I received an extremely astute question from a fixed operations director in Gainesville, Fla.:

Dale: What’s the best way for us to forecast our sales goals for 2015? We typically look at current year volume as a guide for the future. However, this approach seems like we might be misleading ourselves, especially if we have been, and expect to be, in a strong selling environment. For example, our dealership is performing at 145 percent of last year’s sales volumes. But I concede we are in a better selling environment and the market this year was better than last year. I believe we should be looking at market share as opposed to volume. Your thoughts?

Before I share my response, I think it’s appropriate to offer two observations that don’t directly pertain to the question at hand.

First, it’s an extremely good sign that a fixed operations director wants to get a more realistic read on sales expectations for the coming year. As we all know, dealers are increasingly dependent on fixed operations revenue for their overall profitability—a reality this fixed operations director no doubt fully understands. By asking the question, this manager is clearly looking beyond the four walls of his department to properly manage his team’s performance next year—evidence, I believe, of a “total gross” mindset at the dealership.

Second, the manager’s looking ahead to 2015 before Thanksgiving. This proactivity suggests a careful, deliberative approach to planning for the new year, a stark contrast to the rush-jobs that often typify next-year planning at many dealerships.

Now, on to my response:

I told the fixed operations director that I agree with his assessment of the value of market share, rather than sales volumes, as a benchmark for future performance—particularly in the current environment where “a rising tide lifts all boats.”

I also cautioned that sales volume forecasts and projections are often too broad to be meaningful for dealers in a specific market or region, where more localized factors (e.g., economic conditions, weather, etc.) can spur or stunt vehicle sales volumes.

By contrast, a dealer’s new and used vehicle market share essentially measures a store’s piece of the automotive retail pie in a given area. Even as the pie itself grows or shrinks, a dealer’s market share remains a telling gauge of sales performance.

I would encourage all dealers to undertake the same exercise as the fixed operations director. Calculate your dealership’s new and used vehicle market share for the current year, and then, with an honest assessment of your retailing strengths/opportunities and the competition, set your sales goals for 2015.

 

 

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Let’s be honest: Some dealers have taken historically high wholesale used vehicle values for granted.

vision gt 7629 620x349 300x168 3 Ways To Win Amid A Declining Wholesale Used Vehicle MarketThese dealers have eased up on their efforts to quickly retail every used vehicle, knowing that they’ll probably do OK if they decide it’s time to wholesale a unit. At some stores, dealers have realized a profit as they wholesale aged units.

But this luxury has pretty much disappeared as wholesale used vehicle values continue to decline, thanks to rising supplies and seasonally based value drops that arrive this time of year.

So now what?

The answer to this question, of course, is a return to the “retail-first” fundamentals that dealers should always follow, irrespective of the ebb/flow of wholesale market values. Indeed, dealers who focus on the decisions and steps required to retail every vehicle for maximum profitability believe wholesale values are simply the cost of entry to retail a car, not an aspect of their exit strategy.

Here are three fundamentals I recommend to help dealers maintain a “retail-first” focus as the wholesale market becomes more volatile:

Retail-focused appraisals. As wholesale values decline, it’s tempting for dealers to believe they’re stealing a car, particularly given the historically high wholesale valuations we’ve seen in the last two or three years. But this view typically obscures an important retail reality: In most instances, wholesale value declines result from increases in vehicle supplies. In turn, these cars inevitably end up as retail units, which often causes retail asking/transaction prices to diminish.

Dealers who appraise vehicles based on current retail conditions for a specific car rarely fall into this trap. Using technology and tools, they assess the current retail conditions as they size up an auction vehicle or a trade-in. In this scenario, wholesale valuations may play a role, but it’s the spread between the cost to acquire a vehicle (e.g., the Cost to Market) and its likely retail selling point (e.g., the Price to Market) that matter most.

When dealers use these retail-focused metrics, they instantly know if a vehicle fits their inventory needs and profit objectives, as well as steps they’ll need to take (e.g., cost-conscious reconditioning) to manage units that are likely to pose a retail profit challenge.

Real-time retail pricing. Dealers who focus on a retail-first used vehicle strategy are vigilant about each car’s price position relative to the market of the same/similar competing units. With this view, the ups and downs of the wholesale market merit little consideration; instead, the dealers balance each vehicle’s competitive retail price position (as measured by Price to Market data) with the unit’s profit and turn objectives.

At these dealerships, it’s common for dealers to check and adjust their retail pricing at least once a week, if not more frequently. By doing so, dealers are able to mitigate profitability and return on investment (ROI) risks that flow from incoming supplies of competing cars and diminished buyer demand.

Tighter retail turn timelines. I’ve long advocated that dealers maintain at least 50 percent of their used vehicle inventories under 30 days of age. The reason: This standard ensures dealers retail a greater share of their used vehicle inventory in less time to maximize profitability. In a volatile market, this turn-focused standard becomes even more important.

Interestingly, some dealers are even more aggressive, setting a goal to maintain 75 percent of their inventory under 30 days of age. This decision did not follow any worries about volatility in the wholesale market, or even significant shifts in the retail landscape. Rather, the dealers raised the bar for themselves. They recognized a higher level of process efficiency and sales throughput would elevate profitability and sales in used vehicles and other dealership departments.

Each of these fundamentals poses its own set of challenges, particularly for dealers who have become too dependent on the ability to wholesale used vehicles for a profit.

But, again, let’s be honest: A wholesale profit on a retail vehicle is really putting “lipstick on a pig.” After all, the vehicle failed as a retail unit, and this failure cost the dealership far more than the wholesale profit it might have earned.

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autosuccess AutoSuccess Podcast:  Fundamentals of a Retail First Focus
I recently participated in a podcast with Thomas Williams of AutoSuccess Magazine.  Please click here to listen.

 

 

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A Return To Campus Spurs Memories And Inspiration

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Drilling Down Into Overlooked Used Vehicle Opportunities

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  A quick test: What percentage of your used vehicle inventory do you retail in the first 10 days or less? OK. Time’s up. Do you know the correct answer for your inventory? Relax. I wouldn’t necessarily expect that you’d be able to ace the test. In fact, only a few dealers actually monitor their [...]

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Access: Velocity Wrap-Up: Dealer Take-Aways For The Not-So-Distant Future

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We’re still getting feedback from last week’s Access: Velocity conference here in Chicago. So far, the vast majority of dealer attendees consider the two days spent here as well worth the effort and expense. We also gained insights to make the next Access: Velocity event even better—with a particular emphasis on the real-life dealer-led workshops [...]

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