A Case Of One Step Forward, Two Steps Back

Mistakes happen in used vehicles. Simply put, there are too many things that could go wrong, for everything to always go right.

That’s what makes the following story from a used vehicle manager so troubling.

Last December, the manager made a decision to stock up on inventory. He had no choice but to acquire the vehicles from auction, given new vehicle sales had slowed the pipeline of trade-ins. His ratio of auction to trade-in vehicles went from 50/50 to 70/30, respectively.

To make matters worse, auction prices were high. The manager, a student of the Velocity Method of Management, realized that he’d likely acquire the vehicles at a Cost to Market ratio at/near the Price to Market ratio where he typically retailed many units (around 92 percent to 94 percent).

The manager pulled the trigger. “For the past two years, if we had inventory and we followed our strategy, we sold the cars,” he says. “I made the choice to have vehicles available to sell.”

The manager also accepted the risk of additional inventory in the context of the bigger, “total gross” picture. During the prior two years, he made auction-purchased units a fast-turn priority. It wasn’t uncommon for these vehicles to retail as “$0 gross” deals to drive gross in other departments. “We made nearly $1 million in back-end money off the auction units last year,” the manager says. “That doesn’t count dock fees or F&I income.”

But then the market slowed down, forcing the manager to become even more price-aggressive to retail out of the higher-cost cars. “We took a thumping,” he says. “But the worst thing we could have done, from an investment perspective, was to sit on those cars.”

From my vantage point, the manager did exactly the right thing. If you make a mistake, face the music fast, and move on.

Unfortunately, the manager’s dealer didn’t see it that way. Instead, the dealer issued an edict to raise front-end grosses by $450/car.

Guess what’s happening now? As he works to meet the dealer’s directive, the manager’s unable to maintain inventory velocity, and monthly sales are down by two dozen-plus units.

“Our front-end grosses are better, but we’re actually losing money if you look at the dollars returned to the dealership from used vehicles,” the manager says. “It’s a little frustrating to feel like we’re going backwards, but we’ll get it right after the dealer sees the missed opportunities.”

I promised to keep in touch with the manager as he strives to re-ignite his Velocity strategy. Stay tuned.