My recent conversations with dealers reveal three common concerns about their used vehicle performance. I thought I’d use this article to address them and offer recommended cures.
- Softer sales: Despite a relatively strong used vehicle market, I’m hearing from dealers who aren’t seeing the sales numbers they’d like. In many cases, a closer look at their inventories reveals the root causes of the less-than-desirable sales performance.
Inevitably, I’ll find these dealers have a larger-than-acceptable share of vehicles older than 45 or 60 days. I advocate that dealers maintain at least 55 percent of their inventories under 30 days. This benchmark helps seed stocking and pricing disciplines that help you focus on purchasing fast-moving units, and identifying slow-sellers right away that will need help to move quickly.
I also encourage dealers to understand that by 45 or 60 days, the market has spoken: You’ve got a unit that, for whatever reason, you failed to price and retail in the most time-efficient manner.
When dealers let vehicles age, your overall performance suffers. Your money’s tied up in aged inventory, which means you can’t reinvest it in more market-worthy units that will help you achieve, if not surpass, your sales volume goals.
- Sourcing trouble. A week ago, I spoke with a used vehicle manager who complained that he couldn’t find wholesale vehicles that would make any money. He was hunting auctions for vehicles that offered at least a $1,500 front-end gross profit potential (a calculation that accounted for his anticipated purchase/transportation/recon costs and retail asking prices for specific vehicles).
I asked the manager to re-set his stocking tool’s business plan to find vehicles with a $1,000 front-end gross profit potential while keeping all his other purchase preferences—make(s) model year(s), condition grade, ownership history, distance, etc.—intact. In seconds, the dealer had a list of 75 cars he could go out and purchase right away.
To be sure, this exercise was not a satisfying experience for the manager. Why? Because it illustrated the reality of acquiring auction units in today’s competitive and margin-compressed market. As another dealer recently put it, “You can get all the cars you want, but making the money you want is the tough part.”
In an upcoming article, I’ll share how dealers are addressing this wholesale sourcing challenge by acquiring more profit-friendly inventory through unconventional sources.
- Certified pre-owned (CPO) profitability. As many dealers know, CPO vehicles have accounted for a growing share of your retail sales. Across the country, Edmunds reports that CPO units now make up about 25 percent of used vehicle sales at franchise stores.
But here’s the rub: The factory-set purchase cost to acquire off-lease units, and the costs to recondition and put a vehicle in a CPO program, are creeping close to, and sometimes exceeding, the prevailing retail asking prices on the market. This problem is particularly acute for luxury brand dealers, where I’ve seen Cost to Market metrics for CPO units reach 95 percent or higher.
This reality has some dealers questioning whether their CPO participation is worth the expense and trouble—even when they account for the factory monies they earn when they reach their CPO targets.
In these instances, I encourage dealers to balance their desire to achieve a richer front-end gross profit against the “total gross” opportunities every CPO sale represents. Let’s not forget that these sales, like non-CPO sales, generate gross profit in F&I, service and parts. Plus, if a CPO deal involves a trade, you’ve got additional money-making opportunities.
I also advise dealers that front-end gross-challenged CPO units need to be managed for the troubled investments they represent. You’ve got to price them to sell quickly so you can reinvest in your capital in a better-performing vehicle.
The good news for dealers is that, despite some challenges, the used vehicle market is projected to remain relatively strong in the months ahead. This outlook makes now the perfect time to make the operational corrections that will turn today’s performance concerns into tomorrow’s sales opportunities.
Author: Dale Pollak
Dale Pollak, vAuto’s Founder, has 13 years of Dealer Leadership Experience and is a highly sought after best-selling author and recognized speaker on maximizing dealership profits from preowned vehicle operations. Pollak received his B.S. in Business Administration from Indiana University and is a graduate of the General Motors Institute of Automotive Development. He also holds a law degree from DePaul University’s College of Law, and is a four-time winner of the American Jurisprudence Award.