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“Margin compression in used car operations means dealers must disrupt old practices that result in high vehicle acquisition costs and slow time-to-market speed,” says used car operations expert Ed French of AutoProfit, Inc. “There’s no other way to be really successful in used cars these days.”
One way to improve acquisition volume and vehicle quality is to source inventory internally. French says that means sourcing trade-ins from existing and service lane customers.
“Those opportunities should account for 60% of inventory, with private party and auction units making up 40%,” adds French, a former Buick dealer and now also a member of the board of directors at TruWorth Auto, a used car superstore in Indianapolis, Indiana.
Internally sourced units save auction fees and transportation costs. The savings immediately flows $600 to $800 to gross. These vehicles are also newer and with mileage lower than auction candidates. They need less recon, so they’re frontline ready faster.
Strategy #1: Shorten the trade cycle
To increase trade volume, consumers’ long ownership cycle must be shortened. Brian Skutta, CEO for data-mining company AutoAlert, is on the march to help dealers do so.
He says today’s 68-month average ownership cycle keeps buyers out of the market too long. His goal is to help dealers disrupt the cycle down to 36 months.
A recent survey of over 400 vehicle owners commissioned by AutoAlert found that consumers themselves would like to trade more often, Skutta notes.
“Interestingly, the survey found that dealers aren’t sharing disruptive trade practices with customers, so they’re not being made aware of opportunities to trade sooner yet keep payments about the same,” --Brian Skutta
Findings from the survey:
On average, Skutta adds, dealers employing a trade cycle disruption sales strategy not only increase internal used car supply but enjoy new-car sale margins 20% higher than sales from traditional leads or ups.
Strategy #2: Reduce recon bottlenecks
Long recon processes erode gross and slow getting vehicles ready for retail. Even if you image and upload trade and auction unit photos online immediately, those vehicles still must be reconditioned.
“A typical 15-to-8-day recon cycle kills used car gross. An automated workflow approach, on the other hand, can reduce the cycle to four days or less – meaning used car managers have units online and on lot faster at less expense,” --Dennis McGinn
Every unit owned by you has a holding cost associated with it, its share of dealership expense. Paul Faletti, Jr. president and CEO of NCM Associates, cites the average daily holding cost of $32 per vehicle, based on franchise and market area. NCM calculates the cost according to its 20 Group clients and moderator experts. NADA lists holding cost at $40, but French notes the data is heavier in luxury makes, which typically have higher recon costs.
Strategy #3: Reduce holding costs
Dealers can calculate holding cost using this formula: Total cost of used car expense minus sales and sales management compensation minus dealer and policy expense divided by number of units sold that month divided by 30 days.
Once fully aware of how holding costs impact gross, used car managers are more likely to respond more promptly to service-need requests from recon. Or, more quickly authorize a more costly part or be willing to pay for overnight shipping if availability leads to faster front line readiness.
“I simply won’t engage clients who are running their car departments without reconditioning software in use, it’s that important to used-car profitability,” --Ed French
Anthony Martinez is director of Reconditioning for Greenway Ford and Greenway Dodge, Orlando. His team reconditions 600 vehicles a month for the two dealerships. “I can’t control what management paid for the trade or whether the used car manager will authorized recommended services,” says the Iraq War army veteran.
“I can control the fundamentals of estimating, inspecting and doing the work. We run our entire reconditioning department using Rapid Recon software, which has tremendously decreased our cycle time from eight days to four,” --Anthony Martinez
Improving turn once units hit the lot is the idea behind vAuto, founded by Dale Pollak, and now owned by Cox Automotive. Pollak says used car managers must strive for a 30-day or less retail sale, on at least 50% of their inventory. This standard,he says, requires that used car managers buy the right vehicles at the right price, recondition them fast and market price them to sell quickly.
Cost of ownership including acquisition and reconditioning costs should be below 85% of the unit’s current retail asking prices, Pollak says.
“Given this ratio defines a unit’s baseline potential profit margin, decisions that can improve this ratio – like acquiring internally and improving reconditioning times to reduce holding costs – can mean substantial ‘real’ used car grosses.” --Dale Pollak
Smaller dealers lacking Internet and lot inventory marketing expertise may benefit from services provided by LotPop.
“I have found that dealers who struggle with both gross and volume are pushing out and selling too many aged cars,” notes LotPop founder Jasen Rice.
“If a dealership is pushing out more than 20% of its sales as past-60-day units, they’re not hitting their true velocity potential. The key is to push for 50% of sales within the first 30 days,” he says.
The best-performing stores, regardless of franchise or market, push out 60-70% of their sales in the first 30 days and less than 10% go past 60 days.
“Those stores achieve the Holy Grail of used car sales in both gross and volume. Dealers that get their inventory practices in line enjoy a three-to-seven day turnaround time, have competitively and market priced inventory out the gate (not aggressive but competitive, on average around 98%) while adjusting pricing every two weeks to get units sold,” --LotPop founder Jasen Rice
Dealers who want to maintain gross will strive to remove time delay and unnecessary cost from vehicle acquisition to front line readiness. They practice market pricing for online and on lot vehicles to sell them within the magic 30-day turn. Retailing has always been about the numbers – technology simply lets you measure what you’re doing – or not – to eliminate wastes that drag down turn and gross.
Jim Leman writes about automotive retailing from Round Lake, IL. Reach him at firstname.lastname@example.org