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Today's blog post is by Wayne George, an NCM Executive Conference Moderator for several NCM 20 Groups. Prior to joining NCM, Wayne spent 29 years in the retail automotive world. He was also a charter member of the NCM General Managers Top Twenty Group for seven years.
Your service department charging retail rates to recondition your vehicles isn’t really why you aren’t as competitive as you could be. Let’s look at some facts.
Domestic and import average hours per Internal RO in our NCM composites usually comes in at about 2 hours. Effective labor rates are about $90. That means for most of our clients, the labor cost of recon is $180 per RO. Parts sales related to that labor is still running at about a 1:1 ratio. With that in mind, the average parts and labor total of this recon will come in at about $360. Let’s get crazy and discount all of that work by 45% (a very generous discount to the used vehicle department). We now have decreased the cost of that recon by $162 dollars. I would submit that no dealer would lose a deal and not be in a competitive pricing position over $162 in service charges. By the way, all of these examples and ratios hold true for luxury vehicles as well, the numbers are just slightly higher.
Now let’s dig deeper. Our NCM database shows us that reconditioning costs per vehicle for domestic and imports average about $800 per vehicle (this varies by franchise and by how strongly the manufacturer's CPO program is embraced). So why is there a spread between $360 (parts and labor costs) and $800? It’s all the other stuff that we do to the vehicle to make it front line ready. Most of this type of work is done very close to cost rather than at full retail: tires, glass, paint and body, dents, etc. are just a partial list of what makes that difference.
So where is the competitive disadvantage in our recon so far? Is $162 really creating a competitive issue? Here is what I think is really happening as opposed to a sound practice of the shop charging full retail for reconditioning. This is just a partial list of what makes many dealers non-competitive and drives their vehicle costs of sales too high. Again, we see that many dealers have at least a couple of these items that increase vehicle cost going on most of the time:
Unreasonable hard packs. We all know hard packs were created in most cases to cover poor practices within a store. Bad pay plans needed to be hidden, bad inventory management leads to wholesale losses so we need a pack. Expenses are out of line so we need to bring gross back in without paying for it etc., etc.
A poor trade evaluation or recon evaluation leads to careless and unnecessary spending of recon monies.
There is no one in the store monitoring and controlling what the shop does once they have the vehicle. Work is unnecessary, being overcharged, and in some cases padded.
Shops are taking the factory CPO guidelines to an extreme and are demanding repairs over and above guidelines.
Recon cycle time is not being managed and results in multiple service trips and vendor touches to get all the work done only adding to recon costs.
Aging in most inventories requires vehicles be brought back to standards hence producing a second recon RO and a double dip for the shop.
Used vehicles are not being given correct pricing on competitive menu and routine maintenance items. Whatever a retail customer pays for brakes, alignments etc., needs to be passed through to used vehicles as well.
I am sure there are more underlying costs that I haven’t thought of, but it’s just too easy to pin all of the above issues on the practice of pricing recon at retail rates. If a dealer doesn’t have issues with these seven examples or the store is properly managed to eliminate all of these issues, he or she would have no problem charging full retail for repair items done in the shop—and that dealer would have a competitively-priced product to sell and at the same time, protect used and service gross opportunities!
Written By: Wayne George