dealer principal. Dealer Gregg Kunes makes used vehicles a higher operational priority than new vehicles. “Gregg’s philosophy is that if we have a Ford store, everybody knows we have Fords. So we highlight used cars. On our front lines, you’re always going to see used cars, not new Fords or Chevys or the franchise brand,” Myers says.

She shared a story about the group’s acquisition of a Honda store a year ago. It typically sold used Hondas, and a few Toyotas. Today, you’ll see almost any brand in the dealership’s used vehicle inventory. “We kind of shocked the team there by putting used Fords and whatever else in the inventory,” Myers says. “They’ve been doing really well.

Pillar 2: A “serve your customers first” philosophy. This philosophy manifests in an offer the Kunes group advertises in each store and beyond: If a customer can’t find the exact used vehicle they want in inventory, Kunes will get it in 72 hours. “We want to be our customer’s dealer,” Myers says. “We don’t want to lose them for silly things like we don’t have the exact red Ford Focus they want today. If that’s the case, we’ll go get it.”

The philosophy also extends to credit-challenged customers, who make up about half of the group’s used vehicle buyers. “Gregg imparts to the whole team that we take a different approach with subprime. He’s always looking for the next sale in the relationship. Can we do a good enough job today to get a brother, sister or neighbor in here? For us, the subprime market is an opportunity to really take care of people when they’re down. They’re usually not treated well by other dealers and used car lots. Our philosophy is that we’re helping people out of a bad situation that sometimes isn’t their fault. They have credit problems because Mom got sick and they had to quit their job, or they’ve got a lot of medical bills.”

(A quick side note: Kunes’ customer-first philosophy has an interesting history—perhaps owing to dealer Gregg Kunes’ very first car deal, which he discusses in a Q&A here.)

Pillar 3: Highly efficient sourcing. In addition to capturing as many trade-ins as they can, the group’s used vehicle managers have taken advantage of technology and tools in recent years to efficiently acquire a larger share of their inventory online. The group will go to physical auctions in Chicago and Milwaukee because they’re close. But the group recognizes that more efficient sourcing allows managers to be in stores, working with customers and their teams. “Our stores are in more rural, smaller markets,” Myers says. “You can’t take that person away from the store for that long.”

My hat’s off to dealer Gregg Kunes and his team for their stellar achievement—and for demonstrating that with the right approach and philosophy, a dealer’s used vehicle department can be an effective engine for significant growth and success.

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A Dealer in Distress

by dpollak on 05/04/2018 · 1 comment

I received the below note from a dealer experiencing a very stressful Spring selling season, but probably not for the reason you think.

Note from dealer:

Hey Mr. Pollak, hope all is well and you are having a blast doing what you do.

Wanted to say hi and give you an update from your biggest supporters from Pinconning. Life is good for us as we keep plugging along, after 5 years of growth and records by applying the “Velocity philosophy” we rolled into 2018 hopeful but understood that these increases would not last. For us to maintain our 2017 sales level would be a big win for us. We kept analyzing and looking for ways to improve to keep pace with the ever-changing market.

2018 has been a struggle to say the least, we have run out of facility and man power! We have delivered 853 used cars in the first four months of 2018 by applying the Velocity philosophy, setting all-time records in both sales and net. I called Russell early this month and told him we need to back it down…can you believe that? I should also let you know we have sold 40 new Chevys which equates to 150% sales effective by Chevy standards.

We will keep struggling in Pinconning until we get this all figured out.  Thanks for all that you have done and continue to do.

Brad Gross, Schafer Chevrolet

My reply:

Hey pal, keep your chin up.  I’m so sorry to learn of your struggles operating a Chevy dealership and used car operation in Pinconning, Michigan, population of 1307. Retailing 853 used vehicles in 4 months, or an average of 213 per month is a marginal performance at best when you consider the potential addressable market of 300 million Americans.  You obviously have much more upside potential, and with just a little more effort and resources of human capital and facility you might claw your way to a respectable level of performance. Stay focused, keep your head down and pass my best regards on to Russell and Darlene. 😊

 

 

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Automotive News Addresses Used Vehicle Margin Compression

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NADA Day 3: Final Thoughts On A Great Convention

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NADA Day 2: A Telling Conversation and Other Nuggets

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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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