I’ve had two experiences in the last 24 hours that has me really fired up on the issue of reconditioning. First, yesterday afternoon I spoke with one of the most successful high-volume/profit used car dealers in the country. He told me that he averages less than $500 per vehicle reconditioning. I might add that he reluctantly admits to still charging retail labor rates. That’s right, less than $500 per vehicle using retail labor rates.
This stands in stark contrast to what I see most dealers charging, between $650 and $1,250 per car. Unless you’re really in the business of rebuilding used vehicles for retail, as a general rule, what in the world is going on? As my friend explained to me, he can do a safety inspection and even get new rubber and brake pads on a car for less than $500. Shouldn’t this be the norm for most cars?
How does he do this for less than $500 per car? Well, as he explains it to me, the big cost is usually in parts, items like tires and brake pads. He told me that most parts departments want to use the OEM supplied tires and brake pads. These are obviously high dollar items. My friend told me that his parts manager goes out to the after market and procures quality low-cost substitutes, applies the same mark-up, and delivers the parts to the vehicle substantially below the cost of the OEM alternative.
While I would not advocate circumventing any manufacturer’s certified requirements of using OEM parts, nor would I discourage certification on most eligible vehicles, I think that this approach should be the norm for all other vehicles.
The second experience was this morning when I read an article from industry expert David Ruggles on the subject of reconditioning. Completely independently, David sent me an article that he is submitting to Ward’s Dealer Business on this subject. David brilliantly makes the observation that performing excessive reconditioning produces many irrational consequences. One of the greatest evils is that used car managers and buyers can’t justify paying current wholesale market rates for badly needed used vehicle inventory. In light of the highly compressed margin environment, the expectation of $650 to $1,250 reconditioning makes it impossible to justify just about any purchase. It’s really no wonder that most used car managers have the perception that they can’t buy used cars for prices that allow them to make money.
So, even if we don’t want to have the discussion about charging less than retail labor rates, could we at least come to terms with the fact that we probably can’t justify spending $650 to $1,250 to recondition used vehicles on average? Shouldn’t these amounts be reserved for only certified cars, and the occasional exception case? Every day I become more convinced that the old practices of reconditioning are just not fitting the realities of today’s used car market.
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