For the past several years, I’ve been a vocal advocate of a market-based inventory management strategy that pushes dealers to turn their used vehicle inventories to maximize return on investment and minimize risk.
My advocacy flows from a belief that today’s market penalizes dealers who do not make a concerted effort to sell more used vehicles in less time. In today’s market, the longer a dealer hangs on to a vehicle, the less likely it will generate a sufficient return on investment.
My faith in a “turn and earn” retailing strategy also flows from the successes of dealers who adopt this approach. In a matter of months, the best “turn and earn” dealers double their monthly sales volumes and see record-setting levels of profitability in their used vehicle, service/parts and F&I departments. The big pay-off comes a bit later, when the higher level of performance and profitability become standard operating procedure, and dealers achieve a level of financial return and reward they hadn’t considered possible.
But for every success story, there are dealers who can’t adopt a “turn and earn” inventory management strategy. I’ve seen enough of these implementation failures to identify three key reasons the dealers came up short:
They lose faith. A few years ago, I coached a dealer as he adopted a “turn and earn” strategy. His first course of action: Take accountability for all the aged vehicles in his inventory. This wasn’t easy because it required taking a $500,000 loss in the early months to retail cars that had sat too long to offer a positive return.
This day of reckoning is a prerequisite for dealers who adopt this strategy and, for some, it’s too painful to accept. These dealers will blame this new strategy for the loss and ditch the strategy altogether. Of course, the strategy didn’t create the loss; rather, it exposed a “water problem” the dealer would rather ignore.
I compare the initial stage of this strategy implementation to the experience anyone undergoes to rid themselves of an addiction.
At first, it feels terrible and the initial pain proves too much for some. But those with persistence realize that, over time, they feel and function better.
The same is true for dealers adopting a “turn and earn” strategy. Their addiction is aged vehicles, and it’s difficult to break. But those who have the faith and work through the initial pain often wonder why they ever thought an aged unit was OK.
They can’t break the resistance. When dealers adopt a “turn and earn” strategy, the goal posts move closer. Dealers must put used vehicles online as soon as they purchase them. Likewise, reconditioning/detailing must be completed in day or two, not a week or more. Appraisals and asking prices must continually align and re-align with the market. Managers must make speedier decisions about each vehicle’s exit strategy.
In other words, an effective “turn and earn” strategy requires a much higher level of collaboration among dealership departments. Everyone must understand that efficiency and speed drive their paychecks and the dealership’s success. This strategy puts leadership skills to the test.
“At times, it felt like I was herding cats,” said a Midwest dealer who adopted the “turn and earn” strategy two years ago. “It’s tough to get everybody on the same page, and we lost a couple people who couldn’t make the adjustment.”
The old habits never really go away. Some dealers say that their front-end gross profits decline as they adopt a “turn and earn” strategy. I address this complaint by showing average front-end gross profits have really normalized to the market. I also encourage them to focus on the “total” gross profit each vehicle, and their inventory as a whole, now generates for the dealership.
But some dealers, who have a hard time seeing the whole picture, undermine the “turn and earn” strategy with decisions that draw from the traditional front-end gross-focused playbook.
For example, dealers will set used vehicle asking prices well above the market to maximize average front-end gross profits — irrespective of whether market data affirms the price position. This knee-jerk, control-the-gross impulse inevitably puts the dealer’s vehicles at a price disadvantage and slows their rate of sale.
Some “turn and earn” dealers also see diminished front-end profitability due to sales process “leaks.” This scenario occurs when dealers set market-competitive prices, and then allow sales associates to discount the price. The solution, of course, is a compensation plan that rewards sales associates when they stand firm on price and help sustain each vehicle’s front-end profit potential.
I advise dealers who want to adopt a “turn and earn” strategy that it will be a difficult, sometimes painful journey. I also note that every successful dealer who has adopted this strategy has been there. They’d be the first to tell you that adopting this strategy takes an extraordinary level of commitment and courage.
But they’d also say the journey, for all its pain, has been well worth the gain.