In the past several months, I’ve spent a great deal of time discussing and researching the current and future challenges confronting dealers.
This work has fed my upcoming third book, “Velocity overdrive: The road to reinvention.” It highlights how dealers are reinventing people and processes to meet their goals for increased used vehicle sales and profitability in an ever-changing and increasingly challenging marketplace.
Many of the challenges dealers shared for the book are highly relevant as we all head into the holidays and turn our attention to operational goals for 2013. The following are what I’d consider five most-critical areas dealers should address as they aim to improve their performance in used vehicles in the coming year:
1. A vehicle segment-specific inventory investment strategy: A growing number of dealers approach their used vehicle inventories as investments—that is, they are investing in assets (used cars) that offer the maximum return for the least degree of risk. To execute this strategy, these dealers think like investment managers: They view vehicle segments (e.g., compact cars, SUVs, vans, etc.) as distinct classes of investment opportunities that drive the composition of their used vehicle inventories. In this way, the used vehicle inventory is like he portfolio an investment manager would create for a client, often a mix of stocks, bonds, annuities and other investment options—all of which carry different risk thresholds and return on investment (ROI) potential.
The rationale for this segment-based strategy is straightforward: It ensures dealers evaluate all market segments, rather than focus on “what they know,” as they establish goals for market share, profitability and sales. In addition, the strategy ensures a more reliable foundation to assess ongoing performance and adjust for changes in the market that can affect select vehicle segments (e.g., high gas prices lowering demand for SUVs and trucks).
2. Lower-cost sourcing of vehicles: “We can’t find the cars we need at the right prices.” This may well be the most frequently voiced complaint of dealers and used vehicle managers in the past year. Unfortunately, forecasts do not suggest the historically high wholesale costs for used cars will significantly abate in the coming year, even as dealers see more trade-ins and off-lease vehicles. This creates two vehicle acquisition challenges.
First, dealers should aim to maintain an 84% “cost to market” benchmark for their used vehicle inventories. This benchmark allows dealers to better manage the margin between the price they pay to acquire vehicles and their average retail price points (e.g., a vehicle that can be acquired for $8,400 and retailed for $10,000 has an 84% cost to market and a 16% margin). To be sure, the cost to market benchmark varies on specific vehicles, but making it an inventory-wide goal helps dealers control acquisition costs.
Second, dealers are placing a greater emphasis on acquiring cars from current customers (either through trade-ins and service lane acquisitions) and creating “off-the-street” buying programs to acquire vehicles at less cost than they would incur purchasing them at auctions.
Such non-traditional, cost-minded acquisition programs will be essential to drive improved used vehicle sales volumes and profitability for dealers in 2013.
3. Faster “front-line ready” times: I took an informal poll of velocity dealers. Collectively, they aim to have every used car merchandised online and available on the lot within three days of its arrival at the dealership. The benchmark ensures they retail cars right away, when their gross profit potential is at its greatest. It also helps them maintain the velocity of their sales and inventory turns. More than one dealer also told me that “a car that isn’t online isn’t for sale.”
5. More margin-minded reconditioning: In its 2012 fiscal year report, CarMax notes it trimmed $250 off its average used vehicle reconditioning cost—for the second consecutive year. They understand that reducing costs improves margin in today’s more competitive and price-conscious market. Not surprisingly, many velocity dealers have cut roughly $250 from their average reconditioning costs. They achieved this improvement through centralized and streamlined diagnostic/repair processes, lower labor rates and less expensive parts. In the end, these dealers have become more efficient and profitable as they sell and recondition more cars at a lower cost than their competitors.
A greater degree of transparency: Some dealers say the Internet has wrecked the car business. I’d argue it simply changed the game, giving consumers a lot more information and power. I’d even go further and suggest the Internet is now giving back to dealers: It has attuned customer expectations to “I want what I see” rather than “I want what I think I can get.” The big opportunity for dealers lies in satisfying this consumer desire for transparency in your appraisal, sales and F&I processes. Such transparency-minded operational changes are fast becoming the new way to “hold gross” with today’s buyers.