Just before Christmas, CarMax released results for its third quarter of fiscal year 2013. The company, like many Velocity® dealers, saw positive results in used vehicles — total unit sales were up 16 percent for the quarter compared to the prior year, an increase that included a 12 percent gain in same-store sales volumes.
As I reviewed the company’s financials and earnings call transcript, I found three share-worthy nuggets for all dealers who seek to maximize their used vehicle return on investment (ROI) sales and profitability:
1. An emphasis on “total gross.”
In my new book, Velocity Overdrive: The Road to Reinvention, I share how some Velocity® dealers have ditched the traditional focus on “average front-end gross” in favor of a more holistic, total gross mindset to guide their used vehicle operations. The rationale: A total gross approach minimizes the pricing and inventory age problems that occur when dealers focus solely on average front-end gross.
During an earnings call, an analyst asked CarMax resident Tom Folliard if he thought a slight decline in the company’s average front-end gross profit (it dropped $25 to $2,146/car for the quarter) would continue as the company increased its sales volumes and market conditions put downward pressure on retail asking prices.
Folliard offered a total gross–minded response: “We've operated in depreciating environments before and have been able to manage our margins pretty good. I would take lower margins for much higher sales. It really just depends what's going on in the overall marketplace — including wholesale, including finance and including demand and supply.”
As I note in my book, the total gross mindset also typically spurs a greater degree of collaboration and cooperation between dealership departments as managers and employees focus on the bigger picture of dealership-wide profitability, in addition to the deal at hand. These efforts also include compensation packages that provide incentives to encourage everyone’s focus on total gross.
2. Self-discovery for buyers.
CarMax is testing the concepts of unlocking all doors on its vehicles and allowing customers to take salesperson-free test drives. The initiatives are underway at CarMax’s “next generation” stores and may be extended to its other retail outlets. In addition, the company noted the launch of a mobile app for customers, which currently accounts for 5 percent of the company’s website traffic.
In recent years, industry surveys indicated today’s buyers want a more self-directed car-buying experience. They are also likely to tell their family and friends about such positive experiences when they occur, and use social media to relay them.
This backdrop makes the CarMax efforts all the more instructive for other dealers. The lesson: It’s time to reinvent traditional sales practices to better embrace consumer expectations for a different in-store experience.
3. Know when to hold ‘em, know when to fold ‘em.
CarMax reported a 10 percent gain in its wholesale unit sales for the quarter — due to more customers seeking appraisals for their cars, which often did not meet the company’s retailing standards. On average, CarMax buys three out of every 10 cars it appraises and generates an average $923 gross profit when it wholesales the acquired cars.
The stats suggest two useful reminders for dealers who are aggressively sourcing inventory from customers. First, there is a market for vehicles that might not meet your dealership’s mileage and condition standards as a retail unit. Second, if you appraise the vehicles correctly and buy them right, you can still earn a profit via wholesale channels — and potentially close a deal on a different unit with the customer.
Some dealers may believe CarMax is an entirely different type of retailer than a franchised car dealer and dismiss any insights or lessons its retailing model may offer. I would encourage these dealers to revisit their thinking, particularly in light of the company’s ongoing expansion plans and its efforts to shape used vehicle buyer expectations through national advertising.
In the coming year, CARMAX plans new stores in smaller markets such as St. Louis, Mo.; Jackson, Tenn.; and Harrisonburg, Va. The expansion plans will mean a greater degree of competition for dealers, as Foillard says the company is “basically trying to go everywhere we’re not.”