3 Tips To Tune Up Your Used Vehicle Performance and Profitability

It’d be wise for dealers to take a deeper look at three aspects of their used vehicle inventories:

1. What percentage of your used vehicles are less than three years old? How does this figure compare to a year ago? For many dealers, 52 percent of their used vehicle inventory is less than three years old, according to Edmunds.com. The number represents a seven percent increase from 2011. The prevalence of “near-new” vehicles owes to the ongoing increases in off-lease vehicles returning to the market and dealers’ efforts to maximize their certified pre-owned (CPO) sales.
2. What’s your average cost of used vehicle inventory? How does this figure compare to a year or two ago? For many dealers, the average cost of inventory has increased by nearly double-digit percentages in recent years as they’ve pursued CPO opportunities, kept off-lease vehicles for retail and played to consumer demand for SUV and truck segments.
3. What percentage of your new vehicle deals involve trade-ins? What’s the average age of those vehicles? For many dealers, there’s been a fairly steady decline in new car deals that include trade-ins. Industry stats show it’s dropped to about 45 percent. At the same time, the average age of new vehicle trade-ins is about six years old.

I’ve been raising these questions with dealers recently as we address ways to improve their used vehicle performance and profitability.

In many instances, dealers are having a decent year volume-wise in used cars. The problem: They’re finding it harder to move the needle upward, both in the number of units they put across the curb, and in the gross profit they generate with each retail sale.

It’s my belief that these performance difficulties owe, at least in part, to the declining diversity of used vehicle inventories. Today, these inventories often feature a larger share of higher-dollar, near-new vehicles than in recent years past. On the surface, this trend isn’t necessarily a bad thing.

But it suggests a shift in operational focus toward the “easy pickings” in today’s market, and a step away from maintaining a used vehicle inventory that appeals to broader segments of potential buyers. As my colleague and friend Tommy Gibbs puts it, dealers are in the “newscar” business rather than the “used car business.”

Here are three tips I share to help dealers counter-balance these market trends and optimize their used vehicle inventory to increase performance and profitability:

Mind your average cost of inventory. The most-successful Velocity dealers keep a constant eye on their average cost of inventory. The goal: Whatever the current average, you should aim to keep it trending down, not up. The vigilance results in decisions to acquire and retail lower-cost, slightly older inventory to complement and contrast a dealer’s factory CPO business. The older-age inventory can also offer the potential for a faster retail sale due to lower Market Days Supply metrics.

Maximize your trade-in opportunities. Top-performing dealers say their best appraisers do two things: They achieve look-to-book ratios at 50 percent or better, consistently take in vehicles at a Cost to Market ratio near, and preferably below, 80 percent, and diligently record every appraisal for accurate performance data. Such efforts ensure that you make the most of every trade-in opportunity, balance the sometimes competing needs of your new and used vehicle departments, and shape a more diverse inventory.

Minimize your average inventory age. I advocate that dealers should maintain at least 55 percent of their used vehicle inventories under 30 days of age. This operational standard owes to today’s ongoing margin compression and market volatility—factors that combine to erode the retail shelf life of used vehicles. More and more, if you don’t sell used cars quickly, you won’t maximize gross.

Dealers who apply themselves to these best practices often don’t see dramatic, overnight improvements in their used vehicle performance and profitability. It takes time for managers, buyers and others involved in used vehicle operations to break old habits and develop (or re-develop) the process discipline and consistency that puts the benefits these best practices offer within reach.

As a Northwest dealer recently put it, “You’re right, Dale. If this stuff was easy, everybody would be doing it.”