In the past few weeks, industry news items have noted efforts by large dealer groups like AutoNation to become more efficient and effective used vehicle retailers.
These efforts include partnerships with rental car companies to exclusively offer their fleet inventories for sale to dealer group customers. In addition, these larger groups have become more adept at leveraging their size and scale, shifting cars between stores and markets to capitalize on local market supply / demand trends. Likewise, the dealer groups have been testing premium and value used vehicle retail outlets to further capitalize on local market dynamics.
If I were a dealer, I’d consider these developments as a collective “wake-up” call. Today’s used vehicle business isn’t the sleepy second fiddle to a new vehicle franchise it used to be. It’s now a front-and-center pathway for increased sales and dealership-wide profitability.
In my view, there are three important strategic goals dealers should establish for their used vehicle operations to compete effectively against larger players — whether it’s AutoNation or a market share-hungry regional dealer:
Use the market to guide your acquisition strategy.
I’ve long advocated that dealers should rely on local used vehicle supply and demand data to ensure they acquire the right cars for their markets. This best practice is essentially what larger dealer groups do when they decide Dealership A is a better place to retail a specific car than Dealership B. It’s important for dealers to recognize that as their acquisition strategy shifts to a more market-based approach, the composition of their used vehicle inventories will likely change. In my experience, this means acquiring fewer cars that simply “do well for us” and expanding the make / model mix to be more reflective of market demand.
The move to market-based acquisitions means used vehicle managers often must move beyond their traditional comfort zones. The good news: Today’s technology and tools provide the guidance necessary to determine the right cars for a dealership and to help managers develop a more holistic sense of the market.
It should also be noted that the shift to market-based acquisitions will likely require adjustments in service and parts to ensure the proper reconditioning of non-franchise-brand vehicles.
Expand your acquisition nets.
Franchised dealers are blessed with two ways to acquire used vehicles — at the door and at wholesale auctions. Let’s take a closer look at best practices for each of these acquisition nets:
Trade-ins: In today’s environment, dealers need to move past the idea that they can “steal” trades from customers. The reason? A growing number of today’s vehicle buyers will use online appraisal and evaluation tools before showing up at a dealership. Right or wrong, they already have a sense of what they believe their vehicle is worth.
To address this, more dealers are using the same tools as their customers to start appraisals. They check CARFAX and similar condition reports. They will then walk around the car with the customer to affirm and verify the information he or she has disclosed about the vehicle. In most cases, this collaborative review finds an item or two unique to the vehicle that changes the customer’s perception about its trade-in value.
To be sure, this more transparent approach is more time-consuming than the traditional “chair-o-key” appraisal: “I’ll take the keys and appraise the car in my chair.” But it yields higher look-to-book ratios for appraisers and preserves dealership profitability on every trade-in unit from the get-go.
Auctions: Dealers have to go wide and deep to find the “right” cars to feed their inventories. This means tapping a greater number of auctions and reviewing a larger number of vehicles to find the cars that fit the local market and dealership profitability goals. It also means dealers who rely on physical auctions are not working hard or going far enough to feed their used vehicle inventories. In today’s environment, it’s not uncommon for Velocity® dealers to buy 70 percent of their wholesale vehicle acquisitions from online auctions.
Think total gross.
More dealers fixate less on front-end gross than they used to. The reason: They’ve come to understand that every used vehicle deal really represents opportunities in four distinct profit centers — sales, service, parts and F&I. To be sure, front-end gross is still important, but it’s only one way a used vehicle can make money for a dealership.
When dealers adopt a total gross mentality and combine it with Velocity® principles in their inventory management, they have greater flexibility to maximize the return on investment (ROI) and profitability each used vehicle represents. They can more easily “give a little here to get a little there” — all while achieving better overall profitability for the dealership.
For dealers who bristle at the idea that front-end gross remains more important than a total gross mindset, I share a reported quote from AutoNation President and Chief Operating Officer Michael Maroone. He offered the response when questioned about lower front-end gross profits the company earned while selling more used cars:
“We know when we create that transaction, even if we have to step up to that number to get that nice trade, we create that transaction and give ourselves an opportunity to have several other transactions both on the F&I side and the used side of the business — and ultimately in our customer care owner base.”