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5 Big ideas to Improve Used Vehicle Profitability in 2018
Making money in used vehicles can be a very lucrative side of the automotive business, yet most dealers leave a great deal of margin on the table with each transaction. To really be good at this side of the business, it helps to understand some of the larger economic principles at play. The five big ideas to consider concern demand based buying, opportunity costs, reconditioning standards, marketing commodities or customized products, and prioritizing profits.
Demand Based Inventory Buying
Many in the industry will tell you that you make money in used vehicles through “buying right”, and that the ability to see the deals at auctions and during trade-ins is the real factor for success. Undoubtedly buying inventory at an attractive rate is a critical element to your success, but how can you buy smarter to grow your margins? For that to occur, all purchases, whether great deals or fair value purchases, need to support your overall market strategy and inventory portfolio.
Passing on the “deal” and buying based on demand is almost impossible for seasoned car buyers to do, but it causes their dealers to miss out on strategic profits. Low purchase costs, inventory condition, and time to recondition get a lot of attention. They are important, but making a vehicle front lot ready in 24 hours is not beneficial if it will then sit for 60 days without interest. After extended “lot rot” these “hot buys” usually end up costing money through markdowns and sales incentives just to get rid of the eyesore and bring in new vehicles.
Demand base buying is purchasing what sells for your dealership. Especially if your profit stream is heavy from F&I, you want vehicles you can write deals on quickly, even if that means paying more for the upfront acquisition.
Picture the buyer who was getting laughed at during an auction in California for buying every KIA Soul he could get his hands on. $300 over book? SOLD! Little did the competition know, his dealership outside of LA couldn’t keep KIA’s on the lot, and they were making a solid transactional profit on financing the majority of them. The dealer knew that no one else in their “exclusive market” wanted to be caught dead with a used KIA on their sales lot and exploited the opportunity. Focus on buying what you can make money on instead of chasing “great buys”.
Understanding Opportunity Costs
For example, sales executed a great buy on a 2014 Mercedes C63 AMG. Heck of a car but did you need a flashy AMG on the lot? Does it compliment your normal book of business? Unless you are buying that car based on a specific customer request, you are assuming a set demand for this vehicle. If for the same purchase price you could have acquired two ‘09 Camrys, which purchase scenario would net more profit for your dealership? It obviously depends on how your dealership is currently operating.
If your existing revenue streams from F&I outweighs your average used vehicle revenue on a per transaction basis, you might actually miss out on the additional F&I revenue by purchasing the Mercedes, as now you can now only finance one deal.
On the flip side, maybe your book of business and customer base is looking for a higher-end option and you can get your hands on a vehicle that might net you $6,000 in profits. In that case, a longer reconditioning timeline and passing on two plain toast Toyotas would be an easy option.
Let us say you could only count on $1,000 profit from each Camry but could have them on the Front lot in 4-6 days, whereas it would be 20 days in reconditioning to bring the AMG to market, is it still a hot buy for $6,000 in profit? Only you can answer these questions for your dealership, but it shows the advantage of having a well-defined and updated purchase strategy.
The point is you can make money either way, but many dealers shoot from the hip when it comes to purchasing. They look for individual “deals” instead of looking at an inventory portfolio.
Once you’ve acquired a vehicle it is important to track the cost of reconditioning, but it is more important to have a benchmark cost for each vehicle. Set a reconditioning cost target for your vehicles and measure your actual spend relative to this goal. Without a standard, there exists no basis for improvement, and tracking your performance will allow you to identify margin opportunities over time.
This not only helps you with offering a competitive price to the customer but also in determining whether or not to spend up on items like tires or dent removal. You want to know if you can get the money back out of the inventory before you commit to the costs. Just the act of creating a set of standards will help you better control costs once you begin to track them. You know your minivan buyers are different customers from your convertible buyers, but many dealers only recognize this difference on the sales floor and not in the reconditioning shop.
Along with a reconditioning standard, you should have a process for vehicle reconditioning. As a depreciating asset, you need to complete the recon process quickly, which means understanding the available capacity for all areas of the work that needs to be done. I can’t tell you how often I’ve had stores tell me about vehicles “stuck in paint” or “stuck at a vendor” for thirty days or more waiting on routine work as the normal operating condition. This drags out the lead time, or the total time it takes for a raw vehicle to go from acquisition to the sales lot. Having a schedule for each vehicle allows you to track its progress to the front lot and intervene when timelines start to slip.
Lastly, creating a dedicated used service team can help manager’s follow-up on how quickly work is being completed, and how their standards are being applied. Creating clear responsibilities allows for a tighter control of the reconditioning process. This can help prevent technicians loading up tickets by instead offering a steady supply of preauthorized work. Not only does this eliminate the back and forth on what a vehicle does or does not need, it also creates accountability when items are missed. A dedicated team can also be recognized and rewarded for keeping costs on target and be used as a think tank for additional margin improvement opportunities.
Marketing Commodities vs Customized Products
To price successfully, dealers should consider whether they are marketing a unit as a commodity or a customized product. Are they pricing against any other 2009 Toyota Camry or are they taking extra care in reconditioning to market this specific Camry that has a condition and package that is hard to come by?
Understanding what you have to offer your customers is the first step in creating an effective marketing strategy. Take the time to work with your marketing department to spend your advertising dollars wisely. Know what you are selling and who you are selling it to. It may sound simple but we have all seen the ads for “special offers” that really aren’t that special. Don’t find yourself throwing good money after bad by not aligning your advertising and marketing methods to your inventory and product portfolio.
Whether pitching dealer exclusive items, or inventory that is priced to move, you maximize your margin when you have a strategy for your used vehicle department. When purchasing, marketing, and sales don’t work together it’s anyone guess as to the upside potential on a vehicle, and you leave money on the table.
You want to drive profits, not invest in individual inventory. One slow week or great sales weekend does not make the year. Dealers and managers can get so caught up in a monthly sales cycle and in pitting departments against each other that they miss the big profit picture. Imagine if the same attention was given to creating a system to consistently deliver profitable used inventory sales every week? This short-term pressure is common when too much liquidity is tied up in inventory, creating the crisis in the first place.
The margins in used vehicles are razor thin, so it is important to plan carefully. Take a look at the national used car industry leader CarMax. In Q3 of 2017, they booked over 4.1 billion in net sales and operating revenue, yet made only $148.8 million on a combined sale of 169,648 used vehicles and 100,332 units wholesaled out of their inventory. For all of those units sold and transacted they only produced a return of 3.62%* earned income across all revenue streams.
(*calculated for numbers taken for CarMax Inc Q-3 2017 press release published on 12/21/2017 available publicly at investors.carmax.com)
How do your margins compare? If you are less than 5%, clearly transactional volume should be prioritized when answering the question of whether you are dealing in a commodity vs. a customized product. This is why tracking and securing every dollar possible will separate the used leaders from the rest of the pack as we come off another year of record new vehicles sales.
A New Year, New Opportunities
All of these concepts go hand in hand and complement each other, but any one of these ideas can completely change the way you look at your used vehicle business and help you unlock additional margin and sales. While for some dealerships these concepts will be radical, many others already successfully employ strategies that align with these ideas.
If you find yourself hitting the wall for profit growth maybe it is time to try something different? For those who are willing to go deep into the economics and operating principals of vehicle reconditioning the rewards are there. Here is to making 2018 a great year for your used vehicle business.