I am a true believer. It took a while for it too all sink in.

Lately I have been having discussions with folks who are adamant about pricing recon work at full retail. As you know, their premise is based on the idea that sales people are mediocre and simply sell a fixed margin from cost. This concept of retail for recon internal began in the late 70′s and was a direct result of state and federal law requiring OEMs to compensate for warranty work based on the same door rate as they charged retail customer. Dealers jacked up their door rate to capitalize. The service department became an even more important profit center. In the meantime, someone got the idea that not only could we add gross profit to the service department by doing the retail recon thing, we wouldn’t suffer in sales gross profit loss because sales people would merely continue to add their 3 – 4 K to cost and sell from there. Theoretically, dealers would pay service commission at 15% rather than 25% for front end gross.

The Internet obviously does not allow for that old type of selling. Do you think it is time for dealers to review their recon policies? I have seen vehicles wholesaled because it wasn’t possible to recon them and have any “room” left. I have seen dealers try to stand down from trades because of recon costs. I am told by many that the fastest moving used vehicles have to be “made,” which is impossible to do if the vehicle needs considerable work. I’m not pushing recon at cost. That would be absurd. But should the policy be reconsidered? I am told that CarMax does recon at cost, but they aren’t running a service operation.

I am a true believer. It took a while for it too all sink in.

Lately I have been having discussions with folks who are adamant about pricing recon work at full retail. As you know, their premise is based on the idea that sales people are mediocre and simply sell a fixed margin from cost. This concept of retail for recon internal began in the late 70′s and was a direct result of state and federal law requiring OEMs to compensate for warranty work based on the same door rate as they charged retail customer. Dealers jacked up their door rate to capitalize. The service department became an even more important profit center. In the meantime, someone got the idea that not only could we add gross profit to the service department by doing the retail recon thing, we wouldn’t suffer in sales gross profit loss because sales people would merely continue to add their 3 – 4 K to cost and sell from there. Theoretically, dealers would pay service commission at 15% rather than 25% for front end gross.

The Internet obviously does not allow for that old type of selling. Do you think it is time for dealers to review their recon policies? I have seen vehicles wholesaled because it wasn’t possible to recon them and have any “room” left. I have seen dealers try to stand down from trades because of recon costs. I am told by many that the fastest moving used vehicles have to be “made,” which is impossible to do if the vehicle needs considerable work. I’m not pushing recon at cost. That would be absurd. But should the policy be reconsidered? I am told that CarMax does recon at cost, but they aren’t running a service operation.

Has anyone noticed how gasoline prices move up and down while the gas station’s gasoline inventory was delivered last week? What drives gasoline price action? Back-in-the-day it use to be small operator vs. small operator reacting to each other. Not any more. Today’s gas stations are mega operators that have sophisticated pricing models that react to local competition, but, are more heavily weighted to reflect the CURRENT COST of buying the gasoline at wholesale.

Can you see any parallels to Used Cars?? Swap out the gas stations and add Used Car Dealers and see what the FUTURE may hold…

What drives Used Car price action? Back-in-the-day it use to be small operator vs. small operator reacting to each other. Not any more. Today’s Used Car Dealers are mega operators that have sophisticated pricing models that react to local competition, but, are more heavily weighted to reflect the CURRENT COST of buying the automobile at wholesale.

Hmmm… I smell a CARMAX model in there somewhere.

Let’s bring this back to today. Using this wholesale replacement cost pricing model, If you’ve competitively priced your Honda Accord to sell, but, the replacement costs are $500 higher than when you bought it, wouldn’t it make sense to move your Accord retail price up?

Woa… before you skewer me, look at the other side. If you’ve competitively priced your Ford F150 to sell, but, the replacement costs are $500 lower than when you bought it, wouldn’t it make sense to move your F150 retail price down?

These examples are why the Velocity dealer performance ROCKS in a down market (late 2008), but grind it out in an up market (early 2009). We’ve witnessed it 1st hand. Down markets reward aggressive retailing. When prices are falling, buying and turning inventory keeps your cost basis ahead of your competitors. On the flip side, in an up-cycle, the aggressive turning dealer has sold his unit and now has to replace it at a higher cost, there by giving up his cost basis advantage to his slower competitor. This is a great setup for reduced turns and margins getting compressed…. Until the market turns again…

IMO, a missing link in the Used Car business model is the input of replacement cost data.

NOTES:
I have been a big proponent on this topic and have posted this on Dale blog earlier: http://www.dalepollak.com/2008/10/14/manheims-used-vehicle-index/

Gasoline Futures Data FYI:
http://futures.tradingcharts.com/chart/RB/W
http://www.nymex.com/RB_pre_agree.aspx

Has anyone noticed how gasoline prices move up and down while the gas station’s gasoline inventory was delivered last week? What drives gasoline price action? Back-in-the-day it use to be small operator vs. small operator reacting to each other. Not any more. Today’s gas stations are mega operators that have sophisticated pricing models that react to local competition, but, are more heavily weighted to reflect the CURRENT COST of buying the gasoline at wholesale.

Can you see any parallels to Used Cars?? Swap out the gas stations and add Used Car Dealers and see what the FUTURE may hold…

What drives Used Car price action? Back-in-the-day it use to be small operator vs. small operator reacting to each other. Not any more. Today’s Used Car Dealers are mega operators that have sophisticated pricing models that react to local competition, but, are more heavily weighted to reflect the CURRENT COST of buying the automobile at wholesale.

Hmmm… I smell a CARMAX model in there somewhere.

Let’s bring this back to today. Using this wholesale replacement cost pricing model, If you’ve competitively priced your Honda Accord to sell, but, the replacement costs are $500 higher than when you bought it, wouldn’t it make sense to move your Accord retail price up?

Woa… before you skewer me, look at the other side. If you’ve competitively priced your Ford F150 to sell, but, the replacement costs are $500 lower than when you bought it, wouldn’t it make sense to move your F150 retail price down?

These examples are why the Velocity dealer performance ROCKS in a down market (late 2008), but grind it out in an up market (early 2009). We’ve witnessed it 1st hand. Down markets reward aggressive retailing. When prices are falling, buying and turning inventory keeps your cost basis ahead of your competitors. On the flip side, in an up-cycle, the aggressive turning dealer has sold his unit and now has to replace it at a higher cost, there by giving up his cost basis advantage to his slower competitor. This is a great setup for reduced turns and margins getting compressed…. Until the market turns again…

IMO, a missing link in the Used Car business model is the input of replacement cost data.

NOTES:
I have been a big proponent on this topic and have posted this on Dale blog earlier: http://www.dalepollak.com/2008/10/14/manheims-used-vehicle-index/

Gasoline Futures Data FYI:
http://futures.tradingcharts.com/chart/RB/W
http://www.nymex.com/RB_pre_agree.aspx