4 Ways To Drive A Retail-First Strategy In Used Vehicles

Here’s a key question every dealer should consider as they look for ways to improve their performance in used vehicles: Are we wholesaling too many cars and, if so, how can we retail more of these units?

The question follows recent discussions with dealers who have set ambitious goals to improve their used vehicle sales and profitability in 2016. To their credit, many of these dealers plan to focus on making vehicle acquisition, merchandising and pricing more efficient and market-focused.

But I found it curious that only a few of these dealers had established firm goals for reducing, if not eliminating, the number of retail vehicles they took to auction every month. As one dealer put it, “Yes, we would have liked to retail those cars, but we’re making money at auction so they’re not really a big concern.”

The statement is troubling, particularly as the wholesale market is poised to become even more volatile. Analysts predict rising supplies of used vehicles in the auction lanes. Likewise, it’s possible that retail demand for used vehicles, which has been strong and highly beneficial for dealers in recent years, will wane. Both of these conditions will make it more difficult for dealers to see a positive return if/when they take cars to auction.

Now, to be clear, I’m referring to auction cars that dealers choose to recondition and run as retail units—not the vehicles they designated, often at the time of a trade-in, as a wholesale unit.

I’m a firm believer that if a dealer decides to recondition and retail a vehicle, it should be sold to a retail customer. If the car ends up at auction, something went wrong. Either the initial decision was bad, or managers failed to do everything they could during the vehicle’s retail lifecycle to put a customer in the car. It’s these failures of management that I encourage dealers to address as they strive to sell every car they decide to retail.

There are four key components to effectively execute a retail-first strategy and minimize the number of retail cars that wind up at auction:

1. The initial assessment. The best dealers use technology and tools to make the initial retail/wholesale determination. As they appraise an auction or trade-in vehicle, they know right away how much front-end profit the vehicle may generate, given the costs to acquire and recondition the car. They also get a clear view of how difficult it may be to find a retail buyer, given the vehicle’s color, condition, equipment and mileage compared to similar units available in the market. The analysis is dispassionate, and it provides important clues to guide subsequent merchandising and pricing decisions.
2. Pricing. I often find that dealers who wholesale more retail units than they should miss the mark as they set and adjust their asking prices. Sometimes they’ve paid too much to acquire a vehicle, and want the customer to pay off the mistake. In other cases, the initial asking prices don’t reflect the vehicle’s appeal compared to competing units. Ultimately, used vehicle pricing decisions should always be tied to each vehicle’s specific market potential—not someone’s judgment of what the vehicle should bring as a retail unit.
3. Retail timeline. Today’s used vehicle market is far less forgiving than it’s ever been. At many dealerships, used vehicles that age past 30 days have largely lost their profit potential, thanks to a greater number of available cars in the market and more intense pricing competition. Dealers who successfully execute a retail-first strategy recognize these realities. They strive to retail every vehicle in 45 days or less. They monitor their average inventory age, and aim to retail at least 50 percent of their inventory in less than 30 days. By design, this tight timeline forces the proactive evaluation/re-evaluation of every unit’s merchandising and pricing position to drive a timely retail sale.
4. Accountability. As noted above, I view the need to wholesale a retail unit as a failure of management. The Internet has made it possible for dealers to sell any vehicle, on any given day, provided it’s properly priced and merchandised for the market. Retail-first dealers understand that they may not always get it right on every car. But if/when they take a retail unit to auction, there’s at least a conversation, if not a penalty. The goal is to determine how/why they couldn’t sell the car and to turn the mistake into a positive lesson.

Dealers who adopt a retail-first strategy in used vehicles often see benefits that extend beyond increased sales volumes, including increases in F&I sales, more trade-in opportunities and fewer hassles handling wholesale units that didn’t sell at auction.

The next question becomes, what are you doing to make a retail-first strategy a priority at your dealership?