Why Sometimes Even the Best Dealers Fail

In my latest book, Velocity Overdrive: The Road to Reinvention, I wrote about the difficulty for dealers in maintaining their commitment to the Velocity Method of Management. I had an experience yesterday that reinforced how hard it is for even the best velocity managed dealerships to stay away the traditional dealer culture. I received a call from the used car director of one of the nation’s top performing velocity dealer groups. He told me there was much criticism about dealership’s used vehicle performance during their 2012 year-end review. I asked how there could be any criticism given the fact that they turn inventory, on average 18 retail times per year, sales in 2012 were up 15% as was F&I and internal service labor and parts. I asked what in the world could possibly be criticized?

I was told that the group’s owner was in possession of a composite report from his 20 group, which reflected an average gross profit on used vehicle sales year-to-date that was considerably higher than his own group’s performance. According to the owner, this meant that the group significantly underperformed its peers and left a lot of money on the table.

Really? You can’t be serious… Let me tell you something about those dealers that averaged $1,800 and above of gross per unit. I said all of those dealerships have a significant portion of their inventory over 45 and even over 60 days of age. I said that if those vehicles were written down to their actual cash value, and if that write down was applied to the dealership’s year-to-date gross profit, then their average would not be $1,800 as reflected on the composite – but rather much, much lower. What about that, I asked? Does your group’s CEO recognize that there is absolutely no negative equity in his multi-million dollar inventory? How in the world can such a high-performing velocity group, run by such an intelligent leader, miss something this obvious? In fact, however, the failure of dealers to recognize the negative equity in their used vehicle aged inventory is pervasive in the industry.

Any dealer today that maintains a high average gross profit of $1,800 or above is holding out for big grosses, which means that they are asking over-the-market money for their vehicles, which means that they are missing many sales opportunities and consequently, either aging inventory and/or taking large wholesale losses. This conclusion is an immutable fact of reality. Today, any dealer that understands the reality of the market is well advised to focus on their total rather than their average gross profit, and most importantly, recognize that industry benchmarks of average gross profit are meaningless without considering the inevitable mountain of negative equity hiding in their aged inventory.