It’s like a leaky faucet.

Drip by drip, the retail profit you make on used vehicles goes down the drain.  bigstock money flow 3764122 237x300 3 Best Practices To Beat Back Used Vehicle Margin Compression

But unlike a leaky faucet, the fix for margin compression in used vehicles isn’t as easy as calling a plumber.

That’s because, more and more, ongoing margin compression in used vehicles is the nature of the business.

According to the National Automobile Dealers Association (NADA), used vehicle gross profits as a percentage of transaction prices has been shrinking, bit by bit, for nearly the past decade.

NADA data shows that in 2009, used vehicle gross profits ran 14.3 percent of average vehicle transaction prices, compared to 12.1 percent in 2016. This diminished return may not seem like much, but it’s a significant difference when you consider the average used vehicle transaction price has grown by nearly $4,700 (from $15,210 in 2009 to $19,886 in 2016, a 31 percent increase).

The challenge, and opportunity, for dealers rests in how you contend with margin compression.

The fix isn’t as simple as selling more used vehicles. In a margin-compressed environment, you have to sell more used vehicles more efficiently to maximize an ever-smaller return on an ever-larger investment.

To achieve a higher level of operational efficiency and sales, I recommend the following best practices for dealers:

A consistent sourcing pipeline. You can’t retail vehicles you don’t have in stock. More and more, dealers are employing full-time, technology-enabled sourcing specialists to maintain a steady supply of incoming auction inventory. The specialists free up managers who previously found themselves lacking sufficient attention and time to selectively acquire the right auction vehicles, with specific Cost to Market and Market Days Supply metrics, to fill inventory needs. It’s not uncommon for these time-addled managers to just buy cars because their inefficient sourcing methods lead to frustration and less-than-optimal decisions. Similarly, the specialists give managers more time to oversee appraisals and maximize every trade-in opportunity.

Faster retail-ready turnaround. It’s still fairly common for used vehicles to spend five, seven or even 10 days in service before they are reconditioned, detailed, photographed and posted online. A Midwest Chevrolet dealer found that by trimming three days off his dealership’s eight-day retail-ready average, he realized an additional $300,000 in front-end gross profits. The dealer is now working to consistently meet a 36-hour turnaround, and anticipates the improvement will generate an additional $200,000 in front-end gross.

The example highlights the “time is money” axiom of retailing vehicles in today’s margin-compressed market. I would also note that top-performing dealers set aggressive benchmarks of 24 hours or less to complete detail and reconditioning work—a goal that typically requires automotive RO approvals when repair estimates fall within expected ranges, and dedicated recon teams in service.

Reduced inventory age. I currently recommend that dealers strive to retail at least 55 percent of their used vehicle inventory in less than 30 days. Dealers who achieve this objective, which requires a Velocity-oriented pricing strategy, are doing all they can to minimize margin compression and take advantage of retailing vehicles when they are fresh and stand to deliver maximum gross profit. To understand why reducing the days to sale of used vehicles is so important, I encourage dealers to do a quick study of the gross profits they achieve on vehicles retailed in less than 30 days compared to vehicles retailed after 30 days.

In most cases, the results show the average front-end gross profit declines by at least 50 percent once vehicles cross the 30-day line. If you segment vehicles retailed after 45 days, it’s not uncommon to see a roughly 50/50 split between vehicles that make a little money and those that lose a lot more.

This analysis often leads dealers to agree with my assessment that any vehicle that you don’t retail within 45 days represents a failure of management. For some reason, right or wrong, someone turned their back on these units, when they should have been working harder to sell them.

It should be noted that none of these best practices represents an easy fix. Each requires dealers, managers and team members to think and do things differently, sometimes in a manner that’s contrary to what they’ve been taught.

But dealers who get past these hurdles find their reward. It comes in the form of improved used vehicle performance and profitability in an era where neither can be taken for granted.

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One of the first movies that opened my mind to the power of technology was 2001: A Space Odyssey, the 1968 film from Stanley Kubrick.

The movie was a cautionary tale about the danger ofHal image Hal? Where Are The Used Cars You Purchased? computers and technology becoming more human-like, creating dire consequences for actual humans. The central character was Hal, a computer that controlled the spacecraft and interacted with its crew.

Of course, the movie purposely over-dramatized the risks of a technology-driven overthrow of our society, but its point about the ever-growing power of algorithm-driven machines is even more relevant today.

I was reminded of Kubrick’s film while reading a New York Times piece about the decision by the large investment fund company, BlackRock, to eliminate managers of its mutual fund in favor of machines.

This development is a big deal. It’s another step in technology-driven disruption of the investment world, where companies like BlackRock have believed that a “human touch” offers a competitive and financial advantage for individual investors.

Except that the data suggests otherwise. The story notes that algorithm- and technology-driven investment companies like Vanguard have actually out-performed their people-powered competitors—while charging less to their clients.

BlackRock’s decision, and the technology-driven trends it represents, is especially relevant for dealers. In some ways, our business is like the investment business years ago. Day-to-day decisions were largely made by people who, to varying degrees, relied on technology and tools to make their decisions, and track results.

In the ensuing years, the roles reversed. The technology and tools took over the decision-making, and the former decision-makers shifted to more of an advisory- and oversight-type role. All the while, this role reversal lowered the cost of doing business, providing more efficiency and decision-making precision that combined to increase overall profitability.

The story quotes Mark Wiseman, a BlackRock executive who will oversee the company’s new approach to investment management: “The old way of people sitting in a room picking stocks, thinking they are smarter than the next guy — that does not work anymore.”

You could apply this statement to the current state of new/used vehicle inventory management in dealerships. The “old way” is still largely the only way decisions get made. You still have people choosing inventory, deciding what to pay and how to price/promote individual vehicles. To a person, these individuals believe they have “eyes” and instincts that are better than the competition down the street.

Perhaps the biggest take-away from the story is this: BlackRock is essentially playing catch-up ball. They appear to have resisted the advance of technology until it became painfully obvious the time had come to do things differently.

In this way, I find the BlackRock story to be an early indicator. It illustrates technology-driven change that is likely imminent for the car business. Similarly, it indicates an opportunity for dealers who get in front of the emerging trends.

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I had the opportunity to take in a speech this week from former Ambassador Dennis Ross.

Ross is a unique person. He’s served as a diplomat under three presidential administrations. He was a key player in Middle East peace talks for Presidents George W. Bush and Bill Clinton. He also served under President Barack Obama’s administration on the National Security Council as a special assistant and senior director for the Central Region, which includes the Middle East, the Persian Gulf region and Southeast Asia.

Dale and Dennis Ross 225x300 A Key Problem Solving Lesson From A Respected Diplomat

Ross spoke to offer his perspective on the challenges President Donald Trump will face in foreign policy, specifically related to countries in the Central Region, and promote his latest book, “Doomed to Succeed: The U.S.-Israel Relationship from Truman to Obama.”

Ross said President Trump will “confront the greatest set of challenges (in the region) than any of his predecessors.” He went through the list of currently unstable states—Syria, Iraq, Yemen, Egypt, Libya and others. He highlighted the complexity of the competing interests and players involved in each.

But Ross’ perspective on how President Trump, or anyone, should approach these problems struck me as the most compelling take-away from the presentation.

His central point boiled down to this: Today’s solutions can easily become tomorrow’s problems—a scenario that’s more likely to prove true if you don’t at least consider and try to think through the unanticipated and unintended consequences before today’s decision becomes final.

For example, in Syria, Ross believes the extremist group ISIS will eventually be defeated, and the conflict over current President Bashar al-Assad’s rule ultimately resolved. But those developments are only the first steps. The real work, and “victory” as Ross put it, comes when you’ve rebuilt a stable society with proper government, laws, resources and security that ensure the safety and welfare of the people. If any one of those rebuilding efforts fails, conditions are once again ripe for instability and unrest.

I found Ross’ point highly relevant, both for myself and dealers at large. As a group, we pride ourselves on our instincts and abilities to make quick decisions. We thrive in the moment, and don’t often consider consequences until they arrive at our desks.

But we’re working in an increasingly complex, fast-changing and inter-connected business. To be sure, it’s less volatile and consequential than any of the situations Ross described in the Middle East.

Still, as I left the auditorium, I found myself thinking: Have snap judgments outlived their usefulness?

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Chevy Bolt Pricing: A Sign Of The Times

03.21.2017

I was intrigued by an Automotive News article this week that highlights pricing disparities among dealers as the new Chevrolet Bolt EV arrives in showrooms in select markets. The story notes a mix of price discounts and mark-ups across the seven states where General Motors is introducing the vehicle. Some dealers are discounting by as [...]

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Two Perspectives On Sourcing Auction Vehicles

03.07.2017

Let’s imagine there are two dealers in the auction lane, bidding for the same car. The first dealer wants the car because he’s sold a few of the same units recently, and did pretty well in terms of front-end gross. The three-year-old car has about 40,000 miles, and looks/smells pretty good. The CARFAX notes the [...]

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4 Reasons To Rethink How You Source Auction Vehicles

03.02.2017

“How has your auction-sourcing process changed in the past 12 to 18 months?” I’ve been asking dealers and used vehicle managers this question a lot lately. It’s interesting to note the four most-common responses: “Not much has changed.” About a third of dealers say things are pretty much the same when it comes to sourcing [...]

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3 Troubling Auction Sourcing Inefficiencies

02.27.2017

I’ve recently gained a deeper appreciation for the tireless efforts of used vehicle managers and buyers charged with acquiring inventory from auctions. Many spend half their time at work, plus uncounted hours at home, away from their families, to find and vet auction vehicles for an upcoming sale. This reality has given to a belief [...]

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Advancing The “No Barriers” Approach To Life

02.17.2017

I can still remember tearing up at the 2014 Access: Velocity event as Erik Weihenmayer shared his “No Barriers” approach to life and perspective at the meeting. Since that special time in Chicago, Erik’s been busy. He’s just released a new book, No Barriers: A Blind Man’s Journey to Kayak the Grand Canyon. As always, [...]

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An Afterglow That Shines Strong

02.12.2017

It’s hard to pinpoint the proper word. Moved. Uplifted. Changed. Inspired. The reality is I’m feeling a combination of all of these as I bask in the afterglow of meeting Pope Francis last week. To be sure, I’m very touched by all the kind words, love and support from all of you who followed my [...]

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Day 3 in Rome: A Truly Magical Moment

02.10.2017

Moving. Inspiring. Mystical. Powerful. Spiritual. Those were the words running through my mind after speaking one-on-one with Pope Francis earlier today. Thankfully, I woke up this morning with a clear idea of what I would say to the leader of the world’s largest faith. “Your Holiness. I want to thank you for the light that [...]

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