A ProfitTime Insight: Your Worst Used Cars Represent Your Best Opportunity

It’s been a busy, gratifying start to the new year as I’ve been sharing vAuto’s new Provision ProfitTime methodology and metric with dealers.

Together, the new and used vehicle inventory investment at many dealerships ranges between $7 million and $10 million—a sum that represents a significant amount of skin in the game for a typical dealer.

But while many dealers are readily aware of how much they’ve invested in their inventories, it’s become clear that we need a higher level of attention and focus on the overall health of each vehicle as an investment and its ability to drive a meaningful return.

I’ve come to this conclusion after spending much of the past year trying to figure out why as much as 50 percent of used vehicle inventories, and 30 percent of new vehicle inventories, at dealerships across the country represent distressed investments.

By distressed, I mean investments that have lingered too long, failing to find a retail buyer and, over time, losing their ability to deliver a profit-positive return.

I’m encouraged by the fact that many dealers are asking about ProfitTime because they recognize that margin compression is a serious problem. They aren’t happy with the gross profits they’re getting in used vehicles, and they’re hungry for a better way.

The ProfitTime conversations and meetings have led me to an insight that, in some ways, seems a bit ironic—that the worst vehicles on dealers’ lots today represent the biggest opportunity for tomorrow.

Let me explain what I mean.

When I share ProfitTime, I’ll use the system to evaluate a dealer’s inventory based on the investment value, or profit potential, of each vehicle.

For dealer after dealer, and from one store to another, the ProfitTime analysis reveals a similar outcome: Roughly half of the vehicles in inventory (about 46 percent, on average) are classified as Bronze or distressed vehicles. (For those who don’t know, ProfitTime assigns an investment value score to each vehicle, and classifies them with precious metal designations, Platinum, Gold, Silver and Bronze.)

The Bronze vehicles are units that represent little, if any, meaningful return on your investment. Some of these vehicles have been in inventory nearly 60 days or longer; others entered your inventory in an investment-troubled position.

The ProfitTime analysis also exposes two unfortunate conditions that Bronze vehicles typically possess:

1.The Cost to Market ratio is too high. Generally, I see Cost to Market ratios running close to, and sometimes above, 100 percent with Bronze vehicles. This ratio means the costs to own, and keep, these vehicles is almost as much as the retail sales price dealers will get for the vehicle. In other words, there’s little, if any, margin for gross profit. Yet, the vehicles remain in inventory, available for retail sale, day after day.
2.The Price to Market ratio is too high. The Bronze vehicles, despite their distressed investment position, are often priced at or above a 100 percent Price to Market ratio. In effect, this means dealers are attempting to retail these vehicles for all the money, even though buyers seem to be saying they’re asking too much.

The widespread nature of these conditions leads me to believe that dealers need to change the way they think about and manage their Bronze vehicles.

Instead of regarding them as problem cars you hope will go away, I think dealers should consider Bronze vehicles as a blessing—an opportunity-in-waiting, if you will, to drive additional retail volume and improve used vehicle profitability.

I’ve come to this belief based on five factors:

First, if dealers retailed Bronze vehicles more quickly, they’d naturally add momentum to monthly volumes. The key is to recognize how to retail these vehicles in a more timely manner. Hint: The fix often starts with far more market-realistic prices.

Second, if dealers retailed Bronze vehicles more quickly, front-end gross profit averages may take a dip as dealers clear out the initial batch of the most-aged and -distressed units. But over time, and with more consistently diligent Bronze vehicle management, front-end gross profits will grow as you retail these vehicles before they become break-even or money-losing deals.

Third, if dealers retailed Bronze vehicles more quickly, they’d see incremental lifts in their F&I and service departments—a positive “total gross” outcome that naturally follows additional monthly retail sales volumes.

Fourth, if dealers retailed Bronze vehicles more quickly, they’d be less shy about getting the gross profit they deserve on the Platinum and Gold vehicles that merit this expectation. This benefit, when coupled with better grosses on Bronze vehicles, creates a path for you to push back against margin compression and avoid making it worse at your dealership.

Fifth, and perhaps best of all, if dealers retailed Bronze vehicles more quickly, they would seize an opportunity to grow used vehicle sales and profits without investing additional capital. The money you’d need to invest in this opportunity is already on the ground; it’s just not moving as quickly to produce the return it should today.

As I’ve talked to dealers about this ProfitTime-driven shift in thinking and operational management, it’s become clear that it doesn’t appeal to every dealer, and the adjustment may prove difficult, even for those who are fully committed to the change.

This observation occurred to me after the third or fourth time I heard this comment, “But, Dale, some of these Bronze cars just take longer to sell.”

When I hear this, I’ll say, “Of course your Bronze vehicles take longer to sell. That’s what happens when you’re not willing to face the music.”

P.S. Going to NADA? I’d welcome the chance to discuss how your Bronze vehicles represent a great opportunity. I’ll be at the vAuto booth (#1620S). I look forward to seeing you there.

dalepollak.com

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