I am a bit disturbed by some of the recent trends affecting used vehicle departments at franchised dealerships.
First, sales volumes appear to be flat, or worse, in 2017 compared to the prior year. You see this troubling take-away as you compare year-end retail sales for 2016 and retail sales through the first six months of the current year. The National Automobile Dealers Association (NADA) reports that dealers averaged about 60 used vehicle retail sales per month in 2016, and dealers are tracking to achieve the roughly the same in 2017.
Second, dealers seem to be making less money on the used vehicles they are selling. NADA says the front-end retail gross profit (including F&I) for used vehicles averaged $2,415 in 2016; the figure’s $2,396 in the first half of 2017. If the tallies did not include F&I, you’d even have a starker picture. We all know many dealers are leaning more F&I sales to offset declining gross profits on the sales of vehicles themselves.
Third, companies like Black Book are reporting an even faster pace of used vehicle depreciation than many had expected. Black Book says the average, three-year-old-or-less used vehicle is currently depreciating by about 17 percent a year, compared to an annualized decline of 9.5 percent last year. The company attributes the faster depreciation rate to higher MSRPs for new vehicles and the rising influx of off-lease vehicles returning to the used vehicle market.
The convergence of these three factors does not spell good news for many dealers—particularly those who set ambitious goals to grow their used vehicle sales and profitability in the current year. In the past, dealers could achieve their growth goals by simply selling more cars. The market trends suggest, however, that this recipe won’t be enough in the months ahead.
A better approach, I think, is selling more cars faster, while working to minimize your controllable costs on each unit. Here are four best practices I recommend to help dealers move the needle in their used vehicle sales and profitability:
- Know each car’s retail potential up-front. With today’s technology and tools, dealers can almost eliminate the pitfalls of buying the wrong car or paying too much for a vehicle. With a metric like Market Days Supply, dealers can know with a high level of certainty how well a vehicle will perform well as a retail unit. In this way, dealers can get into each vehicle knowing exactly what they’ve got—not what they hope it will be as a retail unit.
- Tighten up your retail timeframe. I’ve long stated that a vehicle that reaches 45 days in inventory represents a failure of management to retail the unit. While many dealers intuitively understand they should not carry any cars past this deadline, it happens all the time and they do not hold managers accountable for missing the mark. At top-performing dealerships, I’m seeing more used vehicle manager pay plans that carry penalties for allowing over-age units and wholesale losses.
- Retail more vehicles earlier in their lifecycle. Not long ago, I advocated that dealers should maintain at least 50 percent of their inventory under 30 days of age. Due to the ongoing pace of depreciation and margin compression, the new threshold should be at least 55 percent under 30 days. Selling more vehicles sooner, while they’re fresh, goes a long way to helping you maximize sales velocity and profitability. To do so, however, many dealers will have to adjust their pricing and re-pricing strategies to attract buyers sooner rather than later.
- Trim your cost structure. I find very few dealers who are proactively managing the costs associated with acquiring and reconditioning used vehicles. They are not requiring appraisers and managers to meet specific Cost to Market benchmarks when they acquire auction and trade-in vehicles—a key reason the average Cost to Market for many dealers is creeping toward 90 percent. Likewise, many dealers are not asking parts suppliers and outside vendors to reduce the cost of goods and services they provide to recondition vehicles. In my experience, dealers can negotiate reductions that trim reconditioning costs up to 20 percent on each vehicle—an improvement that usually means a commiserate increase in front-end grosses.
I share these best practices because they have proven to help dealers slow, if not reverse, some of the current market forces that are causing sales velocity and profitability problems for their peers. As one dealer puts it, “We’re still a work in progress, but at least we’re doing something to improve our results rather than just complaining about them.”
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.