“Dale, remember this: As the used vehicle department goes, so goes the entire dealership.”
My dad offered this advice as I was taking over the used vehicle department at our Cadillac store. I don’t think his guidance was unusual for dealers of his era. In my dad’s case as a domestic dealer, you really couldn’t count on the factory to produce hot-selling cars every year. For him, used vehicles were often the lifeline for cash flow and profitability at the family dealership.
Interestingly, a greater number of today’s dealers recognize the importance of my dad’s advice. While researching my just-released book, Velocity Overdrive: The Road to Reinvention*, I heard dealers say time and again that they now recognize the financial performance and health of their entire dealership operations benefit from a steady, market-guided hand in used vehicles.
In fact, I spend a fair amount of time in Velocity Overdrive detailing how some dealers view used vehicles as the hub of a “wheel of fortune” that feeds sales and profits in every dealership department. These dealers consistently achieve sales volumes and net profits they previously considered out of reach. The book explores the sometimes difficult stages of reinvention these dealers have undertaken to effectively shift their dealership performance into overdrive.
As I share in Velocity Overdrive, reinvention-minded dealers typically encounter four key pitfalls — roadblocks to reinvention, if you will — as they aim to increase the return on investment (ROI) and profitability potential in their dealerships:
1. A Fixation on Average Front-end Gross
Reinvention-minded dealers are recognizing that their traditional fixation on average front-end gross profit impedes their ability to maximize their used vehicle department performance. This realization typically follows a slow-down in used vehicle sales (e.g., gross-driven pricing attracts fewer Internet-enabled customers), persistent problems with aging vehicles and six-figure wholesale loss write-downs at the end of the year.
These pain points typically recede as dealers adopt a “total gross” mindset that balances front-end gross profit expectations on every car, with its contributions to profitability in service, sales and F&I. The reward: As these dealers increase the velocity of their used vehicle sales, the total gross generated across the dealership far exceeds the ROI and profitability they achieved when they focused solely on average front-end gross profit in used vehicles.
2. A Shortage of Used Cars
Velocity Overdrive examines why many reinvention-minded dealers don’t accept the idea that there’s a shortage of used cars. For them, the tighter supplies of used vehicles means they have to work harder — and more efficiently — to source the vehicles they need to feed their inventories. These dealers are undertaking four key initiatives: First, they are paying closer attention to trade-in vehicles and stepping up to acquire fast sellers (Note: This is much easier for dealers to do when they’ve adopted a “total gross” mindset). Second, they are actively seeking to acquire used vehicles from current customers with buy-back offers. Third, they are pinging private sellers. And fourth, they are using online auctions to effectively expand their net beyond local auctions to get the vehicles they need. A vehicle acquisition benchmark: Reinvention-minded dealers now achieve a 50/50 split between the vehicles they’ve acquired at their stores (from trade-ins, buy-backs and other efforts) and those obtained at auctions.
3. Speed to Market
A growing number of dealers recognize that if a vehicle isn’t posted online, it’s not for sale. These dealers also understand that the faster they move used vehicles through reconditioning, the greater their chances to maximize each car’s gross profit potential. The old axiom, “fresh cars deliver the highest gross” is especially true in today’s market. These dealers set two performance benchmarks for their stores: A freshly acquired used vehicle should be posted online within 24 hours, and be front-line ready within three days. To meet these benchmarks, dealers have reinvented their processes for merchandising and reconditioning vehicles. They use daily sit-downs with managers in new / used vehicles and their service department to plot the next steps (retail or otherwise) and timeline expectations for each vehicle. The cross-department collaboration also keeps managers focused on the total gross potential for every vehicle.
4. Trust in Transparency
These days, transparency must be both external and internal. On the former, reinvention-minded dealers “run to, rather than away” from price with customers. The dealers use market-focused technology and tools to validate vehicle prices and minimize discounts. Their discount average: $250 or less. Internally, dealers share each department’s financials among managers to re-emphasize the shared focus on total gross throughout the dealership. In some cases, these dealers have also reinvented compensation plans to reflect the reality my father shared years ago — “as the used vehicle department goes, so goes the entire dealership.”
* Velocity Overdrive: The Road to Reinvention is available at www.amazon.com