Every day I’m more convinced that dealers’ strategy for making money in used car operations is outdated and wrong. Have a conversation with any dealer or manager about used car operations and the words “gross profit” will be mentioned in short order. The problem is what they mean by gross profit is actually the average retail gross profit — not the total gross of the used car department. Average retail gross profit should not be the gold standard measurement although it has been and continues to be the proxy for the efficiency and productivity of both the department and manager.
It is now time for the industry to come to terms with the reality of today’s used car market. It’s not rational to expect a used car operation to generate as much lucky profit on the sale of their vehicles as it once did. As a result, the metric of average retail gross profit is not as relevant as it once was. This realization is very difficult for the retail automotive industry.
In the past, the used car operation was a different business from what it is today. If a dealer was skilled at selecting the right units to buy, smart about their reconditioning, clever about their advertising and a great negotiator, they routinely extracted large profits from their shoppers. The game changer in this industry is the smart consumer empowered by technology.
Today, what a vehicle will sell for is 99% determined by the competition as seen through the eyes of the Internet shopper, not by the dealership’s management staff. Moreover, banks will not loan as liberally as they once did on used vehicle transactions. This means it is not reasonable to expect used car average gross profits to be as large as they once were.
This realization is the key to addressing the challenge of the existing market in a new and more effective way. Quite simply, if you’re not going to get as lucky on the used car lot as you used to and you want to make as much gross profit as you once did, then you are left with just one inevitable conclusion. The only solution is that you have to go from money to metal, money to metal more times in a given period of time. Every day that the price of a vehicle exceeds its market transaction price, it is likely to sit while others are being sold. This makes the clock the enemy because it robs the dealership of an opportunity to turn the dollars. So, instead of worrying about average front end gross profit, the number of inventory turns should be the leading indicator of used vehicle department success and profitability.
Success today means embracing the realities of today’s market in the realization of Velocity Management. At first this recognition creates a lot of pain and consternation for the industry because it challenges a whole generation of managers that still believe large average retail gross profit is the hallmark of management effectiveness and the basis of their self esteem as well as the expectation placed upon them. Letting loose of that notion is difficult. In addition, traditional compensation programs incentivize behavior that is actually contrary to productivity and profitability that comes with Velocity Management.
The dealers, however, who have embraced that it’s now a business of total gross profit through accelerated inventory turns rather than average profit represent the new leaders in today’s market. Today, the dealerships that are consistently selling the most used cars and generating the greatest profits are often operations of little distinction in terms of their market, brand or size. These are often stores in rural and remote locations with small facilities and previously unknown operators. They are in fact the new order of used car leaders in the 21st century; frequently selling hundreds of used retail units per month.
This new breed of velocity dealer embraces the realities of the new market but also uses new tools of management. Their operations focus on conditions that favor great market results. These conditions are numerous and varied from “paint” to “pixels.” The paint conditions mean having the right vehicles, priced correctly and owned for the right money. What is “right” is based on new metrics such as market days supply, price to market and cost to market. The pixel conditions that must exist are having a sufficient number of search result pages (SRPs) and vehicle detail pages (VDPs) in their virtual realm. These conditions also require a new series of metrics which need to be understood, tracked and managed. With a respectable sales process working in between the bookends of paint and pixel conditions, the profit results of any dealership are transformed into an unprecedented high level.