I’d recommend that every dealer conduct the following three-part test of their used vehicle department:
Step 1: Determine your average cost of inventory. How does this figure compare to three or six months ago? Is it up or down, and by how much?
Step 2: Assess your inventory age. What percentage of your inventory is less than 30 days old? What percentage is older than 30 days? How have these figures changed, if at all, in the past three to six months?
Step 3: Calculate your average front-end gross by vehicle age. What’s the average front-end gross for vehicles retailed within 30 days? After 30 days? What’s the difference between the two? Remember this number.
The test helps identify operational problems that can slow the pace and profitability of your used vehicle sales. It’s a useful test at this time of year as fall arrives. Being what they are, the summer months can cause diligence and discipline to dissipate as the mercury rises. Used vehicle performance suffers. Sales slow, and grosses go.
As you take the test, here are some points to consider for each step:
Step 1: If you’re like many dealers, your average cost of inventory has likely headed north—despite month-over-month declines in wholesale vehicle valuations. Hopefully, the increases owe to conscious decisions to accept a higher acquisition Cost of Market ratio as you acquire vehicles from auctions or trade-ins. This scenario is particularly true for dealers that proactively participate in factory certified pre-owned (CPO) programs.
But be honest with yourself: How much of the increase really owes to appraisers offering too much, or buyers simply purchasing the easier-to-find (and more expensive) late model units at auctions?
The best-performing dealers strive to acquire and recondition every used vehicle at a Cost to Market ratio below 85 percent. This ratio, which compares the unit’s cost to prevailing retail asking prices, sets the baseline profit margin potential for every unit. As dealers work to beat this benchmark on every used vehicle acquisition, they effectively keep a lid on the average cost of inventory.
Step 2: If you found more than 50 percent of your used vehicle inventory is older than 30 days, you’ve got at least one problem—your cars aren’t selling fast enough to maximize your gross profit and minimize risk, given today’s market. This is why I recommend dealers maintain at least 50 percent of their used vehicle inventory under 30 days of age. To achieve this operational standard, dealers make it a priority to acquire the right cars for their market, and use pricing and online merchandising as primary, time-sensitive levers to attract buyers and sell the unit quickly.
Step 3: OK, so what was your number? Was it eye-opening to see the difference? If you’re like most dealers, you probably see a steep decline in the average front-end gross profits after 30 days in inventory. In fact, if you look closer, you’ll likely notice a handful of vehicles propped up your average front-end grosses after 30 days, while the rest of the vehicles were effectively money-losing units.
This part of the test reveals a stark retailing reality in used vehicles: You can’t really expect to make a sufficient return on investment on used vehicles once they age past the 30-day mark. This fact of life can be difficult for dealers to accept—and it’s a key reason why the most profitable and successful used vehicle retailers have made 45 days as the final cut off for every unit. Period. End of story.
Perhaps the best part of the test is that it offers useful insights for any dealer.
If you’ve felt like you’re not selling enough used vehicles or making enough money, the test should reveal some operational priorities that help you achieve both. And, if you’re among the dealers who feel satisfied with your used vehicle performance, I suspect the test identified an area or two where your team can improve.
Either way, the test is over. The results are in. What’s your next step?
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