How Midlands Honda Makes Record Profits Giving Away Cars

May 29, 2009

Back in the 1980’s when the jet aircraft engine market became very hot and competitive, aircraft engine manufacturers found themselves unable to make sufficient profit on sales to justify continued operations. While many companies struggled and some went out of business, General Electric (GE) changed the game. GE said no longer will we worry about pricing aircraft engines for profitability, and in fact they began giving them away for nothing at all. Of course it wasn’t really for nothing at all because their give-away program came with some strings attached, specifically the obligation on the part of the acquirer to purchase a long term parts and service maintenance agreement. This revolutionary strategy propelled GE to the forefront of the jet aircraft engine industry and left its competitors wondering what had happened to them.

Randy Threatt of Midlands Honda in Columbia, South Carolina, is taking a page out of GE’s jet engine playbook. Randy is focused on buying cars, any car that has high demand and low supply for any amount of money so long as he can break even. He is not concerned about the vehicle’s brand and he’s not concerned about his front end gross profit. Making 0 front end profit is just fine with Randy if he can turn the car fast and repeat the cycle. Like GE’s brilliant strategy, Randy’s not working for nothing. In fact, he’s making record profits.

In an environment where the used car marketplace is hot and wholesale prices are high, Randy views the vehicle like the aircraft engine as only a way to generate F&I and service income. Using sophisticated tools to identify the vehicles that move fast and the price at which vehicles are likely to transact, Randy backs his way into knowing the maximum amount he can pay in order to break even. If he can buy them for less, he’ll do so, but he’s willing to go to his maximum purchase price. Using this strategy, Randy finds no problems whatsoever purchasing vehicles. The average age of a unit in his inventory is 14 days and his turn is 25 times per year. Randy is having more fun and financial success than he’s ever previously experienced.

Randy’s velocity approach to used car operations stands in stark contrast to and breaks most every rule of the traditional used car business. Traditional dealers are pulling their hair out trying to find vehicles to buy that will generate a so-called acceptable gross profit. The result is that they buy fewer vehicles and ask higher prices for those that they do purchase. Fewer vehicles and higher asking prices are practical constraints that reduce the F&I and service department’s profit opportunities. Rather than pull back and question the wisdom of what they’re doing, they just apply more effort to doing that which they’ve done in the past. Whether we agree with his strategy or not, we should all take our hats off to Randy for having the soundness of mind to stop what he’s doing and question whether it makes sense to do any longer. For Randy the question has been answered, but for most everyone else, the question hasn’t even been asked.