I’ve been noticing a dividing line between dealers in recent months as I evaluate their used vehicle inventories and performance.
The first group of dealers tends to struggle with over-age inventory. As I dig deeper, I’ll often see they’ve got decent cars, and their asking prices aren’t completely out of line with the market. Yet, the aged cars (and wholesale losses) never seem to go away.
The second group of dealers tends to have “clean” inventories from an age perspective. Unlike the first group, these dealers are super strict about selling cars before the 30- or 45-day window they allow for each vehicle as a retail unit. When I meet with this group of dealers, aged inventory is noticeably absent from our discussions. Instead, we spend our time talking about how they can find more cars, hold more gross at the desk and speed up processes that increase inventory turn rates.
Interestingly, the differences between the two groups of dealers do not depend on geography or franchise. I’ve seen competing dealers with the same franchise in the same market. One struggles with aged inventory, the other doesn’t.
Why, then, are the differences between these dealers so distinct and dramatic?
I took this question to a New York dealer who hasn’t had an aged car (or end-of-year wholesale write-down) in the past five years. His response:
“Dale, the difference is this: In today’s market, if you want to make more money, you have to take a little less. For me, this means I’ll take a loss on a car today to create an opportunity to use my investment to make more money tomorrow. I didn’t used to think this way, and I’ll bet dealers with aged cars still operate the way I used to.”
Indeed, dealers with aged-inventory problems typically admit, often with a little prodding, that “avoiding a loss” is a chief reason they continue to hold onto used vehicles. As one dealer put it, “It makes me sick to my stomach when we lose money on a car.”
I understand this operational mindset because it’s the same one I had as a dealer. Unfortunately, times are different today and, in most cases, “avoiding a loss” today translates to aged units and missed opportunities. To help these dealers, I offer four reasons why “taking a loss” on used vehicles can be a good thing:
- You open the door for a better investment outcome. I’ve modeled the financial performance of two different dealers with 100 used vehicles in inventory. One dealer accepts an occasional loss and holds firm on a 45-day age policy, and the other doesn’t. On average, the dealer who accepts an occasional loss at retail achieves a better return on investment (ROI) on a per-vehicle basis than the dealer who “avoids a loss” and ends up with aged units. The analysis also affirms the tried-and-true reality that retailing used vehicles when they’re fresh maximizes gross profit.
- You create more dealership-wide profit opportunities. A big reason the New York dealer believes that “to make more money you have to take a little less” flows from his understanding that every used vehicle represents four opportunities to make money — in parts, service, F&I and the used vehicle department. For him, the combined “total gross” opportunity each car generates in the dealership is more important than avoiding the occasional front-end loss. As he puts it, “The money I make across the dealership more than makes up for the $300 to $500 front-end loss I occasionally take to retail a car that’s run its course in the market. But I’ll be honest, it took me awhile to get off my fixation on front-end gross and see the whole picture.”
- You eliminate a barrier to improve sales volume. As a dealer, I hated it when I realized my used vehicle inventory had too many of the wrong cars. Because I, like other dealers, had a deep aversion to front-end losses, I often felt like we were stuck until we could either retail or wholesale the unit and move on. Back then, I didn’t fully recognize how this operational mindset made my goal to increase used vehicle sales volume seem so elusive; I was stuck on a treadmill with my capital tied up in aged inventory.
- You sleep better. “I don’t lose sleep anymore because my team and I do everything we can — from getting the right cars to pricing and promoting them right — to avoid losses in the first place,” the New York dealer says. “I’m a retailer and we’re all human. We’ll make a mistake and the occasional loss is inevitable. The difference is that I’m now more concerned with ‘turn and earn’ in used cars than ‘avoiding a loss.’”